Big Doings in the Utility Sector

The biggest deal in our table is Kinder Morgan Inc.’s (NYSE: KMI) consolidation of the master limited partnerships (MLP) under its purview. See Our Take on the Kinder Morgan Mega-Deal and the Aug. 18 Utility Roundup.

Here’s a refresher on the offer:

• For each unit of Kinder Morgan Energy Partners (NYSE: KMP), investors will receive 2.1931 shares of Kinder Morgan Inc, plus $10.77 in cash. This is a taxable event and long-time holders will likely have to pay out most of the merger premium to cover taxes on deferred return of capital.
• For each unit of El Paso Pipeline Partners LP (NYSE: EPB), investors will receive 0.9451 units of Kinder Morgan Inc, plus $4.65 in cash. This is a taxable event and is likely to wipe out most of long-term unitholders’ premium with tax.
• For each i-unit of Kinder Morgan Management LLC (NYSE: KMR), investors will receive 2.4849 shares of Kinder Morgan Inc. This is not a taxable event.

Combining these entities into a single C corporation simplifies the organizational structure, while eliminating the MLP’s burdensome incentive distribution rights and reducing its cost of capital.

In short, this transaction effectively expands Kinder Morgan Inc.’s pipeline of organic-growth opportunities, improves internal rates of return on announced projects and makes it easier for the firm to pursue acquisitions in a highly competitive environment.