HS Buying Kinder-Morgan Colorado Assets
HS Resources, based in San Francisco, is further growing its
position in the Wattenberg Field area of the Denver-Julesberg Basin
by buying Houston-based Kinder Morgan's gathering system there
along with its interests in the Amoco-BP Wattenberg Gas Processing
Plant and KN Wattenberg LLC, which owns the Wattenberg transmission
system, in a phased transaction.
Wattenberg's gathering and processing assets were identified for
potential divestiture by Kinder Morgan last September when the
company announced a back-to-basics strategy and said it would sell
non-core assets to improve financial performance and de-leverage
the balance sheet.
"We continue to make progress with our divestiture program,"
said CEO Richard D. Kinder. "Through this transaction, we will
retain cash flow from Wattenberg's operations in 2000 and 2001, and
we expect to realize nearly $30 million in value upon the final
closing, which is expected to occur on or before Dec. 15, 2001."
HS Resources, the largest producer in the area, last week began
operating both the gathering and transmission assets. Under the
agreements, HS Resources will operate the assets to provide
gathering and transmission services to numerous producers in the
Wattenberg area. HS Resources currently operates about 3,000 wells,
accounting for some 65% of the Wattenberg System's daily throughput
of 200 MMcf/d.
The Wattenberg System includes low-pressure gathering and
high-pressure transmission assets. The low-pressure system consists
of 1,500 miles of gathering pipe and 3,000 horsepower of
compression in five northeastern Colorado counties. Gas is
delivered to the inlet of the high-pressure transmission system,
which consists of nearly 60 miles of pipeline and almost 40,000
horsepower of compression, which transports the gas from the
gathering system to the Amoco Plant.
HS management expects the deal to be accretive to earnings and
cash flow starting in 1999. HS also acquired from Kinder Morgan a
right of first refusal to buy the BP Amoco processing plant that is
the delivery point for most of the gas gathered and transported by
the Wattenberg System.
The deal is currently worth about $72.5 million to Kinder
Morgan. Of that amount, $1 million has been paid in cash; $23
million will be paid by assumption of an operating lease; and the
balance of $48.5 million will be paid to Kinder Morgan between now
and Jan. 1, 2002 through the payment of system revenues (including
payments by HS at its current gathering rate) plus the payment of
incremental fees by HS of $4.3 million in each of years 2000 and
2001, and a closing payment of $7 million. Although the deal has a
final closing date of Jan. 1, 2002, due to its structure and nature
of its obligations, HS will book the transaction as a purchase
effective Oct. 1, 1999.
"Acquiring the Wattenberg System represents the next logical
step for HS in consolidating its interests in the Wattenberg Field
area," said HS CEO Nick Sutton. "We now are in a much better
position to take an integrated approach to matching gathering
capacity to production volumes, which should benefit all producers
connected to the system, not just HS. We also expect to achieve,
over time, additional operating efficiencies through this
coordinated, 'total systems' approach. The importance of this total
systems approach is demonstrated by the fact that HS was fully
prepared to construct an alternative gathering system to transport
certain gas volumes that were scheduled to come off an existing
gathering contract in June 2000. Undertaking this acquisition was
the preferable alternative for both HS and KMI."
In September, HS Resources and Patina Oil & Gas announced
the exchange of certain properties in the D-J Basin in a deal
effective July 1. No cash changed hands. Primarily as a result of
HS's December 1997 purchase of Amoco Production Co.'s D-J Basin oil
and gas properties, HS and Patina have identified properties that
enhance the value of each company's Wattenberg assets through more
efficient ownership in the multiple-pay formations found throughout
the Wattenberg field area.
Also in September, HS Resources announced the closing of two
deals that rationalize non-core, non-strategic assets and cut debt.
HS sold small ownership interests in certain D-J Basin properties
and divested its interest in the Blue Forest Unit (BFU) in
Sweetwater County, WY. The deals generated proceeds of $5 million
for a pre-tax gain of $3.4 million in the third quarter.
Joe Fisher, Houston