On February 11, 2011, Kinder Morgan, Inc. (tkr: KMI), a pipeline company, offered 95 million shares of common stock at $30 per share in an initial public offering on the New York Stock Exchange. The stock closed up over 3% on the day at $31.05. Since that time, KMI has declined to just under $31.
KMI's IPO allowed investors, consisting primarily of hedge funds, including Highstar Capital LP, The Carlyle Group and Riverstone Holdings, LLC, to realize their profits. According to KMI's press release, issued on the 11th, no members of KMI's management sold shares through the IPO, and KMI did not receive any of the proceeds generated by the IPO.
KMI's most recent 10-Q, for the period ending September 30, 2010, paints a confusing picture. The company's net income for the nine months ended September 30 declined from $367.9 million for the 2009 period to a loss of $104.3 million for the 2010 period. Likewise, for the third quarter period net income declined from $122.8 million in 2009, to just $10.6 million in 2010. In contrast, total revenues for the third quarter increased from $1,712.3 million in 2009, to $2,088.2 million in 2010. Clearly, the sharp decline in net income is not due to slowing business. A large portion of the discrepancy can be explained by the expense line entitled "General and administrative" ("General Expense"), which increased from $92.2 million in 2009, to $308.2 million in 2010.
The increase in the General Expense category, however, was an anomaly attributable to a one-time charge taken during the 3rd quarter of 2010 - $200 million that is related to a settlement of litigation that arose several years ago when KMI was taken private. Without this charge, KMI would have net income of $210.6 million in the third quarter. While this one-time charge clearly affected KMI's bottom line, it is likely that another one-time charge will be reflected on KMI's upcoming financial statements, this time for expenses related to KMI's IPO.
KMI also carries significant debt of $14,760.2 million. Of this, $2,454 million is short-term debt. While KMI is carrying significant debt, it is solvent and it has been able to cover or renegotiate its debt thus far. If, however, KMI's net-income decreases significantly, it could be forced to take on more debt.
The Play
While KMI has a significant debt load, the future of its business looks good, so long as it can avoid significant one-time costs. I would consider buying KMI stock. However, buyers may face short-term losses, depending on commodity prices, which can heavily impact KMI's business, and the costs associated with KMI's IPO that are reflected on its next financial statements. In the long run, KMI is probably a good buy, which the average length of its pipeline contracts being approximately 8 years, plenty of time to pay-down short-term debt, renew its pipeline contracts and to expand its business.
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