CMS Energy surprised the industry early last week when itreached south from its Michigan gas and electric distribution baseto buy the Panhandle Eastern and Trunkline Gas pipeline companies -pipes, storage and LNG terminal – from Duke Energy, locking in itsown supply line to the Midcontinent and Gulf Coast. The companyalso articulated a strategy to capitalize on demand for gas-firedpower generation in the Midwest, and ended the week bydemonstrating it.

CMS pledged a cool $2.2 billion for the properties, which Dukebought as part of PanEnergy less than two years ago for $7.7billion. The price includes a cash payment of $1.9 billion andexisting Panhandle debt of $300 million.

The assets include: 11,500 miles of mainline gas pipelineextending from the Texas Gulf Coast to Michigan and from theKansas/Oklahoma Midcontinent to Michigan, with a combined capacityof 3.5 Bcf/d; 340 miles of pipeline in the offshore Gulf of Mexico;70 Bcf of gas storage facilities; an LNG port at Lake Charles, LA,unloading and re-gasification facilities with a production capacityof 700 MMcf/d and liquid storage of 1.8 million barrels. Accordingto Duke, the book value of the assets is $700 million.

“This acquisition positions CMS Energy as the premierdiversified energy company in the U.S. Midwest and an even strongerglobal energy company,” said William T. McCormick Jr., CMS CEO.”Panhandle’s energy assets are an exceptionally good strategic fitwith CMS Energy because of their physical connection to oursubstantial gas distribution and storage assets in Michigan and ourextensive gas gathering and processing assets in the U.S.Midcontinent area.”

In an analyst conference call, McCormick said, “the acquisitionis going to provide us a number of growth benefits, including aplatform for expansion in the Midwest for both power and gasstorage as well as transportation revenues. There is growing needfor electricity in the Midwest, and virtually all of that capacitywill be generated through natural gas. Also, very significantly,these assets connect physically to the assets and gas reserves thatCMS owns in the Midcontinent and Gulf Coast areas. These are quitesignificant and we think it really is going to provide a lot ofupside opportunity for us.”

CMS, parent of the Consumers Energy gas and electricdistribution systems, wasted no time implementing its strategy todevelop power generation in Michigan and the Midwest to be servedby its new pipelines. At week’s end the company said it struck adeal for a large power plant to be fed by gas moving on Panhandle.CMS and DTE Energy Services said a new 550 MW gas-firedcogeneration project will serve all of the electric and steam needsof both Rouge Steel Co. and Ford Motor Co. at the Rouge complex inDearborn, MI. The deal was in the works for several months,according to a CMS spokesman, during the same period CMS wasnegotiating to buy the Duke pipes.

CMS said the acquisition will be immediately accretive toearnings in 1999 when the assets are projected to add five to 10cents to per-share results. The deal is expected to close inJanuary.

Strategic Value

Petrie Parkman analyst Stuart Wagner said the deal moves CMSwestward and closer to the wellhead. CMS recently bought Tulsa,OK-based Continental Natural Gas, the operator of 2,000 miles ofMidcontinent gathering lines, 550 MMcf/d of gas processing and 1.4million gallons/d of liquids production (See Daily GPI Aug. 4,1998). Shortly thereafter, CMS bought Heritage Gas Services LLC,also based in Tulsa (See Daily GPI Oct. 27, 1998). Heritage added2,000 miles of gathering pipe as well as a 45 MMcf/d gas processingplant in the Hugoton basin and a gas and liquids marketing staff.These two acquisitions add up to midstream base to go with the newCMS long lines.

Wagner said Panhandle and Trunkline have more strategic valuefor CMS than they do for Duke, which is retaining Texas EasternTransmission and PanEnergy’s midstream and marketing assets. Tetcohas been running close to full for a while, but Trunkline has gonewithout long-term contracts for some time and Panhandle faces somecapacity turnback, Wagner said.

“Panhandle Eastern generates approximately $250 million EBITDAannually, which already reflects heavy discounting on the Trunklinepipeline,” said Duff &amp Phelps Credit Rating. “PanhandleEastern’s pro forma cash flows may be marginally affected byexpected discounting on the Panhandle Eastern Transmission line.”According to 1997 figures, the top 15 customers of Panhandletransportation and storage services represent 72% of total revenue.The top 50 customers represent 97% of total revenue.

