Pipeline Powerhouse? Kinder Morgan To Buy El Paso

Texas-based energy company Kinder Morgan plans to buy El Paso Corp. in a $20.7 billion deal that's expected to create America's largest natural gas pipeline operator.

The deal would more than double the size of Kinder Morgan's existing pipeline network to 80,000 miles. The company's pipelines in Texas, the Midwest and the Rocky Mountains will be joined to El Paso's vast network which stretches from the Gulf Coast east to New England and west to California.

The deal is a vote of confidence in the economic viability of the mushrooming exploration of natural gas in this country. Ken Medlock, a professor at Rice University who studies the natural gas industry, says that back in the '90s, in an effort to keep up with that energy behemoth down the street called Enron, El Paso decided it too needed to become a trading company — and then it too got into trouble.

"If you looked at El Paso 10 years ago, it looked like ... it would be nice take over target for a number of different companies," Medlock says. "But when you looked at their liabilities from their trading activities, it didn't make sense."

After the smartest guys in the room blew up Enron in a cloud of lawsuits and criminal prosecutions, El Paso decided that perhaps following in Enron's footsteps might not be the best strategy and is now in the happy position it finds itself today.

The deal also adds to founder and CEO Richard Kinder's energy empire. Kinder, 66, started the company with friend William Morgan after leaving his post as president of the now-defunct Enron Corp. Forbes lists his net worth at $6.4 billion.

"We believe that natural gas is going to play an increasingly integral role in North America," Kinder, who is also the company's chairman, said on Sunday when the deal was announced.

Medlock says that while Enron executives indulged in flights of fancy, believing every far flung business they touched would turn to gold, Kinder focused on building his core.

"That's the thing about Kinder Morgan; by not traveling that path, it left the company with a solid balance sheet coming out the backside of that merchant energy meltdown," he says. "It put it in a position to grow and this is growth by leaps and bounds obviously."

The Bigger Natural Gas Picture

Robert McFadden, a Houston-based natural gas pipeline consultant, said the expanded network will make it easier to move natural gas from new shale fields that have mushroomed across the U.S. in the past few years.

"Think of it like federal highways and toll roads," McFadden said. "The more options you have to get from point A to B, the shorter your trip."

Pipeline companies, which get paid for moving natural gas from the field to the market, have been in big demand recently as drillers tap rich new deposits in Pennsylvania, Montana, Utah and other states. The pipeline companies have been able to keep transport fees roughly constant during the past several years, even though natural gas prices have dropped from more than $13 per 1,000 cubic feet in 2008 to less than $4 this year.

The acquisition comes on the heels of other consolidation in the industry. Energy Transfer Equity is planning to buy Southern Union Co. for $5.7 billion after a tug of war with Williams Cos.

With more pipelines under its control, Kinder Morgan could charge suppliers higher transport fees, and that may affect the price that utilities and other major natural gas buyers pay for natural gas. But home owners and other retail customers won't notice much of a change on their monthly bills, if any. Retail gas bills are largely influenced by local distribution costs and other items that won't change with this deal, McFadden said.

Kinder Morgan said it will also become the largest independent transporter of gasoline, diesel and other petroleum products if the deal is approved. It will also be the biggest independent owner and operator of petroleum storage terminals. It will be the largest transporter of carbon dioxide in the U.S., moving about 1.3 billion cubic feet per day.

Kinder Morgan's Future

Kinder Morgan and El Paso are both based in Houston and Kinder will remain chairman and CEO of the combined company.

The combined company will surpass other pipeline companies such as Enterprise Products Partners LP, also based in Houston. Enterprise operates about 50,200 miles of pipelines.

Kinder Morgan is also assuming $13 billion, net of cash, of El Paso debt as part of the deal. It intends to fund the purchase with a combination of equity and more debt. But once the deal closes, the company said it plans to sell off El Paso's exploration and production assets and the cash raised will help reduce that debt.

Kinder Morgan said the deal is expected to boost Kinder Morgan's shareholder value through increased cash flow and future growth opportunities. It's also expected to boost Kinder Morgan's dividends and result in about $350 million a year in cost savings.

El Paso had announced plans to spin off its exploration and production unit in May.

The acquisition, which has been approved by the boards of both companies, is expected to close in the second quarter of next year and needs regulatory approval.

NPR's Wade Goodwyn contributed to this report that contains material from The Associated Press.