KMI executes $71-billion consolidation purchase

Kinder Morgan Inc. (KMI), Kinder Morgan Energy Partners LP (KMEP), Kinder Morgan Management LLC (KMR), and El Paso Pipeline Partners LP reported that KMI will acquire all of the outstanding equity securities of KMEP, KMR and El Paso, creating a single publicly traded security, KMI. The total purchase price of the transaction was $71 billion: $40 billion KMI equity, $4 billion cash, and $27 billion assumed debt.

KMI secured committed financing for the cash portion of the transaction. The company described the combined entity as the largest energy infrastructure company in North America and the third-largest energy company overall with an estimated enterprise value of roughly $140 billion.

The combined KMI entities own an interest in or operate about 80,000 miles of pipelines and 180 terminals. KMI’s pipelines transport natural gas, gasoline, crude oil, carbon dioxide, and other products, and its terminals store petroleum products and chemicals and handle such products as ethanol, coal, petroleum coke, and steel.

The company reports $4.6 billion of project backlog over the next 7 years including LNG liquefaction at Elba Island (OGJ Online, Dec. 20, 2013), pipe projects supporting liquefaction projects, Tennessee Gas Pipeline north-to-south expansion projects (OGJ Online, Dec. 17, 2013), Eagle Ford shale crude gathering and processing (OGJ Online, June 4, 2013), Southern Natural Gas and Elba Express pipeline expansions (OGJ Online, Aug. 16, 2013), and system expansions to the Mexico border.

Deal details

KMEP unitholders will receive 2.1931 KMI shares and $10.77 in cash for each KMEP unit, the $89.98/unit price being a 12% premium on Aug. 8 closing prices and 11.4% on the July 16 closing price used by the parties while negotiating the transaction.

KMR shareholders will receive 2.4849 KMI shares for each share of KMR, the $89.75/share price being a 16.5% premium on Aug. 8 closing prices and a 16% premium on the July 16 closing price used by the parties in the negotiation. The parties negotiated consideration for KMR shares equal to the consideration for KMP units, using the July 16 reference date.

El Paso unitholders will receive 0.9451 KMI share and $4.65 in cash for each El Paso unit, the $38.79/unit price being a 15.4% premium on Aug. 8 closing prices and 11.2% on the July 16 reference price.

Both KMEP and El Paso unitholders will be able to elect cash or KMI stock consideration subject to proration.

Outlook: natural gas

Based on Wood Mackenzie’s First-Half 2014 Long-Term view, KMI sees demand for natural gas in power generation increasing 2.6 bcfd by 2019 and 7.2 bcfd by 2024, demand in industrial-petrochemical use increasing 2.9 bcfd by 2019 and 3.8 bcfd by 2024, exports to Mexico increasing 1.7 bcfd by 2019 and 2.5 bcfd by 2024, and LNG exports increasing 5 bcfd by 2019 and 10.1 bcfd by 2024.

KMI has reviewed the proposed transaction with the rating agencies and expects the combined entity will be investment grade. The Kinder Morgan companies will execute cross guarantees among and between the Kinder Morgan entities (with limited exceptions) to be effective on closing of the transaction to create a single creditor class and eliminate structural subordination.

Committees comprised exclusively of independent members of the boards of KMEP, KMR, and El Paso represented the business units in negotiations. The boards of all the Kinder Morgan companies voted to recommend the transaction to their respective unitholders and shareholders.

The companies expect KMI and KMR shareholder meetings and unitholder meetings for KMEP and El Paso in the fourth-quarter of this year, with closing before yearend.

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

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