Implications of New Natural Gas Pipeline Joint Venture (OGE, ETP, KMP)

A 50/50 joint venture between OGE Energy (NYSE:OGE) and Energy Transfer Partners (NYSE:ETP) will create a new midstream company, currently called ETP Enogex Partners LLC, to transport natural gas from Texas and Oklahoma to markets in California and the northeastern US. OGE is contributing all of its Enogex interests to the new JV, and ETP is contributing all its interests in its Transwestern Pipeline, the ETC Canyon Pipeline, and its 50% interest in the Midcontinent Express Pipeline (the other 50% is owned by Kinder Morgan (NYSE:KMP).

As a result, the new JV will own more than 2,300 miles of Enogex’sintrastate pipeline system and about 23 billion cubic feet ofgas storage facilities. Enogex also owns all or part of seven natural gas processing plants with a capacity of nearly 750 million cubicfeet/day that are included in the deal. Energy Transfer contributes its2,400 mile Transwestern Pipeline system, 1,800 miles of the Canyongathering system in Colorado and Utah, and its 50% interest in the500-mile Midcontinent Express Pipeline.

This is not going to be a small potatoes company. Under the agreement,once the transaction is closed the companies will issue an IPO, as amaster limited partnership. Because the new company does not includeany production assets, it will not be subject to the wild price swingsin the natural gas market. Instead, it will generate that nice, steadytransportation cash near and dear to the hearts of pipeline MLPinvestors.

This JV shows all the signs of being a success. The gathering systemsare well-placed in productive, and growing fields, and the interstatepipelines are pointed at the right markets. Early trading today ismixed. OGE is up about 1.5% and Energy Transfer is down about the sameamount.

Paul Ausick
September 23, 2008