Bloomberg News

Kinder Morgan to Sell Rockies Pipes in FTC Deal on El Paso

March 15, 2012

Kinder Morgan Inc. (KMI), the second- biggest U.S. pipeline company, has reached a “tentative agreement” with federal regulators to sell about 7,200 miles of pipelines to gain approval of its $23.8 billion acquisition of El Paso Corp. (EP)

The sales, which one analyst estimated may be valued at about $3 billion, would reduce the combined company’s dominance in Rocky Mountain (RME) natural-gas transportation, while allowing the creation of the biggest U.S. gas pipeline company.

Kinder, based in Houston, agreed with the U.S. Federal Trade Commission to sell assets including its 50 percent interest in the 1,679-mile (2,700 kilometer) Rockies Express gas pipeline along with the 5,100-mile Kinder Morgan (KMI) Interstate Gas Transmission system and the 436-mile Trailblazer Pipeline Co., according to a company statement today.

Kinder said it also will sell two treatment and processing plants in Wyoming.

“We would prefer to retain all of these assets, but as we anticipated when the transaction was announced, we must sell certain assets in the Rockies to obtain FTC approval,” Chairman and Chief Executive Officer Richard D. Kinder said in the statement. “The amount of divestitures is reasonably consistent with our original financial model.”

The FTC is reviewing the deal to ensure Kinder Morgan doesn’t gain an unfair advantage over other pipeline companies.

$3 Billion Value

The sale could bring in as much as $3 billion and reduces the combined Kinder-El Paso market share in the Rockies to 38 percent from about 52 percent, said Becca Followil, an analyst with U.S. Capital Advisors LLC in Houston. She estimated earlier this year that Kinder would need to reduce its share below 40 percent to meet federal guidelines.

“They’ve done a mix of some good assets and a really weak asset,” Followil said in an interview. “Rockies Express is going to be a tough sell.”

Rockies Express, which opened in 2009 between Wyoming and Ohio, earns less than the other pipelines because of cost overruns during construction, Followil said.

Kinder Morgan and El Paso spent billions in the past decade to build pipelines from gas fields in the Rocky Mountains to major cities on the East and West Coasts. In 2007, gas was $4 higher in the Northeast than in the Rockies.

Marcellus Influx

At the same time, new gas fields like the Marcellus Shale of Pennsylvania were being tapped that are closer to major East Coast cities, reducing the need for the pipelines. Using hydraulic fracturing, producers have been able to increase Pennsylvania’s gas output to 3.34 billion cubic feet of gas a day, about 45 percent more than the Rockies Express can carry.

“We see absolutely no industry buyers for Rockies Express given the regional natural-gas supply and demand fundamentals,” Andy DeVries, an analyst with CreditSights Inc., wrote in a note to clients today. “Quite simply, there is no need to bring natural gas from one supply basin (the Rockies) into another rapidly growing supply basin (the Marcellus).”

Kinder anticipates “significant interest” in the pipelines, particularly Rockies Express, the CEO said in the statement. Larry Pierce, a Kinder Morgan spokesman, declined to comment on potential buyers in a telephone interview today.

ConocoPhillips (COP) and Sempra Energy (SRE) Inc., which each own 25 percent of the Rockies Express pipeline, previously tried to sell their stakes but couldn’t find buyers, Vivek Pal, a managing director with Knight Capital LLC in Greenwich, Connecticut, said in an interview.

Long-Term Pain

A ConocoPhillips spokeswoman didn’t respond to voicemails requesting comment. Scott Crider, a spokesman for Sempra, declined to comment.

The divestitures may hurt Kinder’s shareholders in the long run, since new demand for gas, such as from increasing numbers of gas-fueled vehicles, could make the pipelines more valuable in the future, Pal said.

“Nobody knew five years back what the market looks like today; five years from now, it can change dramatically,” he said.

Spectra Energy Corp. (SE) may bid on some of the pipelines, Chief Executive Officer Greg Ebel said in a March 6 interview.

“We don’t have a huge footprint in the Rockies, so if they decided to move down that trail, that’s something we’d be interested in,” Ebel said, referring to a potential Kinder sale.

Williams Cos. (WMB) and Boardwalk Pipeline Partners LP (BWP) may also bid for some of the lines, Knight Capital’s Pal said. Jeff Pounds, a spokesman for Williams, said the company doesn’t comment on speculation. Boardwalk didn’t immediately return a phone call seeking comment.

Kinder expects the El Paso transaction to close in May, the company said.

Cecelia Prewett, an FTC spokeswoman, declined to comment. Enterprise Products LP is the biggest U.S. pipeline operator.

Kinder Morgan rose 0.6 percent to close at $36.25 in New York.

To contact the reporter on this story: Mike Lee in Dallas at mlee326@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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