Pipeline deal to solidify energy giant as No. 1

| Tuesday, Oct. 18, 2011

Kinder Morgan Inc.'s agreement to buy El Paso Corp. for $21.1 billion, the energy industry's biggest transaction in more than a year, would create America's largest natural-gas pipeline network.

The combined company would have 67,000 miles of gas lines and eclipse Enterprise Products Partners LP as the nation's biggest pipeline operator.

The transaction strengthens Kinder Morgan's position as a major player in the U.S. gas industry, providing the infrastructure to transport growing production from new fields to new markets. Chief Executive Officer Richard Kinder is making a bet that the need for pipelines will continue to grow, said Bill Herbert, an analyst at Simmons & Co. International in Houston.

"Rich Kinder continues to make history by shaping and redefining the North American energy landscape," Herbert said. "And he is, once again, likely making the wise bet."

Pipeline grids are growing in Marcellus shale gas-producing regions of Western Pennsylvania and nearby states. More pipelines are needed to move gas to new markets, particularly for power generation, and to accommodate supplies from new gas fields such as the Marcellus Shale, said Dan Spears, a fund manager at Swank Capital LLC in Dallas.

EQT Corp. of Pittsburgh signed a deal with El Paso Corp. two years ago to develop the Northeast Passage line, originating in Monroe County, Ohio, and stretching 471 miles eastward through Greene, Fayette, Somerset and Bedford counties. An EQT spokeswoman did not respond to a request for comment.

Kinder Morgan Energy Partners, Sempra Pipelines & Storage and ConocoPhillips proposed a 375-mile line from Ohio to Princeton, N.J., carrying gas through Greene, Washington, Westmoreland and Indiana counties. Kinder Morgan Energy Partners is an associated master limited partnership.

"The merger makes a lot of sense, in that there are not a lot of duplicate assets" between the two companies, said energy expert Kent Moors at Duquesne University's Institute for Energy and the Environment.

El Paso mainly runs interstate pipelines, while Kinder Morgan has focused on gathering and storage lines, he said. The pipeline business is increasingly lucrative, due to the need to store gas from increased production.

"If you have to move your gas, you need to pay these guys. If it comes out of the ground and you need to store it, you pay these guys," Moors said. "Either way, they win."

"Major acquisitions like this underscore the critical and expanding role America's abundant natural gas reserves, particularly right here from the Marcellus and Utica shale formations, will continue to play in fueling our nation for decades to come," said Kathryn Klaber, president of the Marcellus Shale Coalition, based in Cecil. Utica shale underlies the Marcellus formation.

The El Paso acquisition will establish Kinder Morgan "as the pre-eminent pipeline company in the United States" and will provide operational savings and increased cash flows, said Gianna Bern, president of Brookshire Advisory & Research Inc. in Chicago.

Kinder Morgan said it will try to sell El Paso's exploration and production business. Evercore Partners Inc. and Barclays are advising Kinder Morgan on the effort, which may reap $6 billion or more, said a person with knowledge of the matter. El Paso announced in May that it would spin off the unit to its shareholders.

Kinder, 66, will be chairman and CEO of the combined company. The acquisition, once closed, would create immediate shareholder value because of its cash flow, he said.

Kinder Morgan rose 4.8 percent to $28.19 on Monday. El Paso climbed 25 percent, the biggest gain in nine years, to $24.45.

Barclays Plc agreed to lend Kinder Morgan the entire $11.5 billion cash portion of the bid, the statement said. Kinder Morgan's debt is held by its Kinder Morgan Kansas subsidiary and is rated "BB" by Standard & Poor's, two notches below investment grade.

The total value of the acquisition, including debt assumed from Houston-based El Paso, is $37.8 billion, Kinder Morgan said.

Kinder Morgan and El Paso said they expect their deal to close in the second quarter of 2012, creating the fourth-largest energy company in North America.

"This once in a lifetime transaction is a win-win opportunity for both companies," Kinder said.

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