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CMS Buys Panhandle, Trunkline to Feed Midwest Power

CMS Buys Panhandle, Trunkline to Feed Midwest Power

CMS Energy surprised the industry early last week when it reached south from its Michigan gas and electric distribution base to buy the Panhandle Eastern and Trunkline Gas pipeline companies - pipes, storage and LNG terminal - from Duke Energy, locking in its own supply line to the Midcontinent and Gulf Coast. The company also articulated a strategy to capitalize on demand for gas-fired power generation in the Midwest, and ended the week by demonstrating it.

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

The assets include: 11,500 miles of mainline gas pipeline extending from the Texas Gulf Coast to Michigan and from the Kansas/Oklahoma Midcontinent to Michigan, with a combined capacity of 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 capacity of 700 MMcf/d and liquid storage of 1.8 million barrels. According to Duke, the book value of the assets is $700 million.

"This acquisition positions CMS Energy as the premier diversified energy company in the U.S. Midwest and an even stronger global energy company," said William T. McCormick Jr., CMS CEO. "Panhandle's energy assets are an exceptionally good strategic fit with CMS Energy because of their physical connection to our substantial gas distribution and storage assets in Michigan and our extensive gas gathering and processing assets in the U.S. Midcontinent area."

In an analyst conference call, McCormick said, "the acquisition is going to provide us a number of growth benefits, including a platform for expansion in the Midwest for both power and gas storage as well as transportation revenues. There is growing need for electricity in the Midwest, and virtually all of that capacity will be generated through natural gas. Also, very significantly, these assets connect physically to the assets and gas reserves that CMS owns in the Midcontinent and Gulf Coast areas. These are quite significant and we think it really is going to provide a lot of upside opportunity for us."

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

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

Strategic Value

Petrie Parkman analyst Stuart Wagner said the deal moves CMS westward and closer to the wellhead. CMS recently bought Tulsa, OK-based Continental Natural Gas, the operator of 2,000 miles of Midcontinent gathering lines, 550 MMcf/d of gas processing and 1.4 million 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 added 2,000 miles of gathering pipe as well as a 45 MMcf/d gas processing plant in the Hugoton basin and a gas and liquids marketing staff. These two acquisitions add up to midstream base to go with the new CMS long lines.

Wagner said Panhandle and Trunkline have more strategic value for CMS than they do for Duke, which is retaining Texas Eastern Transmission and PanEnergy's midstream and marketing assets. Tetco has been running close to full for a while, but Trunkline has gone without long-term contracts for some time and Panhandle faces some capacity turnback, Wagner said.

"Panhandle Eastern generates approximately $250 million EBITDA annually, which already reflects heavy discounting on the Trunkline pipeline," said Duff &amp Phelps Credit Rating. "Panhandle Eastern's pro forma cash flows may be marginally affected by expected discounting on the Panhandle Eastern Transmission line." According to 1997 figures, the top 15 customers of Panhandle transportation 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 are fighting -- to sell to an affiliate 720 miles of 26-inch mainline loop for conversion to transport natural gas liquids as hydrocarbon vapor. The converted line would transport liquids from an NGL extraction facility (fed by the Alliance Pipeline) to the Gulf Coast and other markets. "Over-capacity in the Midwest has caused Trunkline to transport gas at deeply discounted rates for several years," Steve Roverud, Trunkline chairman said in July (See Daily GPI July 2, 1998). Shippers are challenging the plan, disputing Trunkline's claims that firm capacity commitments on this part of its system (Line 100-1) are expected to dwindle over the next couple of years (See Daily GPI Aug. 28, 1998).

CMS touted the addition of the Duke assets as being complementary to its TriState Pipeline, a project to move Canadian gas from the Chicago area to the Consumers Energy distribution system in Michigan then to the hub at Dawn, Ontario, and on to connecting pipes to eastern U.S. markets. Trunkline may allow TriState to delay construction of its first leg from Joliet, IL, to the Michigan border, improving the project's economics.

"Certainly it will enhance projects like TriState." said William J. Haener, CEO of CMS Gas Transmission and Storage Co. "Instead of talking about a Chicago hub, I think maybe it ought to be a Michigan hub, and I think we're going to be positioned to play a role in that." CMS said the combination of pipes will allow it to move gas across Michigan, displace gas to the East Coast through existing interconnects, and displace gas back into the Chicago area. "A great combination," said Haener.

Increase LNG Imports

CMS also will be getting the Trunkline LNG facility in Lake Charles, LA. Duke has been actively importing LNG for sale in the U.S.; however, the LNG terminal is operating at a fraction of its capacity. CMS said it will step up LNG imports, making the terminal a complement to its international LNG investments. Duke, which owns two LNG tankers, will continue to use the facility, contracting with new owner CMS.

A regulatory official at one large energy marketing company viewed the CMS acquisition as positive from a competition standpoint. "In my view, moving pipes from the big, huge companies to smaller, more competitive companies, I think, is good because you end up with market concentration if the big guys keep getting bigger and there aren't any small guys."

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

"What we determined was we could achieve our objective in the Midwest, which was to be one of the largest gas and electricity marketers, without actually needing to own the interstate assets in that 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 many years. In fact, many of the changes that have been made to these pipelines over the years have been driven by CMS Energy's needs."

Fowler said proceeds from the sale will be re-deployed in Duke's targeted regions, which are the Northeast, the Carolinas, the West Coast, Midcontinent and Gulf Coast. The money could be spent on gas or electric assets, including gathering, processing, pipelines and generation.

Fowler would not comment on a rumor that Duke is in the running to acquire the gathering and processing assets being sold by Union Pacific Resources.

Following the deal's announcement Monday, CMS stock closed up 2 1/8 at 46 3/16. The stock's 52-week high is 48 3/16. Duke stock closed up 3/16 at 64 7/8. The stock traded as high as 71 in the last 52 weeks. Standard &amp Poor's affirmed its ratings on Consumers Energy and parent CMS Energy Corp. saying the outlook remains positive for both entities. Standard &amp Poor's placed some ratings of Panhandle Eastern on CreditWatch with negative implications.

Joe Fisher, Houston

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