With its sights on Canadian oilsands growth and a stable utility business, Kinder Morgan Inc. (KMI) announced an agreement Monday to buy Terasen Inc., formerly BC Gas, for US$5.6 billion (C$6.9 billion) including debt. The per share value of the purchase is about C$35.91/Terasen share, which represents a 20% premium to the most recent 20-day average and a 14% premium to Monday's closing price on the Toronto Stock Exchange.

Terasen distributes gas to 875,000 customers, or about 95% of gas consumers in British Columbia, and its Terasen Pipelines unit transports petroleum from the rapidly growing Athabasca oilsands region to Edmonton and from Alberta to British Columbia, Washington State, the U.S. Rockies and the Midwest.

Kinder Morgan CEO Richard D. Kinder called it a win-win transaction for both companies. He said the deal would produce strong earnings and cash flow accretion, as well as provide future growth opportunities. "For Kinder Morgan, the merger will dramatically broaden our footprint into Canada. 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 crude oil transportation pipeline business that offers tremendous growth potential."

Kinder said 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. 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."

Canadian oilsands production is projected to double from current levels to about 2 million bbl/d between 2010 and 2012. According to the National Energy Board, Canada's recoverable oilsands reserves are the largest in the world. They currently account for about 37% of all Canadian oil production, and are expected to comprise as much as 67% of the country's oil production by 2015.

Kinder also touted Terasen's experience in the water utility business and in metering and other utility services in Canada and the United States. Terasen is the largest water and wastewater treatment company in British Columbia. "These markets offer significant potential for growth, as Terasen has laid an excellent foundation," he said.

The combined company will have 40,000 miles of gas and petroleum transportation pipelines, more than 1.1 million natural gas distribution customers, 150 terminals and an enterprise value of more than US$19 billion. Including KMI affiliate Kinder Morgan Energy Partners LP, of which KMI is the general partner, the enterprise value of the total combined companies will be US$35 billion.

Terasen shareholders will be able to elect, for each Terasen share held, either C$35.75 in cash, 0.3331 shares of KMI common stock, or C$23.25 in cash plus 0.1165 shares of KMI common stock.

The transaction already has been unanimously approved by each company's board of directors, and by a special committee of independent directors created by the Terasen board to oversee the process. This transaction will require Terasen shareholder approval prior to closing, which is expected by year-end 2005. Terasen has agreed not to solicit competing transactions and to pay a termination fee of C$75 million to KMI under certain circumstances. It also is subject to customary regulatory approvals.

Terasen CEO John Reid called the deal a great opportunity for Terasen and its shareholders. "This transaction creates significant immediate and long-term value for our shareholders and gives us the scale, resources and access to capital we need to accelerate our business strategy and lead the development of world-class infrastructure across Western Canada.

"The offer represents a significant premium to our recent share price at a time when Terasen is trading at all-time highs, and gives Terasen shareholders the opportunity to participate in the ongoing success of the combined company."

Kinder Morgan said the deal should be 6-8% accretive for KMI shareholders on a pro forma basis to recurring earnings per share in 2006, which is expected to be the first year of combined operations.

For 2006, recurring earnings per share are expected to be US$5, and cash flow is expected to be almost US$800 million. Kinder Morgan said it expects an annual dividend of US$3.50 per share in 2006, up from its current rate of US$3/share. In light of the expected prospects for the combined company Kinder Morgan expects to continue to grow earnings per share and the dividend at 10% annually without any acquisitions at KMI or KMP.

The combined entity will have 9,000 employees. It will include the largest petroleum products pipeline network in the United States and a major operator in Canada with 13,000 miles of pipe, transporting 2.7 million bbl/d of refined products and oil. It also will have gas utility operations that serve a total of 1.1 million customers in British Columbia, Nebraska, Colorado and Wyoming.

It remains the second largest owner of gas pipelines and storage assets in the United States transporting 14.2 Bcf/d of gas through 25,000 miles of pipe and holding 384 Bcf of working gas storage capacity. And it also remains the largest terminal operator in the United States, handling more than 80 million tons of coal and other dry bulk materials and having liquids storage capacity of 72 million bbl.

Upon closing, the total debt-to-capital ratio of the combined entity is expected to be about 56%, and Kinder said he expects the combined company will maintain its BBB credit rating. "Terasen's assets are a great fit with our long-standing strategy of owning and operating predominantly stable, regulated, fee-based businesses in growing markets," Kinder said. "We have a proven track record of merging companies, operating assets efficiently and growing existing assets through expansions."

Kinder will remain chairman and CEO of the combined entity, which will be known as Kinder Morgan Inc., with corporate headquarters in Houston. Terasen's gas distribution operations and water and utility services business, will remain headquartered in Greater Vancouver and its pipeline operations office will remain based in Calgary. Terasen Gas, Terasen's gas distribution company, will continue to operate under the Terasen name.

Kinder Morgan said it will hold a webcast on the transaction at 8:30 a.m. EDT on Tuesday at http://www.kindermorgan.com. Terasen will hold a separate webcast/call at 10 a.m. EDT on http://www.terasen.com.

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