In a surprise move announced Monday CMS Energy reached southfrom its Michigan distribution base to buy the Panhandle Easternand Trunkline Gas pipeline companies — pipes, storage and LNGterminal — from Duke Energy, solidifying its own supply line tothe Midcontinent and Gulf.
CMS pledged a cool $2.2 billion for the properties which Dukebought as part of PanEnergy less than two years ago. The priceincludes a cash payment of $1.9 billion and existing Panhandle debtof $300 million.
The assets include: 11,500 miles of mainline gas pipelineextending from the Texas Gulf Coast to Michigan and from theKansas/Oklahoma mid-continent to Michigan, with a combined capacityof 3.5 Bcf/d; 340 miles of pipeline in the offshore Gulf of Mexico;70 Bcf of gas storage facilities; an LNG port, at St. Charles, LA,unloading and re-gasification facilities with a production capacityof 700 MMcf/d and liquid storage of 1.8 million barrels. Accordingto Duke, the book value of the assets is $700 million.
“This acquisition positions CMS Energy as the premierdiversified energy company in the U.S. Midwest and an even strongerglobal energy company,” said William T. McCormick Jr., CMS CEO.”Panhandle’s energy assets are an exceptionally good strategic fitwith CMS Energy because of their physical connection to oursubstantial gas distribution and storage assets in Michigan and ourextensive gas gathering and processing assets in the U.S.Midcontinent area.
Furthermore, there are numerous synergies that will result fromthis first major geographically contiguous electric and gasconvergence merger as gas-fueled electric generation continues togrow rapidly in the U.S. Midwest.”
CMS said the acquisition will be immediately accretive toearnings in 1999 when the assets are projected to add five to 10cents to per-share results. The deal is expected to close inJanuary.
Petrie Parkman analyst Stuart Wagner noted the deal moves CMSwestward and closer to the wellhead. CMS recently bought Tulsa,OK-based Continental Natural Gas, the operator of 2,000 miles ofMidcontinent gathering lines, 550 MMcf/d of gas processing and 1.4million 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 added2,000 miles of gathering pipe as well as a 45 MMcf/d gas processingplant in the Hugoton basin and a gas and liquids marketing staff.
Wagner said Panhandle and Trunkline have more strategic valuefor CMS than they do for Duke, which is retaining Texas EasternTransmission. Tetco has been running close to full for a while, butTrunkline has gone without long-term contracts for some time andPanhandle faces some capacity turnback, Wagner said.
In fact, CMS will be carrying on Trunkline’s plans – whichshippers are fighting – to abandon 720 miles of its mainline forconversion to hydrocarbon vapor transmission (See Daily GPI July 2,Aug 28, 1998). “Overcapacity in the Midwest has caused Trunkline totransport gas at deeply discounted rates for several years,” SteveRoverud, Trunkline chairman said in July (See Daily GPI July 2,1998).
CMS touted the addition of the Duke assets as beingcomplementary to its TriState Pipeline project, a project to moveCanadian gas from the Chicago area to the Consumers Energydistribution system in Michigan then to the hub at Dawn, Ontarioand on to connecting pipes to eastern U.S. markets. “Certainly itwill enhance projects like TriState, which is a project to moveCanadian gas to the East Coast,” said William J. Haener, CEO of CMSGas Transmission and Storage Co.
“Instead of talking about a Chicago hub, I think maybe it oughtto be a Michigan hub, and I think we’re going to be positioned toplay a role in that.”
CMS also will be getting the Trunkline LNG facility in LakeCharles, LA. Duke has been actively importing LNG for sale in theU.S.; however, the LNG terminal is operating at a fraction of itscapacity. CMS said it will step up LNG imports, making the terminala complement to its international LNG investments. Duke, which ownstwo LNG tankers, will continue to use the facility, contractingwith new owner CMS.
A lawyer at one large energy marketing company viewed the CMSacquisition as positive from a competition standpoint. “In my view,moving pipes from the big, huge companies to smaller, morecompetitive companies, I think, is good because you end up withmarket concentration if the big guys keep getting bigger and therearen’t any small guys.”
CMS approached Duke about acquiring the pipes near the beginningof summer. Their sale had not recently been considered by Duke,said Fred Fowler, president of Duke’s energy transmission group. Atthe time CMS came to Duke, Fowler said his company was in theprocess of refining its strategy to focus on building a gas andpower presence in several key regions of the country.
“What we determined was we could achieve our objective in theMidwest, which was to be one of the largest gas and electricitymarketers, without actually needing to own the interstate assets inthat region.”
Fowler said proceeds from the sale will be re-deployed in Duke’stargeted regions, which are the Northeast, the Carolinas, the WestCoast, Midcontinent and Gulf Coast. The money could be spent on gasor electric assets, including gathering, processing, pipelines andgeneration.
Fowler would not comment on a rumor that Duke is in the runningto acquire the gathering and processing assets being sold by UnionPacific Resources.
CMS stock closed up 2 1/8 Monday at 46 3/16, which is 1 ¬ shortof its 52-week high. Duke stock closed up 3/16 at 64 7/8. The stocktraded as high as 71 in the last 52 weeks.
Standard & Poor’s affirmed its ratings on Consumers Energyand parent CMS Energy Corp. saying the outlook remains positive forboth entities. Standard & Poor’s placed some ratings ofPanhandle Eastern on CreditWatch with negative implications.
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