As part of its ongoing effort to get back on its feet financially, Williams said it has signed a definitive agreement to sell its Central natural gas pipeline to Southern Star Central Corp. fo r total consideration of $555 million. Southern Star is owned by AIG Highstar Capital, LP, a private equity fund sponsored by American International Group, Inc.

Under the signed sale and purchase agreement, Southern Star — which was formed for this acquisition — will acquire Williams Gas Pipelines Central Inc. and Western Frontier Pipeline Co. LLC for $380 million plus the assumption of $175 million in debt.

AIG Highstar’s Managing Partner Christopher Lee said the fund currently has a “major investment” in a natural gas storage facility in Upstate New York, owns a couple of power plants and a transportation logistics company. He added that the equity fund currently has $4 million in capital.

“The fund was set up with the premise that investment in infrastructure-related assets and operating companies in the U.S. were going to become a very good asset class for private equity,” Lee told NGI. “The original premise was that these assets would be coming available as a result of deregulation. I think that from our point of view, we are very fortunate that as a result of all the travails in the energy industry since late last year that we are seeing these assets coming out in a much more accelerated fashion than I originally anticipated for different reasons, at frankly more attractive values.”

The company appeared to be on the same track as Warren Buffet’s Berkshire Hathaway, which has acquired Kern River Gas Transmission and Northern Natural Pipeline in the last year and MidAmerican Energy Holdings and its utilities in 1999. Buffet has told his shareholders that now is the time to be investing in companies themselves, rather than their stocks.

Williams sold Kern River for $960 million in cash and debt to a subsidiary of Des Moines-based MidAmerican last March (see NGI, March 11). Williams also sold its stake in Northern Border Partners, which owns the Northern Border pipeline system, to TransCanada PipeLines Ltd. for $12 million.

The AIG Highstar fund was formed to make structured equity investments in infrastructure-related projects and operating companies. AIG is a U.S.-based international insurance and financial services organization. Credit Suisse First Boston and WestLB AG acted as financial advisor to Southern Star Central on the transaction.

Headquartered in Owensboro, KY, The 6,049-mile Central pipeline transports natural gas from Kansas, Oklahoma, Texas, Wyoming and Colorado to markets in the Midwest. The pipeline, previously called Northwest Central, is one of two major interstate gas pipelines Williams has operated in Northwest. The pipeline has a design capacity of 2.3 Bcf/d and an annual throughput of 337.5 trillion Btu. AIG Highstar said it expects the sale to close in 60 days, subject to Hart-Scott-Rodino review.

“This is a significant transaction that demonstrates the steps we are taking to strengthen our balance sheet and build a more select base of energy companies for the future,” said Steve Malcolm, Williams CEO. “Reaching this agreement is a compliment to the highly talented workforce that has operated this pipeline for Williams.”

Despite the sizeable divestiture, Williams said it remains committed to the interstate gas pipeline industry. “We will be focusing on our Transco, Northwest and Texas Gas systems,” said Doug Whisenant, who leads Williams’ interstate natural gas pipeline unit. “We believe that our recent and near-term investments in expansions of the Transco and Northwest systems will provide an earnings potential comparable to what we lost from our two gas systems sold this year.”

Following the completion of the Central sale, Williams said its subsidiaries will wholly own and operate 20,400 miles of gas pipeline, comprised of the Transco, Northwest and Texas Gas systems. Williams added that it has also placed the 581-mile Gulfstream gas pipeline in service in May. Gulfstream is a joint venture between Williams and Duke Energy serving the Florida market.

As a result of the Central sale, Williams said it expects to reduce its capital expenditure requirements by approximately $50 million over the next 16 months. The company added that it also plans to recognize a pre-tax loss of approximately $90 to $95 million from the sale in the third quarter.

There will be no jobs lost as a result of our acquisition of the pipeline and I am not anticipating that Williams is going to enter into any job terminations as a result of the acquisition of this pipeline, although you would have to ask them,” Lee noted.

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