Kinder Morgan Inc. made several significant moves last week as part of its “back to basics” strategy, which is designed to streamline and increase the efficiency of the businesses acquired through its merger with KN Energy earlier this year (see NGI, July 12, Aug. 9, and Aug. 20). Company officials, however, say they are only midway through this transition, and there have been quite a few changes to their original plans.

Gas marketing now is on the auction block along with the company’s West Texas, Panhandle and Hugoton Basin pipelines and processing. Kinder Morgan hopes to net about $700 million in proceeds (including the transferal of assets to Kinder Morgan Energy Partners) to pay down debt and save about $70 million/year when this is all over at the end of the first quarter.

The transactions that took place last week included the sale of the capital stock of MidCon Gas Products of New Mexico to GPM Gas Corp. for $20 million in cash. That deal is expected to close by year-end. The primary assets owned by MidCon Gas Products include the Big Eddy and Logans Draw gas gathering systems located in Eddy County, NM. The combined systems include 159 miles of four- to 10-inch diameter gathering pipe with average throughput of 50 MMcf/d.

Only a week after transferring $700 million in assets, including a 33% share in Trailblazer Pipeline, to its master limited partnership (MLP), Kinder Morgan Energy Partners LP (KMP), the MLP purchased another one-third interest in Trailblazer last week from Columbia Energy Group for $38 million (see NGI, Dec. 20).

CEO Richard Kinder said it was “another accretive acquisition for KMP. Trailblazer generates secure cash flow and has significant opportunities to benefit from expected growth in the Rockies.” Trailblazer is an Illinois partnership that owns and operates a 436-mile, 36-inch diameter gas pipeline that extends from Colorado through southeastern Wyoming to Beatrice, NE, where it connects with Kinder Morgan’s Natural Gas Pipeline Co. of America (NGPL) and Enron’s Northern Natural Gas. The pipeline has a design capacity of 492 MMcf/d and, according to a Kinder Morgan spokesman, is fully subscribed through 2003. Enron owns the other 33.3% in the pipeline.

The other major transaction for Kinder Morgan last week came from its largest interstate pipeline. After several years of decontracting and underutilization, NGPL has significantly improved its long-term health this year through contracts with Aquila Energy and Nicor. Last week it added a transportation and storage agreement with Ameren Corp., which plans to built 1,700 MW of power generation along the pipeline in Gibson City, Kinmundy, Pinckneyville and a fourth site in Illinois. NGPL will provide Ameren up to 245,000 MMBtu/d of transportation service through the four-year term, which will begin on April 1, 2000. That is about 14% of the capacity of NGPL’s Gulf Coast line. The pipeline company also will design, construct and operate new lateral and measurement facilities to connect the plants.

“NGPL is providing Ameren with a very competitive source of capacity and access to diverse gas supply resources. This will enable our new turbines to be aggressive in the Midwestern power markets,” said Scott Glaeser, manager of gas supply for Ameren. “The people at NGPL are genuinely focused on making these types of projects work for customers such as Ameren, especially with the new leadership and support from Kinder Morgan,” noted Glaeser.

After taking the reins at KN Energy this summer, Kinder said a painful but necessary transition was required to turn the company around. He said he intended to “get the car out of the ditch and get it going down the highway.” A laundry list of asset divestitures was drawn up but the plan was not set in stone. Company spokesman Mike Morgan said last week, it is becoming clearer now what Kinder Morgan’s strategy will be going forward.

“Basically the company’s focus is on the interstate lines, on the LDC business and we will keep a participation in the power business. So the gathering and processing and some of the intrastate lines are all items up for divestiture,” said Morgan. “The intrastates in the Rockies we are going to keep because they are related to the LDC system up there. But the Texas intrastates will go. We’re making good progress on the third party sales and the transfer of assets into the [master limited partnership. We announced that last week. That’s a little more than $700 million in assets that will be contributed from Kinder Morgan Inc. into Kinder Morgan Energy Partners LP. There probably will be a little more to follow.

“We’ve said all along that if we got the right value for MidCon Texas Pipeline we would sell it, but we have not got to a definitive agreement yet,” he added. “We’re still in the process of marketing that asset. All of these sales are contingent on value. The restructuring is really being used to pay down the debt. But we’re not going to do anything foolish.

We felt like we got pretty good value for MidCon Gas Products of New Mexico,” he said. “We think we’re going to get there on a lot of the Texas intrastates including MTP but we may decide not to sell all of them. We said we expected to get $750 million to $1 billion of value and have about $400 million to $500 million to pay down debt. The difference between the value and debt is related to some leases that are against some of the assets we are selling. The transfer to the MLP will raise another $330 million net.”

The company has decided not to sell its retail energy marketing operation, en*able, but its wholesale marketing operations are being bundled together with some of the assets being sold. “We would expect the marketing company to go,” said Morgan. KN Energy sold about 4.8 Bcf/d of gas in the first quarter of this year, making it the 13th largest gas marketer in the country according to physical sales volume.

The company already has eliminated about 500 positions. Another 150 marketing staff members are expected to go with some West Texas asset sales in the first quarter.

“There’s still more to come. A lot of the stuff in West Texas and the Panhandle is still being actively marketed. We have some intrastate gas systems in Texas, [particularly] Westar, which is the old American Oil and Gas system. We’ve got some of the Panhandle processing plants and the stuff in the Hugoton basin.” Those include the massive 825 MMcf/d Bushton processing complex and 2,200-mile Hugoton gathering system. “We’re still engaged in those processes. We expect to have everything closed by the end of the first quarter. In term of divestitures that’s the main piece of it.”

Kinder Morgan already has sold the Stingray offshore pipeline system, KN Field Services, Compressor Pump and Engine and its Wattenburg assets in the Denver-Julesburg basin (see NGI, Dec. 6). Also on the block are its Mexican assets, which include a distribution company, the Monterrey Pipeline and the Igasamex industrial services company.

“There’s a significant amount left to go,” said Morgan. “We feel pretty good about getting the transfer accomplished [to KMP]; that will close in January or February. We need to complete the other third-party sales. Then I think most of the restructuring will be behind us at that point. Then it’s just a matter of focusing on growing the assets we have left.”

Rocco Canonica

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