From: eric.gadd@enron.com
To: danny.mccarty@enron.com
Cc: kevin.hyatt@enron.com
Date: 2001-09-05 23:27:02+00:00
Subject: Kinder Morgan - Sonoran Project

Danny,

Today, Kevin and I met with Scott Parker (KMI), Ron Brown (KMI), and Chad Driscoll (Calpine) to discuss possibilities of bundling Kinder Morgan's Sonoran project with Sun Devil.  A summary of our discussions is outlined below.

Concept

Explore the possibility of combining the Sun Devil and Sonoran Pipeline projects into a single venture along the existing Transwestern route from San Juan to the California Border.  Progress separate projects for service to Phoenix (Sun Devil) and California (Sonoran).

Rationale

Lower costs, higher margins
Greater capacity, economic scale, expansion options
Reduced stakeholder interventions (Navajos, environmental interests groups, shippers)
Reduced regulatory process

Background

On May 2, 2001, Kinder Morgan and Calpine announced plans to jointly develop the Sonoran Pipeline, subject to customary approvals and sufficient interest by potential shippers.  As proposed, the Sonoran pipeline will be a 1,160 mile high pressure interstate natural gas pipeline from the San Juan Basin in northern New Mexico to markets in California.  The project, with an estimated cost of $1.8 billion, will provide natural gas transportation capacity to California to serve growing electric generation demand.  

The proposed pipeline will be evaluated and developed in two phases.  The first phase will run from the San Juan Basin to the California border with the second phase extending from the California border to the San Francisco Bay area.  

The first phase of the pipeline is expected to be completed in the summer of 2003.  Phase one will consist of a 460 mile, 36 inch diameter pipeline from the interconnection of TransColorado Gas Transmission and Transwestern Pipeline to various points at the Blanco Hub in San Juan, NM.  In addition, the pipeline will continue westward with deliveries into the California/Arizona border.  A 20 mile, 24 inch diameter lateral would be built to Topock, AZ.  The initial capacity would start with 750,000 dth/d, with capability to expand to 1 million dth/day.  The estimated cost of phase one is $624 with a targeted in-service date of summer 2003.  Sponsors said the open season will seek at a minimum, 20-year term commitments at a fixed transport rate of $0.39/dth for firm transportation.  Sonoran proposes to charge shippers actual fuel on phase one via a fuel tracker.  Fuel is estimated at 1.3%.  More than 1 billion cubic feet per day of binding agreements and non-binding expressions of interest were received for the first phase of the project.  

Phase two will be a 590 mile, 42 inch diameter pipeline from Needles on the California border to points within California, terminating near Antioch in Contra Costa County.  Once completed, the pipeline will be able to transport between 1 million and 1.5 million dth/day.  The in-service date for the phase two has yet to be determined.  The cost is projected to be $1.1 billion.   Another 1.5 Bcf/d of non-binding commitments and expressions of interest were received for phase two.  

Sonoran has already received binding bids from Calpine Energy Services for 400,000 dth/d for phase one and another 500,000 dth/d for its phase two. Once completed, the new pipeline could connect with Kern River, Mojave, Elk Hills, Pacific Gas and Electric, Southern California Gas and various gas-fired power plants.  

SoCalGas's Residual Load Service (RLS) penalty woull not affect the Sonoran project because the pipeline route parallels PG&E's pipelines and the primary target load is new gas-fired generation not within SoCalGas's market territory. 

The pipeline also will connect to a new underground storage facility near Lodi being developed by Lodi Gas Storage, Inc., a subsidiary of Houston based Western Hub Properties LLC.  

The project could have a noteworthy co-owner: the Navajo Nation, the sovereign government of 180,000 residents on the largest Indian reservation within the United States.  An agreement in principle to give the Navajos an ownership interest in the $1.7 billion pipeline that crosses their reservation was disclosed in August by an executive of Kinder Morgan at Indian Energy 2001, a conference of the Council of Energy Resource Tribes that highlighted the growing role Indian tribes play in powering the West.  As part of the deal to secure that right of way, the Navajo Nation would invest in the project and receive a minority interest when the pipeline opens.  The deal would be structured to limit the tribe's exposure to risks during the construction phase of the project.  Gas from the pipeline could also fuel a proposed Navajo-owned power plant on the reservation.  Red Cedar Gas Gathering, which is jointly owned by the Southern Ute Indian Tribe and Kinder Morgan made arrangements with the Navajo Indians.

Kinder Morgan is not interested in expanding the equity participants in the Sonoran Pipeline.

Next steps

Kinder Morgan to evaluate providing facilities to serve TW open season markets (SJ, Phoenix, California) along proposed Sonoran Pipeline route and come back to ETS with a proposal (operating lease, undivided interest, no shipper contractual arrangements). 
ETS to identify risks and mitigants associated with Sonoran Pipeline project 
- Interference with existing TW pipeline operations during construction and on-going operations
- Use of TW r-o-w
- Other