Kinder Morgan to unite a house divided in $44 billion deal

HOUSTON – Houston billionaire Richard Kinder is fusing all the pieces of his fragmented pipeline empire into one company, Kinder Morgan Inc., in a $44 billion transaction that ranks among the largest in U.S. history.

In a move that would end nearly two decades of delegating its main operations to subordinate firms, Houston-based Kinder Morgan said Sunday it is planning to buy out three companies it controls indirectly for $44 billion in cash and stock, bringing its network of North American pipelines and energy storage terminals under one corporate roof. It also will assume $27 billion in debt.

Taken together, the three purchases rank as the second-largest energy deal and 16th-largest acquisition overall in U.S. history, according to data compiled by Bloomberg.

The only U.S. energy deal to outrank the one Kinder Morgan proposed Sunday is Exxon Corp.’s $74.5 billion purchase of Mobil Corp. in 1999. It’s larger than Chevron Corp.’s $36.4 billion takeover of Texaco Inc. in 2001, and it beats out the deal that would have been this year’s biggest in the United States, Comcast’s $43.9 billion acquisition of Time Warner Cable. Kinder Morgan projects its stock market value will climb from $37.1 billion on Friday to around $100 billion after the deal’s close, which is expected by the end of the year.

In an interview with Fuelfix, Richard Kinder — the chairman and CEO of Kinder Morgan Inc. —  said the massive buyout is an effort to accelerate the firm’s North American growth by getting rid of Kinder Morgan Inc.’s rights to cash infusions paid by its main pipeline and terminal companies, Kinder Morgan Energy Partners and El Paso Pipeline Partners.

“We’ve gotten to a size where our incentive distribution rights at the parent take up a very large portion of the cash flow” coming out of the two pipeline operators, Kinder said. After the deal, “everything will be tethered into one melting pot that’s going to produce dramatically increased dividends and a faster growth rate.”

Kinder Morgan Energy Partners’ cash distributions to Kinder Morgan Inc. ate up about half of its $3.3 billion in available cash last year, according to regulatory filings. Eliminating the distributions, Kinder said, will enable the firm to invest unimpeded in North America’s $640 billion market for new energy infrastructure investments.

Kinder Morgan Energy Partners and El Paso Pipeline Partners are master limited partnerships, tax-advantaged corporate structures that are required to distribute its most or all of their cash flow to investors. The third company in the deal, Kinder Morgan Management, was formed in 2001 to hold a stake in  Kinder Morgan Energy Partners.

Two decades ago, Kinder’s firm was the first master limited partnership to put a laser focus on growing its distributions by acquiring or investing in new assets – and the strategy paid off: All told, the Kinder Morgan companies have boosted their enterprise value – their stock value plus debt – from about $300 million in the mid-1990s to a combined $140 billion, operating the largest network of U.S. pipelines and energy storage terminals, with 80,000 miles of pipelines and 180 terminals.

Now, after years of rapid growth, Kinder Morgan is shedding the MLP structure – in a bid to grow even faster.

“We’re still believers in the MLP model; there’s nothing wrong with it,” Kinder said. “But if we put all these together, we can reduce that cost of capital and we can grow faster, and provide a simpler story to our investors. We’ve got a lot of fertile ground to plow.”

Some analysts recently have criticized Kinder Morgan’s corporate structure, saying that the subordinate pipeline firms’ high-percentage payouts to the general partner are stunting their growth. MLPs  have gained favor with investors in recent years because of  yields that are much higher than most other investments, as interest rates have stayed low. The yield is about 7 percent on a Kinder Morgan Energy Partners unit — a master limited partnership’s counterpart to a corporate share.

Under the new structure, Kinder said, the yield will start substantially lower, at 4.5 percent, and will gradually decline. Still,  the bulked-up Kinder Morgan Inc. will be able to boost its annual dividends 16 percent to $2 a share next year, pushing its total dividend payment to around $4.2 billion. It’ll also generate $2 billion in excess cash that could be poured into its investment plans.

And without the cash distributions, the firm could increase its $17 billion backlog of infrastructure projects and take a harder look at rivals it wants to buy. There are about 120 master limited partnerships in the market worth $800 billion, and that’s likely to spur an era of consolidation over the next few years, Kinder said.

Indeed, the firm bought out natural gas pipeline giant El Paso Corp. in 2012 for $21 billion and, last year, spent $4 billion to buy gas pipeline and processor company Copano Energy.

Steve Kean, Kinder Morgan’s president and chief operating officer, said more operators in North America’s emerging shale gas plays and more liquefied natural gas exporters are signing up for gas shipments, with Kinder Morgan adding long-term commitments to handle 5.3 billion in cubic feet of natural gas last year.

“We haven’t even seen the next big wave crash on the shores,” Kean said. “We think there will be substantial power conversion to natural gas. There’s great industrial demand all along the Gulf Coast and there’s more to come on Mexico exports.”

Over the next decade, Kinder said, there will likely be another 27 billion cubic feet of natural gas that needs to be moved around the country.

That’s because the center of gravity for of gas production in the United States has shifted from Texas and Louisiana to the Marcellus Shale in Pennsylvania and the Utica Shale in Ohio. And the nation’s main base for gas buyers has shifted from the Midwestern and Northeastern states to the Gulf Coast, where new liquefied natural gas export and  petrochemical facilities are emerging, Kinder said.

“You’ve got to build a hell of a lot of transportation capacity to get it there, and that’s where I think we really fit well,” he said. He added the company won’t have to lay off any of its 11,000 workers because of the deal, and will actually be able to hire new employees at a faster rate.

Kinder, the richest Houston billionaire according to Forbes, co-founded the pipeline empire in the 1990s and owns 23 percent of Kinder Morgan Energy Partners’ general partner, a stake worth $8.4 billion on Friday. After issuing millions of shares in the transaction announced Sunday, his stake in KMI will fall to 11 percent, he said.

“I think the real test of whether this makes sense or not is that I should be the canary in the coal mine,” he said. “So if I didn’t think this was going to be a really good deal for the KMI shareholders, I certainly would never have voted to do this transaction.”

While he acknowledged mega-deals can often draw scrutiny from investors, Kinder said he’s confident the deal will pass muster, largely because of the favorable terms of the deal.

  • Kinder Morgan Inc. agreed to swap nearly 2.2 shares and $10.77 in cash for each partnership unit in Kinder Morgan Energy Partners, the biggest pipeline operator that it indirectly controls. That’s worth $89.98 a unit, a 12 percent premium on Friday’s closing price.
  • The firm said it will also give nearly 2.5 shares of Kinder Morgan Inc. for each share in Kinder Morgan Management. At a value of $89.75 a share, the offer represents a 16.5 percent premium on Friday’s price.
  • Investors in El Paso Pipeline Partners will get 0.94 shares in the general partner and $4.65 in cash, swapping $38.79 for each unit. That’s a 15.4 percent premium on Friday’s price.