Brookfield, Kinder Morgan up stake in NGPL

The two firms will pay $242m to become the joint owners of one of the largest interstate gas pipeline systems in the US.

Brookfield Infrastructure Partners and Kinder Morgan have entered into a definitive agreement to acquire Myria Holdings’ majority interest in the Natural Gas Pipeline Company of America (NGPL), increasing their respective stakes in the company to 50 percent.

Brookfield Infrastructure, the listed infrastructure investment platform of Brookfield Asset Management, already owns 27 percent of NGPL. It will pay approximately $106 million for an additional 23 percent interest, while Kinder Morgan will pay $136 million for the 30 percent stake it does not already own. 

The $242 million transaction values NGPL at $3.4 billion, inclusive of existing debt, the two buyers said in a joint statement.

The transaction represents one of two options Brookfield was exploring regarding the pipeline gas company. In a letter sent to unitholders announcing its second quarter results for 2015, Brookfield Infrastructure chief executive Sam Pollock said the firm was considering either selling its 27 percent stake in NGPL or “right-sizing” the company’s capital structure and modifying its operating and ownership arrangements, an objective it is now pursuing by buying out its fellow consortium members.

For Kinder Morgan, however, the transaction is an about-face. Last year, the Houston-based company was looking to altogether sell its stake in NGPL. Kinder Morgan at one point exclusively owned the gas pipeline company. In early 2008, it sold 80 percent to Myria Acquisition, a consortium that comprises Brookfield Infrastructure, SteelRiver Infrastructure Partners, Canada’s Public Sector Pension Investment Board and Dutch pension PGGM.

Asked why the company changed course, a spokesperson for Kinder Morgan said: “This transaction simplifies the organisational structure of NGPL which will allow for a more efficient governing process going forward.”

The spokesperson added that Kinder Morgan expects the investment to generate attractive returns and to be immediately accretive to Kinder Morgan’s distributable cash flow.

In a note released on Tuesday, however, Moody’s changed its outlook on Kinder Morgan to negative from stable as a result of the announced acquisition, stating that increased ownership in NGPL, “a distressed company,” will put additional pressure on Kinder Morgan’s already high leverage.

“NGPL is facing potential default on its pending interest payments, suggesting that KMI [Kinder Morgan Inc.] will need to provide cash injections, which will likely be debt funded initially,” Terry Marshall, a senior vice president at Moody's, said in the note.

NGPL has a corporate credit rating of CCC-, which Standard & Poor’s reiterated in a separate note.

“Although we note that the transaction may help alleviate some of the issuer’s more immediate liquidity concerns, we are not yet certain of the long-term strategic importance of NGPL to either of its sponsors, or whether the acquisition could result in operational or financial improvements that lead to a better stand-alone credit profile, and, consequently, rating,” S&P said. The ratings agency maintained its negative outlook as well.

Brookfield and Kinder Morgan declined to comment on the ratings agencies’ statements.

It is not clear whether Brookfield is financing the acquisition through Brookfield Infrastructure Fund II, a vehicle it closed on $7 billion in October 2013 and which according to Infrastructure Investor Research & Analytics, it is still investing.

The Toronto-based firm is currently in the process of raising BIF III, its latest infrastructure offering which has a target of $10 billion.