Kinder Morgan, Williams Ink Major Tolling Deal
Illustrating two different energy business strategies, Kinder
Morgan Inc. (KMI) and The Williams Companies were on the opposite
sides of a major tolling agreement last week. The deal covers 3,300
MW of combined cycle peaking capacity Kinder Morgan is building in
the Midcontinent and in the Southeast regions of the United States.
Williams will provide the fuel to the six gas-fired plants and
pay Kinder Morgan a fee to market the entire power output of the
plants under a 16-year agreement. Financial terms of the deal were
The plants will be built and operated by Kinder Morgan Power Co.
over the next four years. Each of the facilities will produce 550
MW of electricity. The first of the six is currently under
construction in Jackson, MI, and is expected to come online during
the second quarter of 2002. Construction of the second and third
facilities, which will be built along Kinder Morgan's Natural Gas
Pipeline Co. of America, is planned for completion by second
quarter of 2003 and the final three by the second quarter of 2004.
"The 3,300 MW capacity addition is consistent with our strategic
plan to expand, diversify and integrate our national portfolio to
approximately 40,000 MW by 2005," said Steve Malcolm, CEO of
Williams Energy Services. Tolling deals are a large part of
Williams' power market portfolio. It also has several large tolling
arrangements with AES in California (covering 3,956 MW of
generation and AES's 700 MW Ironwood plant), a tolling deal with
Central Louisiana Electric Co. covering 750 MW in Louisiana and a
number of other tolling arrangements with proposed power plants.
Kinder Morgan, meanwhile, is focused on growing its power
business through the opposite side of tolling arrangements, in
which it builds and operates the plants for a set fee with
guaranteed revenue. "This agreement will enable us to rapidly
accelerate our power development program, while retaining our
strategy of focusing on fee-based or tolling projects," said
Richard D. Kinder, CEO of Kinder Morgan Inc. "The partnership with
Williams is a great fit as it will allow us to do what we do best
--- build gas-fired plants using our proprietary Orion technology
--- while utilizing the strength that Williams can provide in the
power marketing arena. Fee-based earnings from these new plants are
expected to drive significant growth in our power segment in 2002
The Kinder Morgan plants will utilize KMI's Orion technology, an
innovative combined-cycle design that includes both aero-derivative
and industrial gas turbines. General Electric will provide the
turbines. The Orion design enables rapid start-up response to meet
peak demand and rapid ramping, KMI said.
Kinder said the plants and tolling deal would yield "a high
return [for KMI] with no merchant power risk. We are not interested
in becoming a merchant power player. There are plenty of those and
Williams is certainly one of the best. We are interested in getting
paid on a fee basis for putting asset packages together and for
owning and operating those assets."
Kinder also said during a conference call that the deal fits
well into KMI's expectations for producing earnings per share
growth of between 18% and 30% per year on a compound basis. The
company is expecting 30-40% EPS growth this year and had more than
70% growth in 2000.
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