Combination Will Form
Largest Natural Gas Pipeline Network and Largest Midstream Energy
Enterprise in North America
HOUSTON, Oct 16, 2011 (BUSINESS WIRE) -- Kinder Morgan, Inc. (NYSE:
KMI) and El Paso Corporation (NYSE: EP) today 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
Corporation 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 Corporation. "We are very pleased to become
a significant part of this combined enterprise and offer our
shareholders the opportunity to participate in what we believe will be
North America's preeminent infrastructure company."
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," stated 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 5 percent
of the combined system's EBITDA. Following is a summary of the plans and
benefits for each entity:
KMI
Following the closing of the transaction, EP will become a subsidiary
of KMI. KMI intends to sell the exploration and production assets of EP.
EP's net operating loss carryforwards will offset taxes associated with
this sale and the resulting cash raised will substantially reduce the
debt borrowed to fund the cash portion of the transaction. KMI also
intends to sell (drop down) all of EP's natural gas pipeline assets to
KMP and EPB over the next few years. Each of these transactions will be
subject to approval by KMP's or EPB's independent directors, who are
expected to obtain independent advisors to assist them in their
analysis.
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, KMR shares and EPB units. At that point, well
over 80 percent of KMI's cash flows is expected to come from the general
partner interests and essentially all of the remainder from its limited
partner interests. KMI expects to continue to determine dividend payouts
based upon this ultimate set of assets and cash flows. In the interim,
KMI will be generating more cash flow than necessary to support the
expected dividend stream and will use the excess to pay down debt.
Incorporating this approach to determining dividends, the transaction is
expected to be immediately accretive to KMI's dividend per share. If
this transaction were to close at the beginning of 2012 and factoring in
KMI's normal expected annual growth, KMI would expect to pay a dividend
per share of approximately $1.45 in 2012, up substantially from its
current annual rate of $1.20 per share. Since the transaction is
unlikely to be in effect for the full year 2012, KMI's actual dividend
in 2012 will likely be slightly less than $1.45. As a result of this
transaction and KMI's normal expected annual growth, KMI now expects its
dividend per share to grow at an average annual rate of around 12.5
percent from its budgeted 2011 dividend per share of $1.16 through 2015.
This growth rate is higher than KMI's previously announced 10 percent
average annual growth rate expectation for dividends per share.
While KMI will be assuming a significant amount of incremental debt
as a result of the transaction, the sale of EP's exploration and
production business, dropdown transactions to KMP and EPB, and excess
cash flows should allow for a rapid reduction in debt levels. KMI
expects its ratio of debt to distributions received will be lower than
its current level of about 2.5 times by the end of 2013 and that the
ratio of consolidated net debt for the entire enterprise (including debt
at KMP and EPB) to consolidated EBITDA will return to a little over 4
times by the end of 2014. "Given the quality of the assets that will be
owned by the combined enterprise and the stability of cash flows that
these assets generate, we believe that we have a clear path to achieving
these expectations and that the resulting debt levels are conservative,"
said Kinder.
KMP and KMR
KMP is expected to purchase a significant portion of EP's natural gas
pipeline assets over the next few years at attractive prices. These
assets will enhance KMP's already very stable cash flow stream and will
provide significant additional growth opportunities. For 2012, the KMP
distribution per unit and KMR dividend per share are expected to be a
little less than $5.00, up from a budgeted $4.60 for 2011. Over the next
several years, the average annual growth rate in KMP distributions per
unit and KMR dividends per share is expected to be around 7 percent,
higher than the prior estimate of 5 percent annually, with the increase
being driven by the expected dropdowns resulting from this transaction.
KMP expects to fund the asset acquisitions with a combination of
equity and debt, consistent with its past practices. The equity will be
in the form of both KMP unit and KMR share issuances, with KMI taking a
small portion of the issuances. KMP expects it will reduce its debt to
EBITDA ratio consistently over this time period down to around 3.3
times, which will continue to represent a very strong balance sheet,
especially considering the strength of its assets and the stability of
its cash flows.
By virtue of the issuance of KMR shares to fund a portion of the
dropdown transactions and the continuation of the payment of KMR
dividends in shares, quarterly automatic issuance of KMR shares is
expected to increase significantly over this time period. As a reminder,
KMP must generate distributable cash flow to support the KMR dividends,
but then retains that cash as the dividends are paid in shares. This
significant increase in total KMR dividends will have some very positive
impacts on KMP and KMR. First, KMP may be able to completely fund the
equity portion of its annual investment programs (expansion capital and
acquisitions) through the KMR dividends, eliminating the need to raise
equity in the capital markets, except in the case of large investments.
Second, to the extent the KMR dividends are greater than the required
equity to fund the investment program, KMP could use the excess cash
flow to repurchase KMR shares on the open market. Thus, KMP would be
unique among MLP's for its ability to fund itself, and KMR would have a
natural, consistent source of demand for its shares.
