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
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.
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
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 & 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
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
Fowler would not comment on a rumor that Duke is in the running
to acquire the gathering and processing assets being sold by Union
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 & Poor's affirmed its ratings on
Consumers Energy and parent CMS Energy Corp. saying the outlook
remains positive for both entities. Standard & Poor's placed
some ratings of Panhandle Eastern on CreditWatch with negative
Joe Fisher, Houston