Kinder’s El Paso Ordered to Pay $171 Million Over Deal

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A Kinder Morgan Inc. unit was held liable for $171 million in damages for overpaying in an unfavorable pipeline deal that a judge found was foisted upon it by the parent company.

Directors of El Paso Pipeline Partners LP failed to properly protect investors by agreeing to a deal that forced the master limited partnership to buy El Paso Corp.’s interest in natural-gas pipelines at inflated prices, Delaware Chancery Court Judge Travis Laster concluded Monday.

The partnership’s board members “went against their better judgment and did what the parent wanted” in approving the pipeline transactions, Laster said in his ruling.

Houston-based Kinder Morgan acquired El Paso Corp. in 2012 for $21.1 billion and created the U.S.’s largest natural-gas pipeline network. Two years later, billionaire Richard Kinder also acquired the portion of El Paso Pipeline Partners he didn’t already own as part of a $44 billion buyout.

Kinder Morgan officials said Monday that Laster’s ruling stems from a dispute between El Paso and its affiliate that pre-dated the pipeline company’s acquisition.

Appeal Weighed

“KMI is disappointed in the result of the decision and continues to believe that the transaction was appropriate and in the best interests of” the partnership, Larry Pierce, a Kinder Morgan spokesman, said in an e-mailed statement. The company is considering asking the Delaware Supreme Court to review Laster’s ruling.

Laster’s ruling also raises questions about the liability of energy companies that use such partnerships to hold assets such as pipelines in hopes of insulating them from investors suits, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

“It doesn’t matter what the corporate form is, directors still have a duty to investors to put their interests first and insure they are treated fairly,” Elson said in an interview.

Investors in the El Paso partnership filed a derivative suit over deals involving the purchase of interests in natural-gas pipeline companies owned by the parent company from 2008 to 2010. At the time, El Paso controlled the partnership.

Unit holders contend the El Paso partnership was forced to overpay by more than $300 million for interests in a pipeline owned by Southern LNG Company.

‘Best Interests’

They argued a committee of board members signed off on the deal, which was being pushed by El Paso executives, even though they agreed privately it wasn’t “really in the best interests” of partnership investors, Laster noted in his ruling.

The board members’ actions “evidenced conscious indifference to their responsibilities” to unit holders, the judge said.

Because the derivative case was filed against the partnership’s directors, the $171 million will be returned to that unit’s coffers.

The case is In Re El Paso Pipeline Partners L.P. Derivative Litigation, CA NO. 7141-VCL, Delaware Chancery Court (Wilmington).

(Updates with Kinder Morgan response in fifth paragraph.)
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