On August 10, 2014, Kinder Morgan Inc. (KMI) announced that it plans to acquire all the outstanding equity securities of Kinder Morgan Energy Partners LP, Kinder Morgan Management LLC, and El Paso Pipeline Partners LP in a deal valued at more than $70 billion. The combined entity will further Kinder Morgan’s reign as the largest energy infrastructure company in North America and the third largest energy company overall, with an estimated enterprise value of about $140 billion. The Kinder Morgan subsidiaries collectively own an interest in or operate approximately 80,000 miles of pipelines and 180 terminals currently. Its pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and its terminals store petroleum products and chemicals and handle such products as ethanol, coal, petroleum coke, and steel.
The move away from the MLP structure that Kinder Morgan helped to engineer is both an indicator of the company’s size and its growth strategy. MLPs have become popular since the 1980s because they combine the tax benefits of a limited partnership (MLPs pay no tax on profit) with the liquidity of publicly traded securities. Since its launch, Kinder Morgan’s growth has slowed, which made it less attractive to investors than other, faster-growing MLPs. Moreover, the amount of money one of the subsidiaries was required to pass on to the general partner—called incentive distribution rights—had reached a tipping point in which it was paying a majority of its dividends to the Kinder Morgan corporation, rather than shareholders. This made the company’s cost of capital high, constraining its acquisitions strategy. With the recent consolidation, KMI states that it plans “to pursue expansion and acquisitions in a target-rich environment,” including more than 120 energy MLPs that have a combined enterprise value of $875 billion.
Does Kinder Morgan’s recent decision signal a trend? The jury is still out, but it is likely that other mature MLPs are facing the same challenges that led Kinder Morgan to this move.
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