In the same week that plans for the creation of its largest competitor were finalized (see story this issue), Dynegy Midstream Services LP announced definitive agreements to sell certain East Texas gathering, treating and processing facilities to an independent midstream processing company. The closing of the sale is expected to occur prior to year-end. Neither the identity of the buyer nor the sale price was disclosed.

The assets being sold include four gas processing and treating plants and 675 miles of related gas gathering with a current throughput of 100 MMcf/day. Proceeds from the sale, net of taxes, will be used to reduce debt. Steve Furbacher, vice president of the Dynegy subsidiary, said the plants produced gas with high-sulfur content and the sale exits Dynegy from that type of operation in East Texas.

“Basically, we were one of two players dealing with high sulfur gas in the area,” Furbacher said. “We were faced with the options of buying them out, selling our assets to them or going into a joint venture. We chose to sell. Dynegy has retained the rights to the liquids produced from the plant, which are important to our downstream infrastructure.”

Dynegy Midstream’s core areas of operation are in the Permian and Fort Worth Basins along with Louisiana, Furbacher said. In the third quarter, the company’s operating margins improved 35% from the same quarter in 1998 to $58 million. Including straddle plants, Dynegy Midstream produces about 110,000 b/d of liquids.

“This sale accomplishes several of our strategic objectives,” Chuck Watson, CEO of Dynegy said. “This transaction is consistent with our goal of reducing our capital investment in the natural gas liquids business in those areas outside of our core Permian and Ft. Worth Basins and Gulf Coast strategic areas.”

While Dynegy was busy getting smaller, Duke and Phillips Petroleum were busy creating the largest midstream player in the industry (see related story). In a conference call after the two companies revealed their plans to form Duke Energy Field Services, Dynegy’s midstream subsidiary was mentioned as a possible purchase for the new entity. While acknowledging the fact that Dynegy’s Midcontinent assets were up for sale, neither Duke nor Phillips would comment on the possible transaction.

Furbacher would not comment on the potential sale either, but he did say that the Midcontinent assets do not feed the company’s downstream infrastructure. He also said that with such a high level of competition in that area and with production falling off, Dynegy is conducting an evaluation of its Midcontinent assets. However, he added that this evaluation is not new and has been an on-going process for the past three years.

Watson said the deal was made with Dynegy’s pending merger with Illinova in mind. “Sales of less strategic assets from across the company, which are expected to exceed $600 million between now and mid year 2000, will reduce the expected size of a new equity offering from a range of $400 to $500 million, as originally contemplated at the time the proposed merger between Dynegy and Illinova was announced, to about $250 million. By doing so, we will achieve our balance sheet objective and coverage ratios, thereby preserving and enhancing our credit ratings and avoiding unnecessary dilution of shareholders’ ownership interests.”

The merger between Houston-based Dynegy and Illinois-based Illinova has already received FERC and shareholder approval from both companies (see NGI, Nov. 15). Dynegy needs to address its interest in two cogeneration facilities before the merger is complete, John Sousa, a Dynegy spokesman said. Both companies expect the transaction to close during the first quarter of next year.

The $2 billion deal would create an energy giant with more than 15,000 gross MW of domestic generating capacity representing the nation’s most geographically diverse generating asset portfolio. Illinova’s gas and electric utility subsidiary serves 650,000 customers.

John Norris

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