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Kinder Morgan Acquires El Paso

Zacks Equity Research

Midstream operator Kinder Morgan, Inc. (KMI) finally completed the acquisition of El Paso Corporation. The agreement announced in October 2011, is effective from today. The deal is valued at $38 billion, including the $17 billion outstanding debt of El Paso and its subsidiaries. The El Paso assets would give a boost to Kinder Morgan’s standing as a major midstream operator in the U.S.

The acquisition was finally completed after getting past a number of regulatory hurdles and fulfillment of conditions laid out for the merger process. Kinder Morgan in order to obtain the Federal Trade Commission approval promised to divest certain assets of Kinder Morgan Energy Partners, L.P. (KMP) within a period of six months, commencing from May 1, 2012.

Besides, Kinder Moran has divested El Paso’s exploration and production business for $7.15 billion. This allows Kinder Morgan to lower the debt incurred to fund the acquisition.

The El Paso assets are primarily regulated interstate natural gas pipelines that produce substantial and stable cash flows, and have access to key supply regions and major consuming markets. Kinder Morgan will be able to leverage these strengths and expects cost savings in excess of $400 million per year, which is $50 million higher than the previous forecast. The company has plans to increase its annualized dividend by 5 cents to $1.40 per share in 2012, subject to the board’s approval, thereby sharing the benefits of the merger with its shareholders.

Despite record low prices, we believe the demand for natural gas will gradually increase because of its clean burning nature. The increasing government regulation to reduce the emission of green house gas will also make power generators to shift to natural gas or commission new units based on natural gas.  We believe the combined entity which has its pipeline spread over the major generation areas will stand to benefit from the gradual rise in demand of natural gas.  

Based in Houston, Texas, Kinder Morgan, Inc. owns and operates energy transportation and storage assets in the United States and Canada. It currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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