Richard Kinder_Kinder Morgan_June2009
Richard D. Kinder, Chairman and Chief Executive Officer of Kinder Morgan Energy Partners LP, addresses the Reuters Energy Summit in Houston on June 2, 2009. Reuters/Richard Carson

(Reuters) - Top U.S. pipeline company Kinder Morgan Inc said on Sunday it will put all its publicly traded units under one roof in a $70 billion deal, responding to investor concerns about its growth prospects and complicated financial structure.

The oil and gas pipeline company said it would shed the tax-advantaged legal structure it had popularized during the U.S. shale boom, the Master Limited Partnership (MLP), and fold its units into one company with a market capitalization of $92 billion organized as a C-corporation.

The affected units include Kinder Morgan Energy Partners LP, Kinder Morgan Management, and El Paso Pipeline Partners. The deal is comprised of $40 billion in Kinder Morgan Inc equity, $4 billion in cash and $27 billion in assumed debt.

Chairman and Chief Executive Officer Rich Kinder had been under pressure from investors and last month on Kinder Morgan Partners' second-quarter earnings call said combinations of the Kinder companies were being evaluated.

A source familiar with the matter said Kinder Morgan's overall valuation had suffered because it traded as four entities and the market struggled to understand it.

The MLP structure also required the units to hand over some 40 percent of their cash to general partners, hurting Kinder Morgan's ability to make acquisitions that will now be easier to carry out, the source added.

At one point, people involved in the transaction considered putting all the units into a single MLP, the source said.

But MLPs, which pay no taxes if they distribute the bulk of their earnings to investors, have been coming under greater scrutiny.

The Internal Revenue Service this year halted approvals for new MLPs that stray from the traditional pipeline model, some investors have said the weak corporate governance standards of MLPs expose minority investors to added risks, and others have warned their allure among yield-hungry investors could diminish if U.S. interest rates rise.


The company said in a presentation on its website that the new structure would allow for better dividend growth of about 10 percent a year and bigger income tax savings. It expects the deal to close by the end of the year.

It forecast a dividend of $2.00 in 2015, a 16 percent increase over the anticipated 2014 dividend of $1.72.

"This combined entity will be the largest energy infrastructure company in North America and the third largest energy company overall," CEO Kinder said in a statement.

Kinder, a former Enron Corp executive, formed Kinder Morgan in 1997, growing the company from one with 175 employees to one that now has about 11,000 employees.

Worth an estimated $10 billion, according to Forbes, he has pledged much of his fortune to charity.

Kinder Morgan is credited with pioneering the use of MLPs that more than 100 capital-intensive companies in the energy sector have adopted, and the company's deal marks a significant pullback from the structure.

Kinder Morgan, the largest midstream company in North America, has an interest in or operates some 80,000 miles of pipelines that move natural gas, refined products, carbon dioxide and crude oil.

In a July note to clients, analysts at Houston-based investment bank Tudor, Pickering Holt said the Kinder companies had underperformed for the last two years, held back by a "stubbornly high cost of capital" even though since 2012 about $40 billion in deals were struck that were intended to jump-start growth.

An email sent to clients of independent research firm Hedgeye Risk Management last year called Kinder Morgan and its associated companies "a house of cards," though other analysts disagreed and said the company had strong fundamentals as U.S. output of oil and gas, and demand for infrastructure to move it, surges.

Barclays and Citi acted as financial advisors to KMI, Barclays is providing committed financing for the transaction, and Weil Gotshal & Manges and Bracewell & Giuliani acted as legal counsel to KMI, according to the statement.

Jefferies acted as financial advisor to KMP and KMR and Baker Botts acted as legal counsel to KMP and KMR. Tudor, Pickering, Holt & Co acted as financial advisor to EPB and Vinson & Elkins acted as legal counsel to EPB.