Kinder Morgan Energy Partners LP (KMP) added the massive eastern Texas pipeline system of Tejas Gas LLC to its shopping cart this Christmas. The company said it’s buying Tejas, a wholly owned subsidiary of InterGen (North America) Inc. — which is a joint venture of Royal Dutch Shell and Bechtel — for $750 million in cash, or “a little less than eight times the [annual] EBITDA of the system,” according to CEO Richard Kinder.

The 3,400-mile Tejas intrastate pipeline system has a transportation capacity of 3.5 Bcf/d. It extends from South Texas along the Mexico border and the Texas Gulf Coast to near the Louisiana border and north from near Houston to East Texas.

KMP CEO Richard Kinder said the assets “broaden the footprint” of KMP in the state of Texas, “which is the largest producer and consumer of natural gas in the United States.” He noted the assets enable KMP, which already owns one large Texas pipeline system, to serve customers in several additional growing Texas cities, including Austin, Texas City, which is near the Houston Ship Channel, and Corpus Christi.

“In addition, we will be able to substantially reduce corporate costs, yet still offer more services to customers,” Kinder said. “We also expect to realize solid growth on the system, primarily due to increased demand for natural gas to fuel new gas-fired power plants that are being built along the pipeline.”

Tejas Gas has access to the major supply areas of South Texas, the Texas Gulf Coast and East Texas. It is a major provider of natural gas to refining, petrochemical, gas and electric utilities, independent power generation and industrial markets. “Tejas Gas has long-term pipeline transportation and sales contracts in place and operates fee-based facilities, which fits our strategy perfectly,” Kinder said.

Tejas Gas is an extension of KMP’s pipeline operations in Texas and is a good fit with Kinder Morgan Texas Pipeline (KMTP), a 2,600-mile intrastate pipeline, Kinder noted. Combining the Tejas and KMTP systems will increase transportation capacity through better pressure utilization, improve reliability and create additional services for customers. “We have a strong track record of acquiring under-utilized assets, reducing expenses and increasing future throughput, which is exactly what we plan to do with Tejas Gas.”

The Tejas Gas system has 16 compressor stations with approximately 73,585 installed horsepower, two natural gas storage facilities with 100 Bcf of working gas capacity, and three fee-based, gas processing/treating facilities.

“We expect the acquisition will be significantly accretive to cash available for distribution to KMP unitholders, and we intend to increase the annual distribution per unit by at least 10 cents to $2.30 in the first full quarter after the transaction closes. We now expect to achieve KMP’s previously announced annualized distribution target of at least $2.50 per unit by year-end of 2002, without any additional acquisitions,” he said. “Additionally, we are increasing our 2002 earnings per share guidance for Kinder Morgan, Inc. (KMI) by 15 cents to between $2.55 and $2.65, up from the previously announced level of between $2.40 and $2.50. We are comfortable with the low end of this range, which represents an approximate 35 percent increase over 2001 consensus estimates of $1.91, without additional acquisitions.” KMI is the general partner in KMP, the largest master limited partnership in the United States.

KMP has now announced almost $1.4 billion in acquisitions in 2001 and over $6 billion since its formation less than five years ago. “Our accretion guidance conservatively assumes that the Tejas transaction is financed with sufficient equity to return KMP to its targeted 40% debt-to-total-capital ratio. We expect the vast majority of the equity will be raised via another offering of Kinder Morgan Management LLC shares to institutional investors once the transaction closes. We do not expect to issue additional KMP common units in a public offering.”

Kinder said the transaction is expected to close in the first quarter of 2002.

“In these uncertain and difficult times, I think it is important to remember that the Kinder Morgan companies are significantly different from most of the so-called convergence companies with which we are usually grouped,” Kinder added. “We really are asset heavy and that’s not a term we’ve just coined in the last few weeks; we’ve been saying that for a long time. We are asset heavy and risk light… That’s why we are so bullish on 2002 and beyond.”

Curt Launer of Credit Suisse First Boston increased his 2002 earnings per share estimate for KMI from $2.50 per share to $2.60. “KMP has made $1.4 billion of acquisitions in 2001, versus a goal of $1.0 billion.

“Our thesis for KMP/KMI looks for it to continue its acquisition and operational based growth path with 30% [earnings per share] growth at KMI for the next several years. Recent mergers among the major oils and the current spate of balance sheet emphasis and potential restructuring adds to the property acquisition pool available to KMP/KMI.” Launer rates KMI a Strong Buy with a $78 price target.

©Copyright 2001 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.