Kinder Morgan enters oil sands with $3-billion Terasen purchase

Kinder Morgan Inc. unveiled an agreement yesterday to buy Terasen Inc. for $3.1-billion (U.S.), giving the U.S.-based energy giant critical strategic involvement in the Alberta's oil sands.

Kinder Morgan is the latest company from outside the country's borders to secure a spot in this key market. Until yesterday, Chinese firms had been the most aggressive suitors, making three separate investments this year. However, lately the oil sands have attracted more attention from the United States, as evidenced by Treasury Secretary John Snow's tour of the region last month.

Terasen's main pipeline from the oil sands runs from Edmonton to B.C.'s Lower Mainland. It operates another that runs south to the U.S. Midwest. With Kinder Morgan's backing, Terasen will have greater access to capital to expand pipelines and move more crude from the oil sands.

Larger rival Enbridge Inc. is also pushing ahead with expansion plans to send more oil sands crude to the U.S.

"It has great upside potential in the sense the oil sands play is going to get larger and larger," Kinder Morgan chief executive officer Richard Kinder said yesterday in an interview. "We think with Terasen's current footprint, the pipelines it has in place, and our financial wherewithal, we'll be able to dramatically increase our capacity to take more product coming out of Alberta."

Houston-based Kinder Morgan started looking at the oil sands a year ago, according to Mr. Kinder. Over the past six to eight weeks, the two parties held discussions. The combined company will have 40,000 miles of pipelines and more than 1.1 million natural gas distribution customers.

Kinder Morgan is also assuming $2.5-billion in debt. Kinder Morgan said the value of the transaction is $35.91 (Canadian) a share, a 14-per-cent premium to Friday's closing price of $31.40. For each share, Terasen shareholders can choose $35.75 in cash, 0.3331 shares of Kinder Morgan, or $23.25 in cash and 0.1165 Kinder Morgan shares.

The deal will immediately be accretive in terms of earnings and cash flow per share, Mr. Kinder said. Kinder Morgan expects the combined company's earnings per share and dividend will grow at approximately 10 per cent annually.

"This transaction is a real validation in many ways of what it is that we're trying to do with the oil sands," Terasen chief executive officer John Reid said yesterday in an interview. "I believe the folks at Kinder Morgan see that, and think that in partnership we can move that so much further ahead. This transaction is about growth. It's about accelerating, further developing growth opportunities."

Analysts are bullish on the outlook for production at the oil sands, which currently stands at one million barrels a day, about 1 per cent of global output. It could reach as high as 11 million barrels a day in the 2040s, analyst Steven Paget of FirstEnergy Capital Corp. wrote in a report a few weeks ago.

According to Terasen, Canadian oil sands production is projected to rise to about 2 million barrels of crude a day between 2010 and 2012.

Those forecasts are bringing in foreign investors. In April, China National Offshore Oil Corp. bought a one-sixth share in Calgary-based MEG Energy Corp. for $150-million. In May, China Petroleum & Chemical Corp. (Sinopec) took a 40-per-cent stake in an upstart project controlled by Synenco Energy Inc.

Kinder Morgan's deal must be approved by 75 per cent of Terasen shareholders who attend a special meeting held before Oct. 31. Regulatory approval is also required. The board of Vancouver-based Terasen is recommending shareholders vote in favour of the transaction.

Terasen said it has agreed to pay a termination fee of $75-million under certain circumstances, without elaborating. There has been speculation that the company could spin off a utility, Terasen Gas. However, Mr. Kinder said Kinder Morgan has no such plan.