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Energy infrastructure giant Kinder Morgan (NYSE: KMI) is coming off an abysmal 2015 -- its stock price tanked 65.1%. However, it is faring much better this year, evidenced by the fact that its stock is up 50% thus far. Fueling that rebound are several factors both external and internal, with three moves in particular standing out as its best ones to date.
Taking its business to the bank
One of the reasons Kinder Morgan's stock sank last year was due to concerns about its credit and access to capital to fund growth projects and refinance maturing debt. The company took care of its near-term capital needs for growth projects by cutting its dividend late last year. It then addressed its refinancing requirements in January by closing a three-year, unsecured $1 billion term loan and a $1 billion expansion of its unsecured revolving credit facility booting its borrowing capacity to $5 billion. That move enabled the company to sidestep the capital markets for the time being by taking its business straight to the bank.
Heading into this year Kinder Morgan had $1.667 billion of maturing debt to address. Typically, it would just issue new debt in the capital markets to roll over its existing debt. However, the deepening oil market downturn at the start of the year made it less appealing to access the capital markets. Kinder Morgan's banks, on the other hand, had no problem lending it $1 billion due to the overall stability of its cash flow. That money, plus the availability under its revolving credit facility, and excess cash flow as a result of cutting the dividend, provided the company with more than enough cash to address its maturing debt removing a huge weight on the stock price.
Diversifying its funding sources
Aside from using internally generated cash flow, Kinder Morgan began exploring other options to fund its growth projects going forward. One source it sought out was joint venture partners to fund a portion of the investment on certain expansion projects. In late July, the company announced its first such deal by signing an agreement with private equity firm Riverstone Investment to become a 50% partner on its Utopia Pipeline Project.
Under the terms of the agreement, Riverstone reimbursed Kinder Morgan for its 50% share of prior capital expenses relating to the project as well as making an undisclosed payment to recognize the value Kinder Morgan created in developing the project thus far. Furthermore, Riverstone will pay for 50% of the project's development costs going forward. This deal not only brought in cash and offloaded half of the project's capex costs going forward, but it serves as a potential model for future project funding with private equity companies.
Linking up with Southern Company
The biggest move the company made this year was its strategic joint venture agreement with utility Southern Company (NYSE: SO). Under the terms of that agreement, Kinder Morgan sold half of its Southern Natural Gas pipeline to Southern Company for $1.47 billion with Southern also assuming half the pipeline's debt.
This transaction accomplished two things for Kinder Morgan. First, it achieved a meaningful reduction in leverage with its debt-to-EBITDA ratio projected to fall to 5.3, which is below its year-end target of 5.5. Second, Kinder Morgan and Southern Company plan to jointly pursue growth opportunities on the system with Southern funding half of those development costs. This combination of debt reduction and growth potential provides both short- and long-term benefits to Kinder Morgan.
Kinder Morgan is making excellent progress on its plan to diversify its funding sources while at the same time reducing its overall leverage. These moves allowed the company to continue to fund its business while avoiding the capital markets during a time when the markets were no longer an attractive source of capital. As a result, the company is in a much stronger financial position than it was to start the year.
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Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Southern Company. 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.