EPB
EPB is also expected to purchase EP pipeline assets from KMI over the
next few years at attractive prices. EPB's asset base will continue to
consist completely of stable, high quality interstate natural gas
pipelines. "We expect EPB to be able to grow its distributions per unit
at an average annual growth rate of about 9 percent through 2015 as a
result of this transaction," Kinder said. "EPB is also expected to fund
its acquisitions with a combination of equity and debt issuance,
maintaining its strong balance sheet. We would expect EPB's debt to
EBITDA ratio to remain around 4 times, which is appropriate for the
strength of the assets that it owns and is expected to acquire."
The combined company will be the:
- Largest owner and operator of
natural gas pipelines and storage assets in North America with
approximately 67,000 miles of natural gas transportation pipelines.
Pipelines are connected to many important natural gas shale plays
including Eagle Ford, Marcellus, Utica, Haynesville, Fayetteville
and Barnett. Largest provider of contracted natural gas treating
services and significant other midstream gathering assets.
- Largest independent transporter
of petroleum products in the United States, transporting
approximately 1.9 million barrels per day of gasoline, jet fuel,
diesel, natural gas liquids and crude oil through more than 8,000
miles of pipelines.
- Largest transporter of CO2
in the United States, transporting 1.3 billion cubic feet per day.
Carbon dioxide is used in enhanced oil recovery projects.
- Second largest oil producer in
Texas, producing over 50,000 barrels per day.
- Largest independent terminal
owner/operator in the United States. Liquids terminals have capacity
of 107 million barrels and store refined petroleum products, ethanol
and more. Dry bulk terminals are expected to handle over 100 million
tons of materials in 2011, including products like coal.
- Only oilsands pipeline serving
the West Coast. The Trans Mountain pipeline system transports
300,000 barrels of crude oil per day to Vancouver, B.C., and
Washington state.
"El Paso's assets are a great fit with our long-standing strategy of
owning and operating predominantly stable, regulated, fee-based
businesses in growing markets," Kinder said. "We have a proven track
record of merging companies, operating assets efficiently and growing
existing assets through expansions, and we are very excited to add these
assets to our portfolio."
Foshee added, "I would like to take this opportunity to recognize the
5,000 members of Team El Paso for their collective efforts to lead our
company to the most important and exciting decision in our 80-plus year
history. The members of Team El Paso have always strived to make El Paso
better. Our merger with Kinder Morgan will not only build on our proven
track record of stewardship and customer service, but it will also
provide new opportunities for our employees as they become a part of
larger platforms."
Once the transaction is completed, Kinder will remain chairman and
CEO of the combined entity. The parent company will be named Kinder
Morgan, Inc. and its corporate headquarters will remain in Houston,
Texas. Two members of EP's board of directors will join the KMI board of
directors. The transaction will require the approval of both KMI and EP
shareholders who will vote at special meetings expected to be held by
January 2012. Both the boards of directors of KMI and EP are
recommending that shareholders vote in favor of the transaction. EP has
agreed not to solicit competing transactions and to pay a termination
fee of $650 million to KMI under certain circumstances.
Evercore Partners and Barclays Capital acted as financial advisors
and provided fairness opinions to KMI and Weil Gotshal & Manges LLP and
Bracewell & Giuliani, LLP acted as legal counsel to KMI. Morgan Stanley
acted as financial advisor and provided a fairness opinion to EP in
connection with the KMI transaction, Goldman Sachs also acted as
financial advisor to EP in connection with its previously announced
spin-off transaction and related matters in connection with the KMI
transaction, and Wachtell, Lipton, Rosen & Katz acted as legal counsel
to EP.
El Paso Corporation provides natural gas and related energy products
in a safe, efficient, and dependable manner. The company owns North
America's largest interstate natural gas pipeline system, one of North
America's largest independent exploration and production companies and
an emerging midstream business. El Paso owns a 42 percent limited
partner interest and the 2 percent general partner interest in El Paso
Pipeline Partners, L.P. For more information, visit
http://www.elpaso.com.
Kinder Morgan, Inc. (NYSE: KMI) is a leading pipeline transportation
and energy storage company in North America. It owns an interest in or
operates more than 37,000 miles of pipelines and 180 terminals. Its
pipelines transport natural gas, gasoline, crude oil, CO2 and
other products, and its terminals store petroleum products and chemicals
and handle such products as ethanol, coal, petroleum coke and steel. KMI
owns the general partner interest of Kinder Morgan Energy Partners, L.P.
(NYSE: KMP), one of the largest publicly traded pipeline limited
partnerships in America. Combined, KMP and KMI constitute the largest
midstream energy entity in the United States with an enterprise value of
approximately $55 billion. For more information please visit
http://www.kindermogan.com.
Please join Kinder Morgan and El Paso at 8:30 a.m. Eastern Time on
Monday, Oct. 17 at
www.kindermorgan.com for a LIVE webcast conference call to
discuss the announced transaction.The presentation for the call is
available at
www.kindermorgan.com.
IMPORTANT ADDITIONAL INFORMATION WILL BE FILED WITH THE SEC
