Steve Kean, the President and COO of Kinder Morgan, joins Motley Fool analyst, Taylor Muckerman, to discuss the energy industry and his company's contribution to it as the largest midstream energy company in North America. The Kinder Morgan family includes Kinder Morgan, (NYSE:KMI), Kinder Morgan Energy Partners, L.P. (NYSE:KMP), Kinder Morgan Management, LLC (NYSE:KMR), and El Paso Pipeline Partners (NYSE:EPB).
In this video segment Mr. Kean explains how Kinder Morgan, as an investment-grade entity, approaches the risks involved in using debt to finance growth projects. He also discusses the differences between MLPs, and what investors should keep in mind. The full version of the interview can be seen here.
A full transcript follows the video.
Taylor Muckerman: Then to target the interest rates, very widely believed that they should start to rise in the near future. You mentioned distribution growth of 5-6% on an annual basis, but from a capital structure standpoint how are you going to address financing in a rising interest rate environment, because MLPs do typically use a lot of debt to finance growth projects?
Steve Kean: We do. We're an investment-grade entity, so we've been able to raise capital in good times and in bad. We think that investment-grade rating, and our substantial existing capital structure, and our asset footprint, that becomes a competitive advantage for us, not a disadvantage.
I think that's the way you need to look at it, is on a relative basis. We're well positioned to succeed in this market with the balance sheet that we have.
Our interest rate target generally has been ... typically, when we raise capital, we're raising 50% equity, 50% debt. Then within that debt, it's 50/50 fixed and floating. Gradually in our MLPs we've been migrating a little bit more to fixed, so we've taken a little bit of that risk off the table.
But we capture that sensitivity and identify it for our investors. For example, 100 basis points rise in interest rates for a full year, on a full year basis in KMP, is a little over $50 million, and that's on a segment earnings before DD&A of about $5.7 billion, so that gives you a little bit of an order of magnitude on the exposure there.
Muckerman: Yeah, it doesn't seem like it's going to affect you too much, especially given the fact that they probably won't let the interest rates rise too rapidly, so it seems to be pretty well set up.
Then the MLP space from a competitive side, it seems like it's kind of in vogue for major corporations to spin off MLPs. Phillips 66 (NYSE: PSX) fairly recently, and Valero (NYSE: VLO) spinning off their midstream as well. How has that changed the competitive landscape, as far as attracting equity investors?
Kean: Well, two ways. One, in a very positive way, it has expanded interest in the sector. It's made it grow into more of an asset class that investors want to own, or want to own a piece of their portfolio in. It's good from that standpoint; it's attracted interest in the sector.
On the other hand, not all MLPs are the same, so when somebody sets up a refinery MLP or an MLP that's built around a specific plant for example, we have to make sure that we are continuing to educate our investors on the difference between an MLP like us and an MLP like that.
Frankly, I don't think it's that hard for people to sort that out. I think it's generally been a good thing. We believe -- and certainly other companies are showing this by their actions -- that this is the right structure to own these kinds of assets.
There's the tax advantage, there's the capital raising capability that's been demonstrated both by our track record and those of others. It's a good way to own these assets. It's a good vehicle for expanding infrastructure in the United States, which we desperately need, so it works, we think for everybody.
Taylor Muckerman has no position in any stocks mentioned. The Motley Fool recommends El Paso Pipeline Partners LP and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.