CMS to purchase Panhandle Eastern pipeline

CMS Energy Corp., Dearborn, Mich., has agreed to buy Panhandle Eastern Pipeline Co. (Pepco) from Duke Energy Corp., Charlotte, N.C., for $1.9 billion in cash and the assumption of $300 million in Pepco debt.

The move comes barely more than a year after Duke acquired the Panhandle Eastern assets in a merger with Pepco (OGJ, June 2, 1997, Newsletter).

The acquisition will include the 11,500-mile Pepco natural gas pipeline system extending from Texas, Kansas, and Oklahoma to Michigan. It also will encompass Duke's Trunkline Gas Co., Trunkline's LNG terminal on the Texas Gulf Coast, 340 miles of pipeline in the Gulf of Mexico, 70 bcf of underground gas storage capacity, and a 1.8 million bbl LNG storage facility. When the acquisition is complete, CMS will operate about 22,000 miles of pipeline with an aggregate capacity of 3.5 bcfd of gas.

CMS official Kelly Farr says the deal will further CMS's plans to invest in natural gas-fired power generation capacity in the U.S. Midwest, where electricity supplies are tight and where CMS's market is concentrated.

"Panhandle and Trunkline will become the centerpiecesellipsethat connect CMS Energy's Midwest facilities," said Fred Fowler, Duke's group president of energy transmission. "Their desire is to become the premier diversified energy company in the U.S. Midwest."

Duke acquired the Pepco pipeline when Duke Power Co. merged with PanEnergy Corp. in 1997 (OGJ, Dec. 2, 1996, p. 44).

Duke's Plans

Duke expects to record an after-tax gain of $700 million, or $1.94/share, as a result of the transaction, which is expected to close by January. The firm plans to use the proceeds on power plant construction and other expansion projects in its target regions, which include the U.S. Northeast, the Gulf Coast, and California.

Fowler told reporters how the deal developed: "The fact of the matter is we weren't looking to sell these assets, but we were approached earlier in the summer by CMSellipseThey approached us at the time that we were refining our own strategic plan after about a year of operating as the new Duke Energy. As we considered the direction of Duke Energy in our strategic plan, their offer did start making some sense to us."

Duke Energy's chief financial officer, Rich Osborne, said, "We set out to do this because we felt that we had a purchaser at our doorstep who had a use for these assets and an ability to utilize these assets in that region that was better than our own and therefore could pay us a value that was in excess of the value of those particular pipelines to Duke Energy. And we reached that decision independent of other investment opportunities."

Fowler said Duke is aiming to develop "regional centers of energy assets involving gas, electric generation, and marketing" in and outside the U.S.

"In the U.S., we're aggressively investing in projects in the Northeast-not only New England but the upper Mid-Atlantic, in the producing areas both in the Mid Continent and along the Gulf Coast, as well as in the western part of the United States.

"As we considered the CMS Energy offer, we concluded that we could accomplish our objectives in the Midwest without owning Panhandle and Trunkline. Those objectives are being one of the major natural gas and electricity marketers in that area."

Duke also determined that it could reinvest proceeds from the sale into high-growth activities in its target regions.

"In our focused regions," said Fowler, "natural gas and the pipes remain an essential part of the Duke Energy strategy for the future. I think you can witness our investments in the Maritimes & Northeast Pipelines, the new Cross Bay Pipeline that we have announced in conjunction with some other partners in the New York area (OGJ, Feb. 9, 1998, p. 34), and our interest in the Alliance Pipeline."

Among Duke's potential investments is the possible acquisition of Union Pacific Resources Co.'s (UPR) gas processing and gathering assets. Fowler said Duke has been short-listed in the bidding process for the assets.