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

“Between the two of them they will own just a little less than30% of the company. And they want to send a message that theirrewards will be totally tied to future performance of the company,”said KN spokesman Larry Pierce. “I don’t know if it’sunprecedented, but I certainly think it is unusual.”

John Olson, a veteran industry analyst with Sanders Morris &Mundy, said the salary moves were a “noble gesture[s]. Clearly[Kinder] is highly confident that KN’s going to make a turnaround.” Olson said the move is not unheard of. Other similar casesinclude El Paso’s William Wise, who takes his salary in stock andCEO George Mitchell of Mitchell Energy who didn’t take a salary foryears because he owned 60% of the company. “It’s not common, butit’s a nice measure of good faith. It’s a vote of confidence,” saidOlson.

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

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

Management also has recommend to the new board that the dividendbe reduced from $0.80 to $0.20 annually. This measure would savenearly $70 million in cash annually that could be used to reducedebt and fuel growth initiatives. Kinder said he is committed toincreasing the dividend as the company’s financial performanceimproves.

The cost-saving measures are expected to raise earnings beyondanalysts’ current consensus estimate of $0.92/share for KN for theyear 2000, the companies said. However, there will be some hugeone-time charges for discontinuing operations related to a laundrylist of assets divestitures.

Olson called the changes “very painful but very necessary” givenKN’s sharp financial downturn, which sunk its previously proposed$6 billion merger with Sempra Energy in June (see Daily GPI, June22).

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

The companies added KN’s massive Bushton processing plant, whichhas a capacity to process 825 MMcf/d of gas, and the Hugotongathering system in Kansas to the long list of assets previouslyidentified for potential divestiture. The Bushton complex hassuffered through a tough market over the past two years and hasfaced stiff competition from three other local plants includingAmoco’s state-of-the-art Hugoton Jayhawk processing plant inUlysses, KS. Other assets KN expects to divest in the fourthquarter of this year include all of its international assets, theMidCon 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 reducedebt and long-term leases by $750 million to $1 billion. Accordingto Bliss, KN’s debt to total capitalization ratio will be reducedfrom 72% to 65%.

Some of KN’s assets will be sold at fair market value to futureaffiliate Kinder Morgan Energy Partners, a publicly traded masterlimited partnership. Kinder said the assets sold must qualify forthe partnership and be accretive to distributions per unit. Suchtransactions were the highlights of Kinder’s plans when the mergerwas announced in July. By selling assets to KMEP, the company willstill continue to participate in their future growth through itsgeneral partner interest. “Keep in mind that Kinder Morgan EnergyPartners will buy the more attractive assets KN is divesting,” saidOlson.

The combined company will retain its interstate gas pipelines,interstate refined products pipelines, retail gas distribution, gasmarketing and trading and power development operations with an eyeon improving efficiency. In addition, Kinder said he intends toaggressively seek accretive acquisitions and expansions in thesecore businesses. He said the company will pursue new powerdevelopment and retail gas distribution opportunities, as well asstrategic 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 onwhether to issue 41.5 million shares of company stock in return forall of the outstanding shares of Kinder Morgan. KN shareholdersalso will vote on amending KN’s articles of incorporation to changethe name of the company to Kinder Morgan, Inc. upon completion ofthe merger, which is expected in early October.

The merger would create a massive midstream energy company with30,000 miles of gas, petroleum products and liquids pipelines, andan enterprise value of $8.5 billion. It already has passed federalantitrust review, but still requires final approval from theColorado Public Utilities Commission the California PublicUtilities Commission, FERC and the Securities and ExchangeCommission. The two companies announced the merger in July justafter KN’s $6 billion merger with Sempra Energy collapsed on newsthat KN’s financial performance was faltering (see Daily GPI, July12 and Aug. 26).

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