Illustrating two different energy business strategies, KinderMorgan Inc. (KMI) and The Williams Companies were on the oppositesides of a major tolling agreement last week. The deal covers 3,300MW of combined cycle peaking capacity Kinder Morgan is building inthe Midcontinent and in the Southeast regions of the United States.

Williams will provide the fuel to the six gas-fired plants andpay Kinder Morgan a fee to market the entire power output of theplants under a 16-year agreement. Financial terms of the deal werenot disclosed.

The plants will be built and operated by Kinder Morgan Power Co.over the next four years. Each of the facilities will produce 550MW of electricity. The first of the six is currently underconstruction in Jackson, MI, and is expected to come online duringthe second quarter of 2002. Construction of the second and thirdfacilities, which will be built along Kinder Morgan’s Natural GasPipeline Co. of America, is planned for completion by secondquarter of 2003 and the final three by the second quarter of 2004.

“The 3,300 MW capacity addition is consistent with our strategicplan to expand, diversify and integrate our national portfolio toapproximately 40,000 MW by 2005,” said Steve Malcolm, CEO ofWilliams Energy Services. Tolling deals are a large part ofWilliams’ power market portfolio. It also has several large tollingarrangements with AES in California (covering 3,956 MW ofgeneration and AES’s 700 MW Ironwood plant), a tolling deal withCentral Louisiana Electric Co. covering 750 MW in Louisiana and anumber of other tolling arrangements with proposed power plants.

Kinder Morgan, meanwhile, is focused on growing its powerbusiness through the opposite side of tolling arrangements, inwhich it builds and operates the plants for a set fee withguaranteed revenue. “This agreement will enable us to rapidlyaccelerate our power development program, while retaining ourstrategy of focusing on fee-based or tolling projects,” saidRichard D. Kinder, CEO of Kinder Morgan Inc. “The partnership withWilliams is a great fit as it will allow us to do what we do best— build gas-fired plants using our proprietary Orion technology— while utilizing the strength that Williams can provide in thepower marketing arena. Fee-based earnings from these new plants areexpected to drive significant growth in our power segment in 2002and beyond.”

The Kinder Morgan plants will utilize KMI’s Orion technology, aninnovative combined-cycle design that includes both aero-derivativeand industrial gas turbines. General Electric will provide theturbines. The Orion design enables rapid start-up response to meetpeak demand and rapid ramping, KMI said.

Kinder said the plants and tolling deal would yield “a highreturn [for KMI] with no merchant power risk. We are not interestedin becoming a merchant power player. There are plenty of those andWilliams is certainly one of the best. We are interested in gettingpaid on a fee basis for putting asset packages together and forowning and operating those assets.”

Kinder also said during a conference call that the deal fitswell into KMI’s expectations for producing earnings per sharegrowth of between 18% and 30% per year on a compound basis. Thecompany is expecting 30-40% EPS growth this year and had more than70% growth in 2000.

Rocco Canonica

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