Just one week after the break-up of the KN/Sempra merger overpoor financials, KN Energy has started action on an intense assetdivestment strategy. The Colorado-based company sold $51 millionworth of various Gulf of Mexico (GOM) assets last week, includinginterests in HIOS, U-TOS and Stingray, to Leviathan Gas Pipelinewhich is controlled by El Paso Energy. The transaction closed June30.

KN’s goal is to reduce its debt ratio from the present 72% levelto the 55 to 60% level. The proceeds from the sale will go directlyto debt reduction. Because of this move, KN said it will recognizea gain which will “significantly” offset its forecast operatingloss in the second quarter.

“Last week, KN committed to accelerate the deleveraging of ourbalance sheet within the context of a broader plan to restore ourrate of earnings growth to levels consistent with KN’s historicalperformance,” said Larry Hall, KN’s CEO, when the sale wasannounced. “A part of that plan is to divest of non-strategicassets and to use the proceeds of those sales to deleverage and tofund business development projects adjacent to our strong assetbase.”

Hall said the properties in question, including the High IslandOffshore System, the U-T Offshore System, the East Breaks GatheringCo. and the Stingray Pipeline Co. did not measure up to KN’sonshore projects.

“These offshore assets, which KN acquired through the MidContransaction in January of 1998, could not compete with our onshoreoperations for growth capital. There are additional valuable assetsamong our holdings that also may not contribute to the long-termvision that we have for KN.”

The slash and burn strategy was implemented after the break-up ofthe proposed merger between KN and Sempra Energy (See Daily GPI, June 22). Analysts said KN’s poor economicstatus was a contributing factor to the demise of the merger.

For El Paso, the purchase of these assets adds to its alreadyoverflowing GOM portfolio. Leviathan Gas Pipeline, a publicly heldmaster limited partnership of which El Paso Energy is the generalpartner, is one of the largest independent gatherers of natural gasin the Gulf. It transports more than 3 Bcf/d from the Gulf toonshore processing plants.

Leviathan owns the Viosca Knoll Gathering Co. and the SundaySilence field. Additionally, the GOM gatherer holds interest inseven gas pipeline systems and five offshore leases, including thethree systems purchased earlier this week.

El Paso’s growing presence in the Gulf demonstrates a troublingtrend, Phil Budzick, vice president of the Natural Gas SupplyAssociation (NGSA), said. “One of the problems we see is that thereare too few offshore players in the GOM. It isn’t a problem now,but if FERC decides to stop regulating offshore parties, thelikelihood of these companies turning to monopolistic practicesincreases.”

El Paso spokesperson Paula Delaney said expanding the company’sGOM presence is a pillar in El Paso’s overall plan. “It’sdefinitely one of the legs we’re standing on, with the other beingadditional electric generation. Through Leviathan, we are thelargest Gulf producer and will do everything to keep it that way.With everybody, including us, building electric generation plants,we believe the Gulf will be the best source of fuel that will firethese plants.”

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