Kinder Morgan, Williams Ink Major Tolling Deal

Illustrating two different energy business strategies, Kinder Morgan Inc. (KMI) and The Williams Companies were on the opposite sides of a major tolling agreement last week. The deal covers 3,300 MW of combined cycle peaking capacity Kinder Morgan is building in the Midcontinent and in the Southeast regions of the United States.

Williams will provide the fuel to the six gas-fired plants and pay Kinder Morgan a fee to market the entire power output of the plants under a 16-year agreement. Financial terms of the deal were not disclosed.

The plants will be built and operated by Kinder Morgan Power Co. over the next four years. Each of the facilities will produce 550 MW of electricity. The first of the six is currently under construction in Jackson, MI, and is expected to come online during the second quarter of 2002. Construction of the second and third facilities, which will be built along Kinder Morgan's Natural Gas Pipeline Co. of America, is planned for completion by second quarter of 2003 and the final three by the second quarter of 2004.

"The 3,300 MW capacity addition is consistent with our strategic plan to expand, diversify and integrate our national portfolio to approximately 40,000 MW by 2005," said Steve Malcolm, CEO of Williams Energy Services. Tolling deals are a large part of Williams' power market portfolio. It also has several large tolling arrangements with AES in California (covering 3,956 MW of generation and AES's 700 MW Ironwood plant), a tolling deal with Central Louisiana Electric Co. covering 750 MW in Louisiana and a number of other tolling arrangements with proposed power plants.

Kinder Morgan, meanwhile, is focused on growing its power business through the opposite side of tolling arrangements, in which it builds and operates the plants for a set fee with guaranteed revenue. "This agreement will enable us to rapidly accelerate our power development program, while retaining our strategy of focusing on fee-based or tolling projects," said Richard D. Kinder, CEO of Kinder Morgan Inc. "The partnership with Williams is a great fit as it will allow us to do what we do best --- build gas-fired plants using our proprietary Orion technology --- while utilizing the strength that Williams can provide in the power marketing arena. Fee-based earnings from these new plants are expected to drive significant growth in our power segment in 2002 and beyond."

The Kinder Morgan plants will utilize KMI's Orion technology, an innovative combined-cycle design that includes both aero-derivative and industrial gas turbines. General Electric will provide the turbines. The Orion design enables rapid start-up response to meet peak demand and rapid ramping, KMI said.

Kinder said the plants and tolling deal would yield "a high return [for KMI] with no merchant power risk. We are not interested in becoming a merchant power player. There are plenty of those and Williams is certainly one of the best. We are interested in getting paid on a fee basis for putting asset packages together and for owning and operating those assets."

Kinder also said during a conference call that the deal fits well into KMI's expectations for producing earnings per share growth of between 18% and 30% per year on a compound basis. The company is expecting 30-40% EPS growth this year and had more than 70% growth in 2000.

Rocco Canonica

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