Among the more notable sacrifices being made to get KN Energy “out of the ditch” and back down the highway are the decisions by Richard Kinder and William Morgan to work for annual salaries of $1 with no bonuses. They will become the two largest shareholders of the new company once the merger of Kinder Morgan and KN is completed. They also will be the top two executives.

“Between the two of them they will own just a little less than 30% of the company. And they want to send a message that their rewards will be totally tied to future performance of the company,” said KN spokesman Larry Pierce. “I don’t know if it’s unprecedented, but I certainly think it is unusual.”

“It’s not like he needs a salary,” said one industry analyst referring to Kinder. He already is “extremely wealthy,” he said.

John Olson, a veteran industry analyst with Sanders Morris & Mundy, called the move a “noble gesture.” Clearly Kinder is “highly confident that KN’s going to make a turn around.” Olson said the salary move is not unheard of. Other similar cases include El Paso’s William Wise, who takes his salary in stock and CEO George Mitchell of Mitchell Energy who didn’t take a salary for years because he owned 60% of the company. “It’s not common, but it’s a nice measure of good faith. It’s a vote of confidence,” said Olson.

The other steps being taken to put KN back on track perhaps will be less surprising. Kinder, who will be named chairman and CEO of the combined entity, outlined what he called a “back to basics” strategy last week that is designed to achieve annual cost savings between $65 million and $70 million beginning next year. About one third of the savings are expected to come from staff reductions.

The company intends to have about 15% fewer employees next year than previously expected. A total of between 450 and 500 positions are being eliminated, many related to asset divestitures. The combined company is expected to have a total staff of about 3,900 compared to the 4,400 employees currently on the payrolls of KN and Kinder Morgan.

Management also has recommend to the new board that the dividend be reduced from $0.80 to $0.20 annually. This measure would save nearly $70 million in cash annually that could be used to reduce debt and fuel growth initiatives. Kinder said he is committed to increasing the dividend as the company’s financial performance improves.

The cost-saving measures are expected to raise earnings beyond analysts’ current consensus estimate of $0.92/share for KN for the year 2000, the companies said. However, there will be some huge one-time charges for discontinuing operations related to a laundry list of assets divestitures.

Olson called the changes “very painful but very necessary” given KN’s sharp financial downturn, which sunk its previously proposed $6 billion merger with Sempra Energy in June (see NGI, June 28).

Stewart Bliss, interim chairman and CEO of KN, said he expects third quarter operating results near break-even with minor merger-related charges producing a net loss. In the fourth quarter, significant non-recurring charges are expected, including losses associated with assets definitively identified for sale or discontinuance, as well as merger-related charges. Combined, this could result in an after-tax charge in the range of $200 million to $250 million.

Bushton Complex on the Block

The companies added KN’s massive Bushton processing plant, which has a capacity to process 825 MMcf/d of gas, and the 2,200-mile Hugoton gathering system in Kansas to the long list of assets previously identified for potential divestiture. The Bushton complex, which is the fifth largest in the country producing about 1.2 million gallons per day of liquids and 1.7 MMcf/d of crude helium, has suffered through a tough market over the past two years and faced stiff competition from three other local plants including Amoco’s state-of-the-art Hugoton Jayhawk processing plant in Ulysses, KS.

“They overpaid for Bushton,” said one analyst who asked to remain unnamed, “but it’s been a tough market. Being a straddle plant on Northern Natural, Bushton has had to run whether the margins were favorable or not.”

KN purchased the plant from Enron in February 1997 for an undisclosed sum. The plant and pipeline assets could fit well with existing Kinder Morgan NGL lines in the area, and Kinder who came from Enron already is familiar with those assets, the analyst said. The gathering lines collect about 475 MMcf/d of gas, which then is transported on Northern Natural’s pipeline to the Bushton complex.

“Keep in mind that Kinder Morgan Energy Partners will buy the more attractive assets KN is divesting,” said Olson. Kinder already has stated that some of KN’s assets will be sold at fair market value to future affiliate Kinder Morgan Energy Partners, a publicly traded master limited partnership. He said the assets sold must qualify for the partnership and be accretive to distributions per unit. Such transactions were the highlights of Kinder’s plans when the merger was announced in July. By selling assets to KMEP, the company will still continue to participate in their future growth through its general partner interest.

Other assets KN expects to divest in the fourth quarter of this year include all of its international assets (mainly in Mexico), the MidCon Texas Pipeline system, Wattenberg Gathering and Processing, en-able and Orcom, KN Field Services and Compressor Pump & Engine, and certain West Texas transmission assets. In total, the sale of non-strategic assets is expected to reduce debt and long-term leases by $750 million to $1 billion. According to Bliss, KN’s debt to total capitalization ratio will be reduced from 72% to 65%.

“I’d bet the MidCon Texas Pipeline is sold over book,” said the analyst mentioned earlier. “I wouldn’t be surprised at all if someone like HL&P came in and paid up for those assets.” The analyst also said KN may already be close to selling its Wattenberg gathering and processing assets in Denver Julesburg Basin in Colorado to HS Resources.

KN-Kinder Morgan will retain its interstate gas pipelines, interstate refined products pipelines, retail gas distribution, gas marketing and trading and power development operations with an eye on improving efficiency. In addition, Kinder said he intends to aggressively seek accretive acquisitions and expansions in these core businesses. He said the company will pursue new power development and retail gas distribution opportunities, as well as strategic growth projects along its interstate pipeline systems.

Both companies have scheduled special shareholder meetings Sept. 28 to vote on the proposed merger. KN shareholders will vote on whether to issue 41.5 million shares of company stock in return for all of the outstanding shares of Kinder Morgan. KN shareholders also will vote on amending KN’s articles of incorporation to change the name of the company to Kinder Morgan, Inc. upon completion of the merger, which is expected in early October.

The merger would create a massive midstream energy company with 30,000 miles of gas, petroleum products and liquids pipelines, and an enterprise value of $8.5 billion. It already has passed federal antitrust review, but still requires final approval from the Colorado Public Utilities Commission the California Public Utilities Commission, FERC and the Securities and Exchange Commission.

The two companies announced the merger in July just after KN’s $6 billion merger with Sempra Energy collapsed on news that KN’s financial performance was faltering (see NGI, July 12).

Rocco Canonica

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