Kinder Morgan deal: Why it's a big deal

Kinder Morgan deal will make the company the 4th biggest US energy company by market value. The Kinder Morgan deal will bring three additional companies under the Kinder Morgan Inc. umbrella.

The group of oil and gas pipeline and storage companies controlled by Kinder Morgan but traded separately will combine and become the 4th biggest U.S. energy company by market value.

“This transaction dramatically simplifies the Kinder Morgan story, by transitioning from four separately traded equity securities today to one security going forward, and by eliminating the incentive distribution rights and structural subordination of debt,” chairman Richard D. Kinder said in a press release Sunday. “Further, we believe that KMI will be a valuable acquisition currency and have a significantly lower hurdle for accretive investments in new energy infrastructure."

The companies announced Sunday that Kinder Morgan Inc., Kinder Morgan Energy Partners, Kinder Morgan Management and El Paso Pipeline Partners will all combine under the Kinder Morgan Inc. umbrella and trade under the KMI ticker symbol.

Houston-based Kinder Morgan Inc. says the total purchase price of the three other companies is $71 billion, including $27 billion of assumed debt.

The combined market value of the four companies was $92 billion as of the close of the market Friday. That would make it the fourth largest U.S. energy company after Exxon Mobil, Chevron and ConocoPhillips.

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.

CEO Richard Kinder said in a statement Sunday that it will be easier for the combined company to add new pipeline projects and other energy infrastructure in a way that will add to the company's earnings.

"In the opportunity-rich environment of today's energy infrastructure sector, we believe this transaction gives us the ability to grow KMI for years to come," Kinder said.

Kinder Morgan said it expects the combined company's debt will be rated investment grade by rating agencies, which would allow it to borrow money for new projects at relatively low rates.

The deal is subject to shareholder and regulatory approval. It is expected to close this year.