Consumer Federation of California

Kinder Morgan’s management buyout will likely close at the end of May
or early June following the decision by the California Public Utilities
Commission (CPUC), sources said.

A procedural schedule was issued by the CPUC in January, pointed out
Larry Pierce, a spokesperson for KMI. At the time the company expected
the transaction to close in the first quarter. But the CPUC ‘ the final
body that needs to approve the MBO ‘ indicated that it would provide a
ruling by May. ‘We have been working with them to expedite that,’
Pierce said.

Maryam Ghadessi, an analyst at the energy division of CPUC, outlined
the recent course under the procedural schedule. She explained that all
parties, including KMI and several shippers that have underlined a
number of problems with the going-private business, had to file opening
briefs which were scheduled for 19 March followed by reply briefs
scheduled for 2 April. The assigned judge evaluating the claims is
expected to issue a proposed decision on 24 April, noted Ghadessi. A
decision is going to be voted on in 30 days, pushing a final approval
date to 24 May, she added.

A source close to the shippers said the judge will not advance the time
taken to receive CPUC approval nor retard it despite some pressure from
the merging company. Therefore, the earliest time frame for a deal to
close is at the end of May or 1 June, the source said. This assumes
that three out of five commissioners agree on the case, he added.

Since the start of the schedule, the shippers – including BP West Coast
Products, ExxonMobil Oil, Chevron Products Company and Valero Marketing
and Supply Company – have claimed that KMI would abandon its local
California pipeline systems, SFPP and CalNev, by placing them into
bankruptcy.

As a result, there have been a series of trials and hearings, according
to Ghadessi, with the shippers setting a number of conditions
requesting the holding company to be liable for the debt loaded on
CalNev and SSFP. ‘These entities don’t have any employees. So basically
that is the position that they are taking, they wanted to make sure
that the refund that they are scheduled to receive would be
forthcoming. SSFP and CalNev won’t go into bankruptcy. Those are the
issues that they discussed at the hearing,’ Ghadessi said. A source
close to the shippers said according to KMI’s own figures the company
might owe as much as USD 450m in refunds for past shortages at both the
federal and state level.

In addition, the Consumer Federation of California joined
the group to oppose a separate request by the investors of the buyout
group, including Goldman Sachs, AIG, Carlyle Group and Riverstone
Holdings. The equity funds have asked to be relieved of a California
statute that would prohibit them from buying another California utility
without the prior permission of the CPUC, the source close to the
shippers said. "They want that statute waived," he added. Another
condition put forward by the shippers is KMI’s rate setting for public
utilities.

The source said there are costs that come down from the parent holding
company that are then included in the rates of the bottom tier public
utilities. ‘These people are going private, they won’t file with the
SEC anymore, we want access to the numbers so we are not cheated in
rate cases,’ the source said.

Pierce said he was not at liberty to discuss conversations with the
commission, but noted that the complaints by the shippers have no
relation to the going-private proposal. ‘They are totally separate
issues. The things that they are filing complaints about have to do
with the products pipelines which are owned by KMI,’ he said.

Ghadessi disagreed. She said the shippers have participated in the
hearings during the opening brief and filed testimony as well as cross
examined KMI among other parties in the hearing. Alexis Wodtke, a staff attorney at the Consumer Federation of California,
pointed out that as part of the cross examination with executives at
KMI, her organization pointed out that the only component left of SFPP
are the pipes in the ground. ‘My only goal in this is to make sure the
commission takes a close look at this transaction to make sure it
doesn’t approve something that is going to be harmful to consumers,’
she said.

As evidence, Wodtke compared KMI’s filing with the SEC, as following
the pattern of holding companies in the 1920s, leveraging a
subsidiary’s inflated equity to secure debt which is then paid out in
dividends to the parent. The source confirmed that KMI has yet to
directly respond to the shippers’ conditions. But when asked if there
is a strong likelihood of KMI closing the deal by May 24, Ghadessi
answered yes.

With KMI already receiving HSR antitrust clearance, shareholder
approval and state regulatory approval from the respective utility
commissions in Colorado, Nebraska and Wyoming, Pierce said all that is
left comes down to is time. The termination date for the going private
transaction is in August, in accordance with the merger agreement.