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Winter storm windfall put Kinder Morgan in position for Stagecoach purchase

A $1 billion boon to Kinder Morgan Inc.'s balance sheet from February's severe weather enabled the natural gas pipeline giant to offer to buy Stagecoach Gas Services LLC from Crestwood Equity Partners LP and Consolidated Edison Inc., analysts said.

Mizuho Securities USA LLC Managing Director Gabriel Moreen agreed with analysts at Scotiabank and Raymond James & Associates Inc. that Kinder Morgan was "effectively taking the [winter storm] proceeds and redeploying them."

"I think the acquisition should be well received, but I think investors still want to know Kinder Morgan's capital return plans," Moreen said in an interview.

Stagecoach Gas, which Kinder Morgan agreed to acquire for roughly $1.23 billion, comprises four gas storage facilities in New York and Pennsylvania with a total working capacity of 41 Bcf and 185 miles of pipelines. The pipelines have interconnects to major interstate gas pipelines, including Kinder Morgan's Tennessee Gas Pipeline Co., connecting gas supplies to Northeast U.S. demand markets.

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Scotiabank told clients June 1 that while they "expect the sticker price to cause some upfront heartburn" for shareholders, Kinder Morgan "is expected to be one of the few operators that could have potentially captured operating synergies" from buying Stagecoach, given the connection to Tennessee Gas.

For Crestwood, the deal announcement "eliminates some uncertainty as investors had been somewhat concerned" that it would buy out ConEd's 50% stake, Raymond James said. Crestwood took a $120 million impairment during the first quarter on Stagecoach to make the company more attractive to potential buyers.

"We had an indication that the market value of Stagecoach's assets was below its carrying value," Crestwood Executive Vice President and Chief Accounting Officer Steven Dougherty said during an April 27 conference call. "We also had a very comparable transaction announced in a similar time frame with the Natural Gas Pipeline Co. of America LLC trade, coming in at the 11x to 12x range, which was kind of also in the ZIP code of how we assessed fair value."

After Kinder Morgan and Brookfield Infrastructure Partners LP agreed in February to farm out a 25% stake in the Natural Gas Pipeline system to a fund managed by ArcLight Capital Partners LLC, Crestwood valued its 50% share in Stagecoach at $666 million.

ConEd, which bought its stake in Stagecoach in 2016 for $975 million, may also consider monetizing its 12.5% stake in the Equitrans Midstream Corp.-led Mountain Valley Pipeline LLC project as part of the utility's plans to stop investing in long-haul gas pipelines. Mountain Valley Pipeline has said it expects to begin service in late 2021 after delays.