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KN, El Paso Headed in Opposite GOM Directions

KN, El Paso Headed in Opposite GOM Directions

Just one week after the break-up of the KN/Sempra merger over poor financials, KN Energy has started action on an intense asset divestment strategy. The Colorado-based company sold $51 million worth of various Gulf of Mexico (GOM) assets last week, including interests in HIOS, U-TOS and Stingray, to Leviathan Gas Pipeline which is controlled by El Paso Energy. The transaction closed June 30.

KN's goal is to reduce its debt ratio from the present 72% level to the 55% to 60% level. The proceeds from the sale will go directly to debt reduction. Because of this move, KN said it will recognize a gain which will "significantly" offset its forecast operating loss in the second quarter.

"Last week, KN committed to accelerate the deleveraging of our balance sheet within the context of a broader plan to restore our rate of earnings growth to levels consistent with KN's historical performance," said Larry Hall, KN's CEO, when the sale was announced. "A part of that plan is to divest of non-strategic assets and to use the proceeds of those sales to deleverage and to fund business development projects adjacent to our strong asset base."

Hall said the properties in question, including the High Island Offshore System, the U-T Offshore System, the East Breaks Gathering Co. and the Stingray Pipeline Co. did not measure up to KN's onshore projects.

"These offshore assets, which KN acquired through the MidCon transaction in January of 1998, could not compete with our onshore operations for growth capital. There are additional valuable assets among our holdings that also may not contribute to the long-term vision that we have for KN."

The slash and burn strategy was implemented after the break up of the proposed merger between KN and Sempra Energy (See NGI, June 28). Analysts said KN's poor economic status contributed to the demise of the merger.

For El Paso, the purchase of these assets adds to its already overflowing GOM portfolio. Leviathan Gas Pipeline, a publicly held master limited partnership of which El Paso Energy is the general partner, is one of the largest independent gatherers of natural gas in the Gulf. It transports more than 3 Bcf/d from the Gulf to onshore processing plants.

Leviathan owns the Viosca Knoll Gathering Co. and the Sunday Silence field. Additionally, the GOM gatherer holds interest in seven gas pipeline systems and five offshore leases, including the three systems purchased earlier this week.

El Paso's growing presence in the Gulf demonstrates a troubling trend, Phil Budzick, vice president of the Natural Gas Supply Association (NGSA), said. "One of the problems we see is that there are too few offshore players in the GOM. It isn't a problem now, but if FERC decides to stop regulating offshore parties, the likelihood of these companies turning to monopolistic practices increases."

Yet Paula Delaney, an El Paso spokesperson, said expanding the company's GOM presence is a pillar in El Paso's overall plan. "It's definitely one of the legs we're standing on, with the other being additional electric generation. Through Leviathan, we are the largest 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 fire these plants."

John Norris

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