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Strategies & Market Trends : Value Investing
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To: bruwin who wrote (53640)3/23/2014 11:48:14 AM
From: Spekulatius  Read Replies (2) of 78702
 
Re KMI - you estimate if debt costs is certainly wrong. I think you also did not understand what I said about. Kinder Morgans capital structure. The idea of KMI's structure is that KMI does not issue any new shares whatsoever to finance growth, the growth would be financed by limited partners EPB, KMP (and KMR).

These entities pay distributions ranging from 8-9% currently, so that is the cost if equity, plus add a growth rate of 2-5% (if you want). The blended cost if debt for Kinder Morgans LP is less than 5%. The key for Kinder Morgans LP is to stay investment grade, to keep the debt cost reasonable low, and have constant access to debt markets.

Even if KMI were to issue equity, your formula is wrong. First of all you need to consider taxes, since KMI is a C-tax corp, they pay ~35%. So the equity cost for KMI is roughly 6.5%, plus the growth rate. The growth rate is currently 8% and has nothing to do with retained earnings. You can easily see that issuing equity is way more expensive than issuing debt.
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