Kinder Morgan to acquire El Paso in $38 billion deal

Kinder Morgan Inc. reported it will acquire all outstanding shares of El Paso Corp. in a transaction creating the largest midstream and the fourth-largest energy company in North America, with an enterprise value of $94 billion and 80,000 miles of pipelines, the companies said. The total purchase price, including assumption of debt outstanding at El Paso and debt outstanding at El Paso Pipeline Partners LP (EPB), is $38 billion.

The combined enterprise, including the associated master limited partnerships, Kinder Morgan Energy Partners LP (KMP) and EPB, will be:

• The largest owner and operator of natural gas pipelines and storage assets in North America with roughly 67,000 miles of natural gas transportation pipelines connected to a variety of producing areas, including natural gas shale plays such as Eagle Ford, Marcellus, Utica, Haynesville, Fayetteville, and Barnett.

• The largest provider of contracted natural gas treating services and other midstream gathering assets.

• The largest independent transporter of petroleum products in the US, moving about 1.9 million b/d of gasoline, jet fuel, diesel, NGL, and crude oil through more than 8,000 miles of pipeline.

• The largest transporter of carbon dioxide in the US, moving about 1.3 bcfd.

• The largest independent terminal owner-operator in the US. Its combined liquids terminals will have capacity of 107 million bbl for refined products, ethanol, and more. Dry bulk terminals will handle over 100 million tons of material in 2011, including coal.

• The only oil sands crude pipeline serving the West Coast. The Trans Mountain pipeline system transports 300,000 b/d to Vancouver, BC, as well as to Washington state.

Deal details

The parent company will be named Kinder Morgan Inc. and its corporate headquarters will remain in Houston.

Consideration to be received by El Paso shareholders for the transaction is valued at $26.87/share based on KMI’s closing price as of Oct. 14. Upon closing, KMI shareholders are expected to own 68% of the combined company and EP shareholders are expected to own the remaining 32%.

Each company’s board of directors has approved the transaction. KMI has a commitment letter from Barclays Capital underwriting the full amount of cash required for the transaction. The transaction will require approval of both Kinder Morgan and El Paso shareholders before closing. Kinder Morgan expects the transaction to close in second-quarter 2012, subject to regulatory approvals.

Kinder Morgan anticipates cost savings of about $350 million/year as a result of the transaction. Following close, El Paso will become a subsidiary of Kinder Morgan. Kinder Morgan intends to sell El Paso’s exploration and production assets.

Kinder Morgan also intends to sell (drop down) all of El Paso’s natural gas pipeline assets to KMP and EPB over the next few years. By the end of 2015, KMI expects its assets to consist almost exclusively of its general partner interests in KMP and EPB, and the ownership of KMP units, Kinder Morgan Management LLC (KMR) shares and EPB units.

Contact Christopher E. Smith at chriss@ogjonline.com.

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