Kinder Morgan Inc. Abandons Master Limited Partnership Structure in Consolidation of Three Subsidiaries

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.

Key Details

  • Owners of subsidiaries’ units will receive either shares in KMI or a combination of KMI shares and cash; the KMI shares will be at a premium compared against a July 16 reference date
  • The reorganized company, a C-corp, will abandon the financial structure known as the master limited partnership (MLP)
  • Although the proposed combination will eliminate the partnership’s tax-free status, the arrangement will confer other tax benefits on the parent company, reducing income tax liabilities by about $20 billion over 14 years
    • Note that this figure is on corporate income; from the investor’s perspective, the consolidation counts as a taxable sale, which means they will owe approximately $4 to $25 per unit
  • The founder of the company, Richard Kinder, will likely receive a large payout (hundreds of millions of dollars) as a result of the transaction

Implications

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.

More Information

NY Times: Kinder Morgan’s Reorganization Puts Master Limited Partnerships in Question

Bloomberg: Billionaire Kinder Streamlines Empire to Target Rivals

Bloomberg: Kinder Nets $800 Million in One Day on Consolidation Deal

This report is part of the Gas Minute series. To view all featured Minutes, please click here.

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