Kinder Morgan Inc. (KMI), the general partner of the Kinder Morgan structure of master limited partnerships, is purchasing its underlying MLPs: Kinder Morgan Energy Partners, L.P. (KMP), Kinder Morgan Management, LLC (KMR), and El Paso Pipeline Partners, L.P. (EPB). KMI will acquire all of the outstanding equity securities for all three of the entities above.
This is huge news as MLPs have been popular investments for many dividend growth investors due to their combined high starting yield and strong dividend growth. I personally never invested in any MLPs due to their rather complicated tax structure, but I have invested in general partners due to their exposure to the energy renaissance taking place here in the US, high growth profile, strong yield, and incentive distribution rights. KMI is my largest such investment.
This news basically means the following:
- KMP unitholders will receive 2.1931 KMI shares and $10.77 in cash for each KMP unit. This results in a price of $89.98 per unit, a 12% premium based on the August 8, 2014 closing price.
- KMR shareholders will receive 2.4849 KMI shares for each share of KMR. This results in a price of $89.75 per share, a 16.5% premium based on the August 8, 2014 closing price.
- EPB unitholders will receive .9451 KMI shares and $4.65 in cash for each EPB unit. This results in a price of $38.79 per unit, a 15.4% premium based on the August 8, 2014 closing price.
- Both KMP and EPB unitholders will be able to elect cash or KMI stock consideration subject to proration.
Furthermore, Chairman and CEO, Richard D. Kinder, announced that the combined entity should be able to generate 10% annual growth in dividend during the 2015-2020 period due to significant cost savings and the elimination of the IDR.
And the best news of all: KMI will increase its dividend to $2.00 annually per share in 2015, a 16.3% increase from the last declared payout of $0.43 quarterly per share.
This transaction is expected to complete by year end.
After the transaction completes all shareholders and unitholders in any of the above entities will hold shares in one single, publicly traded security – KMI.
The combined entity will be the third largest energy infrastructure company in North America and the third largest energy company overall based on enterprise value, and will own approximately 80,000 miles of pipelines and 180 terminals.
I personally applaud this move. It simplifies the structure, reduces costs, eliminates the IDR that the underlying MLPs were having a hard time paying, and results in a solid yield with outstanding growth in the dividend. And I was always a fan of this business, as KMI is one of my largest investments. I love the pipeline model, and KMI is just a monster in this arena as it is now by far the largest midstream energy firm. The pipelines are a toll road like business, allowing Kinder Morgan to collect fees when energy products are transported across their pipelines. And the infrastructure is a huge competitive advantage in and of itself, as it’s difficult to go out and just recreate this for a competitor.
As a KMI shareholder it appears I need to do nothing here but enjoy continuing to collect my rising dividend. Shareholders or unitholders in the other entities will be affected via the outcomes listed above.
I may regret not purchasing more KMI in the low $30s as it traded not that long ago, but KMI was already a very large portion of my portfolio. And due to its high yield, it’s one of my largest single sources of dividend income. As such, I was okay diversifying in other areas of the market. Of course, a case could be made to go large with a successful company, as you can see with the way Richard D. Kinder himself has been busy buying up KMI shares hand over fist lately.
You can view the official press release here.
Full Disclosure: Long KMI.
What do you think? A fan of this move?
Thanks for reading.