Kinder Morgan Buying Terasen

The big energy distributor makes a bet on Canada's oil sands.
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Kinder Morgan

(KMI) - Get Report

agreed to buy a Canadian energy distributor called Terasen for $3.1 billion.

Houston-based Kinder Morgan said the deal gives Terasen holders a 20% premium based on trading prices last month. The deal allows Terasen holders to choose cash, stock or a mix of both. Kinder Morgan intends to pay about two-thirds cash and a third in stock. The deal is worth $5.6 billion including the debt Kinder will assume.

The combined company will boast 40,000 miles of natural gas and petroleum transportation pipelines, more than 1.1 million natural gas distribution customers, some 150 terminals and an enterprise value of more than $19 billion.

Terasen has two core businesses -- a low-risk, large regulated natural gas distribution company in British Columbia that produces stable cash flow, and a strategically located refined products and a crude oil transportation pipeline business that offers tremendous growth potential. Terasen's pipelines are well-positioned to transport growing production from the Alberta oilsands, which is expected to become an increasingly important supply source to North America and Asia, Kinder said.

"For Kinder Morgan, the merger will dramatically broaden our footprint into Canada," Richard Kinder said. "There is a definite need for additional pipeline infrastructure from the Alberta oilsands, and we have a great opportunity to use the capital strength of the combined company -- along with our expertise in building and operating pipelines -- to increase capacity on Terasen's existing pipeline system and help meet the growing demand of an oil-starved world."

Kinder said the deal would be 6%-8% accretive for its holders on a pro forma basis to recurring earnings per share in 2006. For 2006, recurring earnings are expected to be approximately $5 a share, and cash flow is expected to be almost $800 million.

On Monday, Kinder fell 26 cents to $88.60.