Kinder Morgan Inc. is consolidating its vast
oil-and-gas pipeline empire into a single company in a $44 billion deal amid
investor worries about the enterprises' growth prospects. The reorganized
company will abandon the financial structure it helped popularize in the late 1990s:
the master limited partnership. These complex tax-oriented offerings have
caught on among energy companies facing substantial investments in
infrastructure because of the U.S. oil and gas boom.
Acknowledging the difficulty that companies like this are
having building big new pipelines because of regulatory scrutiny and public
opposition, the newly consolidated Kinder Morgan would be able to move
aggressively to acquire rivals and to expand its existing 80,000 miles of
pipelines.
Kinder Morgan would pay about $40 billion in stock and $4
billion in cash to investors in the other three related companies. The company
also will assume $27 billion in debt, bringing the total value to approximately
$71 billion.
Master limited partnerships basically give special tax
breaks to companies that get almost all their revenues from natural-resource
businesses. That typically has meant pipeline companies, which charge toll-like
fees to move oil and gas. The partnerships don't pay corporate taxes to the
federal government, distributing most of their cash flow to shareholders—and to
the general partners who run the MLPs—in dividend-like payments.
These payouts have made them increasingly popular with
investors, especially baby boomers hungry for high yields in an era of ultralow
interest rates. Energy companies have also embraced them as a way to raise
equity and issue debt backed by specific assets such as pipelines.
But investors have been concerned that with a $37 billion
market value, Kinder Morgan's flagship partnership, Kinder Morgan Energy
Partners LP, is so big that it is difficult for the partnership to
achieve substantial revenue growth. Analysts also have cited the hefty
payments—about 46% of its cash—that the partnership has been making to the publicly
traded company that runs it, Kinder Morgan Inc. Mr. Kinder owns 23% of that
company, though his stake will decline to about 11% after the consolidation.
After the deal announced Sunday is completed, only Kinder
Morgan Inc. will remain. In exchange, owners of the other three other
securities will receive a mixture of cash and shares of Kinder Morgan Inc. at
premiums ranging from 12% to 16.5%, based on last Friday's closing prices. Each
of the stocks has slipped about 5% since late last month. Kinder Morgan said it
had secured financing for the cash needed to pay its investors.
Under the consolidation, many individual investors in Kinder
Morgan partnerships at first could receive smaller regular distributions,
though the investors will also receive an initial cash payment of $4.65 or
$10.77 a unit, depending on which partnership they own. The new combined entity
will offer a $2 annual dividend that is expected to increase 10% annually
through 2020, the company said. The value of the new entity's debt and equity
is expected to be $140 billion.
Mr. Kinder and William Morgan created Kinder Morgan and they
started with $40 million in assets purchased from Enron, which was eager to
jettison the staid pipeline business in favor of conducting flashier financial
engineering. In 2006, Mr. Kinder announced a plan to take Kinder Morgan Inc.
private in what was then the largest management-led buyout of a public company.
Five years later, the company went public again in a large public offering.
Later that year, a $21.1 billion purchase of rival El Paso Corp. made Kinder
Morgan the largest natural-gas pipeline operator in the U.S.
U.S. energy production has soared since 2009 because of
widespread use of hydraulic fracturing and other technologies that have made it
possible to tap energy trapped in shale deposits.
At the same time, getting new pipelines off the drawing
board has been tough. Heightened regulatory scrutiny and public opposition have
derailed or delayed some of the largest pipeline projects, including Kinder
Morgan's proposed Trans Mountain Pipeline to Canada's West Coast.
Infrastructure companies including Kinder have increasingly have invested in
rail terminals and other equipment so that oil can be shipped by railroad,
barge and truck.
Kinder Morgan's new structure will allow the company to move
more rapidly to take advantage of the need for more energy infrastructure. The
deal is expected to be completed by year-end, subject to shareholder and
regulatory approval.
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