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Kinder Morgan El Paso Deal Harmed Investors, Lawyer Says

Kinder Morgan Inc.’s El Paso Corp. unit should face claims that former executives harmed investors by allowing a $21.1 billion takeover of the oil-pipeline provider, a lawyer argued.

El Paso Pipeline Partners LP is a natural gas partnership part-owned by El Paso. Investors in the partnership were damaged by Kinder Morgan’s $29.91-a-share acquisition because they will no longer have access to El Paso Corp.’s pipeline assets, Sarah Lopez, an attorney for partnership unitholders, said to a judge today.

Kinder Morgan’s takeover completely changed the partnership’s business model and robbed it of value, Lopez told Delaware Chancery Court Judge Sam Glasscock III in Georgetown. The judge reserved his decision on whether the case should proceed.

Kinder Morgan officials said last month that second-quarter profit fell as the pipeline company cut the value of some of the assets it’s selling to obtain regulatory approval for the El Paso acquisition. Net income dropped to $153 million from $230 million a year earlier, company officials said.

Kinder Morgan completed its acquisition of Houston-based El Paso in May, two months after a Delaware judge refused to block a shareholder vote on the takeover.

In an Aug. 3 filing with the U.S. Securities and Exchange Commission, Houston-based Kinder Morgan called the investors’ lawsuit meritless and said the company would fight it.

Asset Shift

The investors said El Paso Pipeline Partners, also known as EPB, was set up in 2007 as a publicly traded partnership to which the parent company shifted ownership of pipeline assets for tax purposes. El Paso “raised capital through the sale of EPB interests,” the unitholders said in an April court filing.

After the takeover, El Paso’s pipeline assets were no longer exclusively available to the partnership and were slated to be transferred to an entity owned by Kinder Morgan, the investors said.

“The non-controlling EPB unitholders have not benefitted from the transaction, but instead have lost substantial value,” they said in the filing.

The investors said Douglas Foshee, El Paso’s chief executive officer, and other top managers and directors enjoyed big paydays as a result of the takeover while the value of the unitholders’ stakes declined.

Foshee’s handling of takeover negotiations was criticized by both investors and a judge overseeing the case because of his conflicting interests in the deal.

$90 Million

Foshee was slated to receive more than $90 million from the Kinder Morgan acquisition while El Paso’s 11 non-employee directors stood to get a total of $224.2 million for their company shares, partnership investors said in court filings.

El Paso executives owed a duty to partnership investors not to approve a sale “that would benefit them at the expense of non-controlling EPB unitholders,” the partnership investors said.

“This is not about one or two assets that didn’t drop down to the partnership,” Lopez argued at today’s hearing. “This is about a complete change in the business model.”

El Paso officials said in their filings that they didn’t owe fiduciary duties to investors under the partnership agreement and that the unitholders can’t prove they have been damaged by Kinder Morgan’s takeover. They are asking Glasscock to throw out the suit.

‘Subordinates’ Interests

The partnership agreement “subordinates the interests of the partnership to the interests of El Paso and El Paso’s stockholders,” the company said in a May 21 court filing.

The agreement also places specific limits on the fiduciary duties El Paso executives owe partnership investors and never imposed a legal duty on the pipeline company to shift assets to the entity, the company said.

The agreement specifically says there is “no obligation to drop down assets to the partnership,” Brad Davey, one of El Paso’s lawyers, told Glasscock today.

The case is Hite Hedge LP v. El Paso Corp, CA No. 7117, Delaware Chancery Court (Georgetown).

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