A Colorado district court late Monday ordered a Kinder Morgan Inc. (KMI) affiliate to pay Questar TransColorado nearly $110 million in damages, after it declared as “valid and enforceable” a 1997 agreement and 1998 letter of understanding that allowed Questar Corp. to sell its 50% ownership of its pipeline subsidiary to KMI’s KN TransColorado (KNTC), which owns the other 50%.

The court also ruled that Questar Pipeline Co. had failed to install compression as promised, but dismissed all of KMI’s other claims.

KMI had filed a lawsuit in June 2000 charging Questar with a breach of its fiduciary duty to the TransColorado pipeline partnership after Questar announced plans to build a competing pipeline that would transport gas from the Uinta Basin to Kern River Gas Transmission (see Daily GPI, Jan. 11, 2001). TransColorado, completed in 1999, consists of 292 miles of 22-inch and 24-inch pipe extending from the Piceance Basin near Meeker, CO, to the San Juan Basin near Blanco, NM. Questar and KNTC had been seeking damages of up to $500 million.

In its ruling, the Garfield County District Court in Glenwood Springs said KNTC had “breached” two agreements “by failing to honor the Put provision” giving the Kinder Morgan entity Questar’s 50% ownership on or before March 31, 2001. The court ruled that KNTC is liable to Questar TransColorado and Questar Pipeline…for damages, and must pay the same within 45 days after the order is issued.

In its final judgment, the court ruled the following:

1) A net Put payment of $114.8 million to Questar TransColorado. The figure represents the depreciated value of Questar TransColorado’s 50% interest in the TransColorado Pipeline, plus 50% of all cash investments held by the partnership.

2) Return of cash contributions and loan origination fee — totaling $2.8 million — paid by Questar Pipeline Co. after Questar TransColorado exercised the put on March 31, 2001.

3) Prejudgment interest of $10.1 million up to April 7, 2002, and $25,760 per day after April 7, 2002, until entry of the final judgment.

4) Reduction of the total amounts awarded by $21.8 million to compensate KMI entities for Questar Pipeline Co.’s failure to provide “head-end” compression for the pipeline.

Bill Allison, president of KNTC, said KMI attorneys were reviewing the 72-page opinion to determine whether they would recommend appeal.

Standard & Poor’s Ratings Services said resolution of the dispute “will not have an immediate effect on Questar Corp.’s (A/Negative/A-1) or Kinder Morgan Inc.’s (BBB/Stable/A-2) credit quality.” The settlement is “positive for Questar because it provides for more than $105 million in cash in exchange for Questar’s interest in the pipeline. Although it is not an ideal transaction for Kinder Morgan, Standard & Poor’s believes the requirement to purchase the TransColorado Pipeline will not immediately affect credit quality. The addition of the TransColorado Pipeline would represent about 1% of Kinder Morgan’s cash flow.”

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