Pipeline giant El Paso Corp. is looking to fuel its growth plans by putting up to $500 million of its assets into a master limited partnership, a kind of business with huge tax benefits and low capital costs.
The company won't yet say what portions of its 55,500 miles of interstate pipelines will end up in the partnership when it is created later this year, but during an analyst conference Wednesday CEO Doug Foshee said it will choose assets that are unlikely to be affected by changing government regulations.
"In 2007, we are making the largest commitment to pipeline growth capital in the history of our company," Foshee said, referring to a $610 million budget for new projects and $400 million for maintenance.
The company said it also plans to spend $1.7 billion on its exploration and production business and is aiming for earnings per share in 2007 of between 82 cents and 98 cents.
On Wednesday, El Paso also said it expected to report a fourth-quarter 2006 loss of 25 cents per share and net income of 64 cents per share for fiscal year 2006. Audited results will be released Feb. 27.
Shares of El Paso closed up 21 cents on Wednesday at $15.19.
Master limited partnerships are publicly traded companies that do not pay either state or federal corporate income taxes. They usually have a general partner that runs the business — which is often owned by a parent company that created the master limited partnership — and many limited partners that provide capital but have no role in management.
The general and limited partners are paid quarterly dividends, which is why master limited partnerships are often formed around businesses with steady and predictable income, such as pipelines.
In the past, such partnerships weren't viewed as growth vehicles, said Joseph Cunningham, co-head of RBC Capital Markets' U.S. energy group in Houston. But that changed in 1997 when two former Enron executives, Rich Kinder and Bill Morgan, bought Enron Liquids Pipeline and turned it into what is today Kinder Morgan Energy Partners.
By taking advantage of the lower cost of capital that master limited partnerships enjoy, Kinder Morgan grew from about $300 million in value to $35 billion in just 10 years.
Dozens of companies have followed suit, including many in Houston. This includes Enterprise Products Partners, Plains All American Pipelines and, more recently, Targa Resources.
Several ways to benefit
First, the $500 million initial public offering would give it cash to use on anything from capital projects to debt reduction without adding leverage to the company or diluting its equity.
Second, it could give El Paso a way to get Wall Street to recognize higher values for some of its assets, Cunningham said. For example, a 25 percent stake in one of El Paso's pipelines could be placed in the partnership which, if it went public for $500 million, would likely lead analysts to value the 75 percent of the pipeline still under El Paso's corporate umbrella at $1.5 billion.
"They could do this with a number of assets that they believe are undervalued," Cunningham said.
Funding growth cheaply The master limited partnership also gives the company a way to fund growth less expensively, using the partnership's balance sheet but still funneling income back to El Paso through the general partner.
The master limited partnership is also a ready buyer for El Paso assets should the company want to raise money without losing control of an asset.
While El Paso's entry into the master limited partnership game is relatively late compared with other large pipeline operators, the company's executive team is already well acquainted with the business model.
Chief Financial Officer Mark Leland was previously chief operating officer with GulfTerra Energy Partners, a master limited partnership controlled by El Paso that merged with Enterprise Products Partners in 2004 in a transaction valued at $2.9 billion.
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