Kinder Morgan Energy Partners and Copano Energy announced a definitive agreement whereby KMP will acquire all of Copano’s outstanding units for a total purchase price of approximately $5 billion, including the assumption of debt.
The transaction, which has been approved by the boards of directors of both companies, will be a 100 percent unit for unit transaction with an exchange ratio of .4563 KMP units per Copano unit. The consideration to be received by Copano unitholders is valued at $40.91 per Copano common unit based on KMP’s closing price as of Jan. 29, 2013, representing a 23.5 percent premium to Copano’s close on Jan. 29, 2013.
The transaction, which is expected to close in the third quarter of 2013, is subject to customary closing conditions, including regulatory approval and a vote of the Copano unitholders. TPG, Copano’s largest unitholder (owning over 14 percent of its outstanding equity), has agreed to support the transaction.
Copano, a midstream natural gas company with operations primarily in Texas, Oklahoma and Wyoming, provides comprehensive services to natural gas producers, including natural gas gathering, processing, treating and natural gas liquids fractionation. Copano owns an interest in or operates about 6,900 miles of pipelines with 2.7 billion cubic feet per day (Bcf/d) of natural gas throughput capacity and 9 processing plants with more than 1 Bcf/d of processing capacity and 315 million cubic feet per day of treating capacity.
“We are delighted to have reached this agreement with Copano, a company that we know very well and have partnered with through the years, as this transaction will enable us to significantly expand our midstream services footprint,” said KMP Chairman and CEO Richard D. Kinder. “As a result of this acquisition, we will be able to pursue incremental development in the Eagle Ford Shale play in south Texas, gain entry into the Barnett Shale Combo in north Texas and the Mississippi Lime and Woodford Shales in Oklahoma. We continue to be bullish on the domestic shale plays and believe they will drive substantial future growth at KMP. Copano’s assets are very complementary to ours, as KMP is principally a pipeline transportation and storage company, while Copano is primarily a fee-based gathering, processing and fractionation player. Broadening our midstream assets will allow us to offer a wider array of services to our customers.”
“We are excited to have reached this agreement with KMP, which delivers a significant premium to our unitholders that is reflective of the strength and potential of our business and provides an ownership interest in a highly diversified industry leader with an impressive history of sustained distribution growth,” said Copano President and CEO R. Bruce Northcutt. “Through this transaction, Copano will become part of a larger, investment grade organization with stable cash flows and the financial resources to fund our increasing number of high-return growth projects. We are committed to continuing to support our customers with the highest quality service, and expect that KMP’s size and scale will allow us to provide even more value for customers. In addition, we expect this combination will provide opportunities for our many talented employees. We look forward to completing this transaction and to building significant long-term value for all of our stakeholders as part of KMP.”
“Copano is already executing on a substantial backlog of expansion projects for which it has secured customer commitments and is exploring a significant amount of projects incremental to these,” Kinder added. “Given the growth in cash flow that will come from the projects already in progress with existing customer commitments, we expect the multiple of EBITDA paid for Copano to decline to the very low double digits over the next few years and considering the growth opportunities beyond that, we expect continued attractive EBITDA growth from these assets thereafter.”
The acquisition of Copano is expected to be accretive to cash available for distribution to KMP unitholders upon closing. The general partner of KMP, Kinder Morgan, Inc. (NYSE: KMI), has agreed to forego a portion of its incremental incentive distributions in 2013 in an amount dependent on the time of closing. Additionally, KMI intends to forgo $120 million in 2014, $120 million in 2015, $110 million in 2016 and annual amounts thereafter decreasing by $5 million per year from this level. The transaction is expected to be modestly accretive to KMP in 2013, given the partial year, and about $0.10 per unit accretive for at least the next five years beginning in 2014.
“Copano’s cash flow is largely and increasingly fee based, and our accretion projections are based on commodity prices consistent with the current forward curve for the portion that is sensitive to commodity prices,” Kinder explained.
The acquisition will be immediately accretive to KMI’s cash available to pay dividends, even after KMI foregoes a portion of the incremental incentive distributions this transaction is expected to produce. The increase in KMI’s cash available to pay dividends (net of the amounts voluntarily foregone) is expected to be approximately $25 million in 2014 growing to approximately $70 million in 2016.
“We anticipate retaining the vast majority of Copano’s approximately 415 employees,” Kinder said. “This transaction is about producing future cash flow and expanding our midstream services footprint.”
Upon closing, KMP will own 100 percent of Eagle Ford Gathering (currently a joint venture with Copano), which provides gathering, transportation and processing services to natural gas producers in the Eagle Ford Shale. Eagle Ford Gathering comprises approximately 400 miles of pipelines (including its capacity rights in certain KMP pipelines) with capacity to gather and process over 700,000 MMBtu/day.
Citi acted as financial advisor for KMP and Weil Gotshal & Manges LLP and Bracewell & Giuliani acted as legal counsel to KMP. Barclays Capital Inc. and Jefferies & Company, Inc. provided financial advisory services to Copano and Wachtell, Lipton, Rosen & Katz acted as legal counsel to Copano.
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Plans call for development to begin in 2013. Each plant will produce between 7,500 to 40,000 Diesel Gallons Equivalent (DGE) per day of capacity, subject to current and future contractual commitments. According to Joseph Farley, Director of Business Development, “We see a need for LNG and CNG as another important supply fuel to the Oil & Gas industry and service providers. Producers and Suppliers of Oil & Gas are looking for ways to cut their fuel cost and by switching to Natural Gas for their rigs, frac units and fleets they can save millions of dollars each year.
“AmericaCNG.Com,Inc along with their Strategic Alliance Partners(SAP) can convert the trucks, the frac units and the drilling rigs to run off CNG. Thigpen Energy, one of our SAP, is a field service company that specializes in the installation and operation of natural gas fueling infrastructure, be it CNG, LNG or field gas.
“Gas safety equipment, crew safety training and fuel reconciliation are all part of the Thigpen Energy solution. By utilizing our LNG processing, storage and transportation capabilities we will be able to wholesale the fuel, plus transport the fuel to each well site, regasify it back to CNG, and sell it to drillers, suppliers, service companies and converted vehicles…”
“We have the capability to turn around a project in about 180 days for the smaller units out in the field.”
Another SAP is Alternative Gas Processing Inc.. They supply wellhead gas processing equipment for methane and NGL’s, portable LNG fuel skids, and LNG and CNG transportation modules. Methane and NGL recovery at the well head can be accomplished with no out of pocket expense to the producer in specific targeted areas.