Last year, mergers in the energy industry tallied a record-setting $402 billion. We're already off to a good start in 2013, with several deals already announced and more likely to come as buyers salivate and sellers dream of a big payday. While getting a deal done is a complex process in and of itself, it takes on another level of complexity in the midstream industry.
As you're probably aware, most master limited partnerships, or MLPs also have a general partner that they're beholden to. Sometimes those GPs are publicly traded, in which case getting a midstream deal done can mean placating four sets of investors. Having a supportive general partner is very important in the the industry and can be a competitive advantage for completing a deal.
Take Kinder Morgan Energy Partners (NYSE: KMP) and its recently announced deal for Copano Energy (CPNO +0.00%). Including debt being assumed, the $5 billion deal is a fairly large acquisition for anyone to swallow. One of the keys in getting the deal to pass muster is that Kinder Morgan Energy is receiving some relief from its general partner, Kinder Morgan (KMI +2.50%).
As you probably know, one of the benefits of being the general partner is that it typically comes with incentive distribution rights, or IDRs. These give the GP an increasing share of the incremental distributable cash flow that the MLP generates. To get the Copano deal to make sense (and cents), Kinder Morgan agreed to forgo a portion of its incremental incentive distributions in 2013 and beyond.
Because a portion of the incremental IDRs were waived, the transaction will be modestly accretive to Kinder Morgan Energy unitholders this year while being about $0.10 accretive for the next five years. Investors of both companies win, as both will see the increased income that's now available to be sent back to investors. Without waiving those incentive distribution rights, the deal probably would not have been possible.
Other midstream peers are using similar models to get deals done that the MLP probably couldn't have done otherwise. Take Boardwalk Pipeline Partners (BWP +0.00%), whose general partner is owned by diversified holding company Loews (L 0.48%). The company's subsidiaries include hotels, insurance, offshore drilling, and exploration and production, Loews has a uniquely diverse business as well as a deep financial strength.
As the owner of Boardwalk's general partner, Loews has incentives to help Boardwalk out if an attractive asset comes along. Just last year it helped Boardwalk to acquire HP Storage as it took an 80% equity interest in the asset, which it held until it could be sold to Boardwalk in a drop-down transaction. The companies later teamed up in a deal that enabled Boardwalk to acquire PL Midstream. Both deals have worked out well for Boardwalk, so more are likely in the future.
Because of this relationship with its general partner, the company can, according to CEO Stanley Horton, be "very, very busy looking at acquisitions." Boardwalk CFO Jamie Buskill took it a step further, saying: "[W]e've been able to utilize help from our parent. ... And what it's allowed us to do is not only grow the company but we've also bettered our capitalization." Going a step further, he hinted that there is a confidence level that the company could do it again: "So it really depends on the opportunity, and I can't speak for our parent. But as in the past, they've helped us if there was a big opportunity that came available." That gives Boardwalk the flexibility to dream a bit bigger if the right deal comes along, and according to Horton, "there appears to be no shortage of opportunities."
The ability to work with a strong parent gives both Kinder Morgan Energy and Boardwalk a strong competitive advantage when it comes to sealing a deal. If you own an MLP or are thinking about investing in one, make sure you know a bit about the general partner. That relationship will be a key to growing your investment over time, so make sure you're investing alongside someone whose interests are best aligned with yours.
