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HS Buying Kinder-Morgan Colorado Assets

December 6, 1999
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HS Buying Kinder-Morgan Colorado Assets

HS Resources, based in San Francisco, is further growing its position in the Wattenberg Field area of the Denver-Julesberg Basin by buying Houston-based Kinder Morgan's gathering system there along with its interests in the Amoco-BP Wattenberg Gas Processing Plant and KN Wattenberg LLC, which owns the Wattenberg transmission system, in a phased transaction.

Wattenberg's gathering and processing assets were identified for potential divestiture by Kinder Morgan last September when the company announced a back-to-basics strategy and said it would sell non-core assets to improve financial performance and de-leverage the balance sheet.

"We continue to make progress with our divestiture program," said CEO Richard D. Kinder. "Through this transaction, we will retain cash flow from Wattenberg's operations in 2000 and 2001, and we expect to realize nearly $30 million in value upon the final closing, which is expected to occur on or before Dec. 15, 2001."

HS Resources, the largest producer in the area, last week began operating both the gathering and transmission assets. Under the agreements, HS Resources will operate the assets to provide gathering and transmission services to numerous producers in the Wattenberg area. HS Resources currently operates about 3,000 wells, accounting for some 65% of the Wattenberg System's daily throughput of 200 MMcf/d.

The Wattenberg System includes low-pressure gathering and high-pressure transmission assets. The low-pressure system consists of 1,500 miles of gathering pipe and 3,000 horsepower of compression in five northeastern Colorado counties. Gas is delivered to the inlet of the high-pressure transmission system, which consists of nearly 60 miles of pipeline and almost 40,000 horsepower of compression, which transports the gas from the gathering system to the Amoco Plant.

HS management expects the deal to be accretive to earnings and cash flow starting in 1999. HS also acquired from Kinder Morgan a right of first refusal to buy the BP Amoco processing plant that is the delivery point for most of the gas gathered and transported by the Wattenberg System.

The deal is currently worth about $72.5 million to Kinder Morgan. Of that amount, $1 million has been paid in cash; $23 million will be paid by assumption of an operating lease; and the balance of $48.5 million will be paid to Kinder Morgan between now and Jan. 1, 2002 through the payment of system revenues (including payments by HS at its current gathering rate) plus the payment of incremental fees by HS of $4.3 million in each of years 2000 and 2001, and a closing payment of $7 million. Although the deal has a final closing date of Jan. 1, 2002, due to its structure and nature of its obligations, HS will book the transaction as a purchase effective Oct. 1, 1999.

"Acquiring the Wattenberg System represents the next logical step for HS in consolidating its interests in the Wattenberg Field area," said HS CEO Nick Sutton. "We now are in a much better position to take an integrated approach to matching gathering capacity to production volumes, which should benefit all producers connected to the system, not just HS. We also expect to achieve, over time, additional operating efficiencies through this coordinated, 'total systems' approach. The importance of this total systems approach is demonstrated by the fact that HS was fully prepared to construct an alternative gathering system to transport certain gas volumes that were scheduled to come off an existing gathering contract in June 2000. Undertaking this acquisition was the preferable alternative for both HS and KMI."

In September, HS Resources and Patina Oil & Gas announced the exchange of certain properties in the D-J Basin in a deal effective July 1. No cash changed hands. Primarily as a result of HS's December 1997 purchase of Amoco Production Co.'s D-J Basin oil and gas properties, HS and Patina have identified properties that enhance the value of each company's Wattenberg assets through more efficient ownership in the multiple-pay formations found throughout the Wattenberg field area.

Also in September, HS Resources announced the closing of two deals that rationalize non-core, non-strategic assets and cut debt. HS sold small ownership interests in certain D-J Basin properties and divested its interest in the Blue Forest Unit (BFU) in Sweetwater County, WY. The deals generated proceeds of $5 million for a pre-tax gain of $3.4 million in the third quarter.

Joe Fisher, Houston

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ISSN © 2577-9877 | ISSN © 1532-1266
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