Monday, October 17, 2011

Kinder Morgan purchasing El Paso for approximately $38 billion

HOUSTON, Texas - Kinder Morgan, Inc. (NYSE: KMI) and El Paso Corp. (NYSE: EP) on Oct. 16 announced a definitive agreement whereby KMI will acquire all of the outstanding shares of EP in a transaction that will create the largest midstream and the fourth largest energy company in North America with an enterprise value of approximately $94 billion and 80,000 miles of pipelines.

The total purchase price, including the assumption of debt outstanding at El Paso Corp. and including the debt outstanding at El Paso Pipeline Partners, L.P. (NYSE: EPB) is approximately $38 billion.

The combined enterprise, including the associated master limited partnerships, Kinder Morgan Energy Partners, L.P. (NYSE: KMP) and EPB, will represent the largest natural gas pipeline network in the United States, the largest independent transporter of petroleum products in the United States, the largest transporter of CO2 in the United States and the largest independent terminal owner/operator in the United States.

"This once in a lifetime transaction is a win-win opportunity for both companies," said Kinder Morgan Chairman and CEO Richard D. Kinder. "The El Paso assets are primarily regulated interstate natural gas pipelines that produce substantial, stable cash flow and have access to key supply regions and major consuming markets. The natural gas pipeline systems of the two companies are very complementary, as they primarily serve different supply sources and markets in the United States. The transaction is expected to produce immediate shareholder value (upon closing) through strong cash flow accretion and offers significant future growth opportunities."

The consideration to be received by the EP shareholders is valued at $26.87 per EP share based on KMI's closing price as of Oct. 14, 2011, representing a 47 percent premium to the 20-day average closing price of EP common shares and a 37 percent premium over the closing price of EP common shares on Oct. 14, 2011.

The offer is comprised of $14.65 in cash, 0.4187 KMI shares (valued at $11.26 per EP share) and 0.640 KMI warrants (valued at $0.96 per EP share) based on KMI's closing price on Oct. 14, 2011. The warrants will have an exercise price of $40 and a five-year term. EP shareholders will be able to elect, for each EP share held, either (i) $25.91 in cash, (ii) 0.9635 shares of KMI common stock, or (iii) $14.65 in cash plus 0.4187 shares of KMI common stock. All elections will be subject to proration and in all cases EP shareholders will receive 0.640 KMI warrants per share of EP common stock.

The receipt of shares and warrants by EP shareholders in the transaction is intended to be tax free for U.S. federal income tax purposes.

Upon closing, KMI shareholders are expected to own approximately 68 percent of the combined company and EP shareholders are expected to own the remaining 32 percent.

"El Paso's board and management have been highly focused on delivering value for our shareholders, and we believe that our agreement with Kinder Morgan will provide even greater value for our shareholders than we expected through the planned spin-off of our exploration and production business," said Doug Foshee, chairman, president and chief executive officer of El Paso Corp.

The transaction has been approved by each company's board of directors.

KMI has a commitment letter from Barclays Capital underwriting the full amount of cash required for the transaction. Prior to closing, the transaction will require approval of both KMI and EP shareholders. The transaction is expected to close in the second quarter of 2012 and is subject to customary regulatory approvals.

"We believe that natural gas is going to play an increasingly integral role in North America," said Kinder. "With the recent development of shale resources, there are now abundant domestic supplies of natural gas, which are being used increasingly to generate electricity and are environmentally friendly. If America is serious about reducing carbon emissions to benefit the environment, and reducing its dependence on foreign oil, natural gas is absolutely the best readily available option. We are delighted to be able to significantly expand our natural gas transportation footprint at a time when it seems likely that domestic natural gas supply and demand will grow at attractive rates for years to come."

The transaction is expected to be immediately accretive to dividends per share at KMI, distributions per unit at KMP, dividends per share at Kinder Morgan Management (NYSE: KMR) and distributions per unit at EPB. Part of these benefits will be driven by cost savings, which are expected to be approximately $350 million per year, or about five percent of the combined system's EBITDA.

Kinder Morgan intends to divest El Paso’s exploration and production assets in order to trim the high debt level that is expected to crop up from the takeover. By the end of 2015, Kinder Morgan expects its assets to exclusively comprise its MLP and El Paso Pipeline Partners L.P. (NYSE: EPB) stakes, as well as the ownership of their respective shares and of Kinder Morgan Management LLC (NYSE: KMR).

The deal will also enhance steady cash flow generation and promise growth for the company’s MLP, Kinder Morgan Energy Partners, which plans to acquire a significant portion of El Paso’s natural gas pipeline assets over the next few years at attractive prices.

For some several years to come, the average annual growth rate in KMP distributions per unit and KMR dividends per share is expected at around seven percent, up five percent annually from the prior estimate on the back of likely dropdowns from this transaction.

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