Kinder Morgan Inc. is leaving behind the master limited partnership structure and becoming a corporation in order to stay alive with both investors and regulators.
Alison Sider and Russell Gold wrote for The Wall Street Journal about the company’s new structure:
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.
But Kinder now is so big that the MLP structure is limiting, said Richard Kinder, the companies’ founder and chief executive. Combining all four of its publicly traded units into one corporation, he said in an interview, “will allow us to further expand the reach of the kind of projects we can do.”
Acknowledging the difficulty that companies like his are having building big new pipelines because of regulatory scrutiny and public opposition, Mr. Kinder suggested that the newly consolidated Kinder Morgan would be able to move aggressively to acquire rivals and to expand its existing 80,000 miles of pipelines.
The New York Times said in a story by David Gelles that the company is set to become the third-largest oil and gas firm in the country:
The new Kinder Morgan will have an estimated enterprise value of about $140 billion — $100 billion of market value and $40 billion of debt — making it the third-largest energy company in the United States, after Exxon and Chevron.
“This simplifies the structure and will allow us to get to this turbocharged growth,” Richard D. Kinder, chief executive and co-founder of Kinder Morgan, said in an interview.
Mr. Kinder pioneered the M.L.P. structure in the 1990s and became a billionaire by overseeing Kinder Morgan’s growth for nearly two decades. He will own 11 percent of the new company, a stake that will account for about $11 billion of his fortune.
Under the deal’s terms, Kinder Morgan will acquire its two related M.L.P.s — Kinder Morgan Energy Partners and El Paso Pipeline Partners — and a third related company, Kinder Morgan Management, for $71 billion.
Kinder Morgan will pay a premium for each company, and use mostly stock to fund the purchases, allowing shareholders of the three targets to essentially continue their ownership.
The deal exposes one of the significant challenges M.L.P.s face: the need to constantly acquire new assets to continue increasing the dividends they pay investors.
Bloomberg’s Joe Carroll detailed the pressure from investors that the company is under at the point:
Investors have been putting pressure on Kinder, 69, to consolidate, cut costs and increase profits. Kinder Morgan Partners, the main operating unit, has been forced to buy into riskier, lower-profit businesses, such as oil tankers, because of its higher cost of capital, analysts with investment bank Tudor Pickering Holt & Co. said in a note to investors last month.
Kinder also has been criticized for the large amount of fees it paid out to his partnership management, among the highest in the industry, making it more expensive to finance growth.
Concerns that Kinder may have trouble being able to make deals that immediately add to earnings, plus “a deteriorating business mix have been major factors in three-year under-performance across the complex,” according to the July 16 Tudor Pickering note.
Kinder has lagged rivals such as Williams Cos. (WMB) and Enterprise Products Partners LP (EPD) during the past three years, generating a 73 percent total return compared with 221 percent for Williams investors and Enterprise’s 130 percent return.
The move signals a new round of dealmaking for the pipeline industry, which has seen growth rocket in the past five years as the shale boom has spread across North America, creating demand for more pipes in new locations to ship oil and gas to markets. The number of partnerships has multiplied rapidly because of demand from investors for cash payouts that beat debt yields.
The Associated Press story by Jonathan Fahey pointed out that Kinder Morgan is leaving the structure it helped start:
The combination means Kinder Morgan will abandon a novel corporate structure it pioneered and leveraged to great benefit, called the Master Limited Partnership. MLPs are given special tax breaks in part because they distribute much of their cash flow to investors and the partners who run the companies.
MLPs have become especially popular in recent years because investors have been willing to pay a premium for high-yielding investments at a time when interest rates on savings accounts and bonds are low.
The investor enthusiasm has helped make it easier for MLPs to raise money to buy pipelines or build new ones to grow their portfolios.
The Kinder Morgan Partners MLP is so big, though, that investors have questioned whether it could continue to grow under the requirement that it distribute so much of its cash.
While the story itself might seem a bit bland, it is interesting to see a company abandon a structure it helped implement. But it is good to see a company listening to investors and working to make itself profitable in the long run. The new company will certainly be large, and it will be interesting to see if it’s as responsive to investors going forward.
