Kinder Morgan Capital Raise via Depositary Shares

Kinder Morgan’s SEC filing shows that it is offering 32,000,000 depositary shares, each of which represents a 1/20th interest in a share of its pending Series A Mandatory Convertible Preferred Stock. Prior to this offering, there has been no public market for the depositary shares. The company is applying to list the depositary shares on the New York Stock Exchange under the symbol “KMI.PRA.”

The filing showed the following under its description:

Dividends on our mandatory convertible preferred stock will be payable on a cumulative basis when, as and if declared by our board of directors, or an authorized committee of our board of directors, at an annual rate of         % on the liquidation preference of $1,000 per share. We may pay declared dividends in cash or, subject to certain limitations, in shares of our Class P common stock, par value $0.01 per share (our “common stock”), or in any combination of cash and common stock, on January 26, April 26, July 26 and October 26 of each year, commencing on January 26, 2016 and ending on, and including, October 26, 2018.

Here are the details of the mandatory convertible offering, and the company filed for capital raises under the entities Kinder Morgan Terminals Wilmington and Kinder Morgan Galena Park West.

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The reality is that investors were looking for an alternative non-equity funding. Whether or not a depositary share, or a mandatory convertible preferred share, should be considered equity is something that will be left up to the investment community to interpret.

Joint book-runners for the offering were listed as follows: Citigroup, Bank of America Merrill Lynch and Morgan Stanley. The corporation also said in its filings that it intends to grant the underwriters a 30-day option to purchase a maximum of 4,800,000 additional depositary shares if the underwriters sell more than 32,000,000 depositary shares in the offering.

Early voting is that this might not quite be what investors expected. Kinder Morgan shares were already down last week, and the reaction on Monday morning had shares down 4.5% more at $27.95. Kinder Morgan also had seen some 6.3 million shares trade in just the first 45 minutes of Monday’s session, versus an average volume of about 16.3 million shares.

Kinder Morgan’s 52-week range is $25.81 to $44.71, and the consensus price target now is still officially up over $38.00.

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Below are some of the specific risk summaries noted in the filing as well, taken verbatim from the filing’s risk factors:

• You will bear the risk of a decline in the market price of our common stock between the pricing date for the depositary shares and the Mandatory Conversion Date.
• Purchasers of the depositary shares may not realize any or all of the benefit of an increase in the market price of shares of our common stock.
• The market price of our common stock, which may fluctuate significantly, will directly affect the market price for the depositary shares.
• Recent regulatory actions may adversely affect the trading price and liquidity of the depositary shares.
• The Fundamental Change Conversion Rate and the payment of the Fundamental Change Dividend Make-Whole Amount upon the occurrence of certain Fundamental Changes may not adequately compensate you for the lost option value and lost dividends as a result of early conversion upon a Fundamental Change.
• The Fixed Conversion Rates of the mandatory convertible preferred stock and, in turn, the depositary shares may not be adjusted for all dilutive events that may adversely affect the market price of the depositary shares or the common stock issuable upon conversion of the mandatory convertible preferred stock.
• Purchasers of the depositary shares may be adversely affected upon the issuance of a new series of preferred stock ranking equally with the mandatory convertible preferred stock represented by the depositary shares sold in this offering.
• The possibility of the sale of our common stock in the future could reduce the market price of our common stock and, in turn, the depositary shares.
• You will have no rights with respect to our common stock until you convert your depositary shares, but you may be adversely affected by certain changes made with respect to our common stock.
• You will have no voting rights except under limited circumstances, and you will need to act through the depositary to exercise voting rights with respect to our mandatory convertible preferred stock.
• Our mandatory convertible preferred stock will rank junior to all of our and our subsidiaries’ liabilities, as well as the capital stock of our subsidiaries held by third parties, in the event of a bankruptcy, liquidation or winding up of our or our subsidiaries’ assets.
• Our ability to pay dividends on our mandatory convertible preferred stock may be limited.
• You may be subject to tax upon an adjustment to the conversion rate of the mandatory convertible preferred stock and the depositary shares even though you do not receive a corresponding cash distribution.
• Corporate U.S. holders of depositary shares may be unable to use the dividends-received deduction.
• Non-U.S. holders may be subject to U.S. federal income tax with respect to gain on disposition of their depositary shares or common stock.
• An active trading market for the depositary shares does not exist and may not develop.

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