CMS will be carrying on Trunkline’s plans — which shippers arefighting — to sell to an affiliate 720 miles of 26-inch mainlineloop for conversion to transport natural gas liquids as hydrocarbonvapor. The converted line would transport liquids from an NGLextraction facility (fed by the Alliance Pipeline) to the GulfCoast and other markets. “Over-capacity in the Midwest has causedTrunkline to transport gas at deeply discounted rates for severalyears,” Steve Roverud, Trunkline chairman said in July (See DailyGPI July 2, 1998). Shippers are challenging the plan, disputingTrunkline’s claims that firm capacity commitments on this part ofits system (Line 100-1) are expected to dwindle over the nextcouple of years (See Daily GPI Aug. 28, 1998).

CMS touted the addition of the Duke assets as beingcomplementary to its TriState Pipeline, a project to move Canadiangas from the Chicago area to the Consumers Energy distributionsystem in Michigan then to the hub at Dawn, Ontario, and on toconnecting pipes to eastern U.S. markets. Trunkline may allowTriState to delay construction of its first leg from Joliet, IL, tothe Michigan border, improving the project’s economics.

“Certainly it will enhance projects like TriState.” said WilliamJ. Haener, CEO of CMS Gas Transmission and Storage Co. “Instead oftalking about a Chicago hub, I think maybe it ought to be aMichigan hub, and I think we’re going to be positioned to play arole in that.” CMS said the combination of pipes will allow it tomove gas across Michigan, displace gas to the East Coast throughexisting interconnects, and displace gas back into the Chicagoarea. “A great combination,” said Haener.

Increase LNG Imports

CMS also will be getting the Trunkline LNG facility in LakeCharles, LA. Duke has been actively importing LNG for sale in theU.S.; however, the LNG terminal is operating at a fraction of itscapacity. CMS said it will step up LNG imports, making the terminala complement to its international LNG investments. Duke, which ownstwo LNG tankers, will continue to use the facility, contractingwith new owner CMS.

A regulatory official at one large energy marketing companyviewed the CMS acquisition as positive from a competitionstandpoint. “In my view, moving pipes from the big, huge companiesto smaller, more competitive companies, I think, is good becauseyou end up with market concentration if the big guys keep gettingbigger and there aren’t any small guys.”

CMS approached Duke about acquiring the pipes near the beginningof summer. Their sale had not recently been considered by Duke,said Fred Fowler, president of Duke’s energy transmission group. Atthe time CMS came to Duke, Fowler said his company was in theprocess of refining its strategy to focus on building a gas andpower presence in several key regions of the country.

“What we determined was we could achieve our objective in theMidwest, which was to be one of the largest gas and electricitymarketers, without actually needing to own the interstate assets inthat region.”

In Fowler’s view, the Duke pipes are a natural fit with CMS.”CMS Energy has been a customer of the Midwest pipelines for manyyears. In fact, many of the changes that have been made to thesepipelines over the years have been driven by CMS Energy’s needs.”

Fowler said proceeds from the sale will be re-deployed in Duke’stargeted regions, which are the Northeast, the Carolinas, the WestCoast, Midcontinent and Gulf Coast. The money could be spent on gasor electric assets, including gathering, processing, pipelines andgeneration.

Fowler would not comment on a rumor that Duke is in the runningto acquire the gathering and processing assets being sold by UnionPacific Resources.

Following the deal’s announcement Monday, CMS stock closed up 21/8 at 46 3/16. The stock’s 52-week high is 48 3/16. Duke stockclosed up 3/16 at 64 7/8. The stock traded as high as 71 in thelast 52 weeks. Standard &amp Poor’s affirmed its ratings onConsumers Energy and parent CMS Energy Corp. saying the outlookremains positive for both entities. Standard &amp Poor’s placedsome ratings of Panhandle Eastern on CreditWatch with negativeimplications.

Joe Fisher, Houston

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