Midwest Electric AEP Acquires Louisiana Gas
In a move to build up the natural gas side of its business and
become a Btu trading power, American Electric Power subsidiary AEP
Resources agreed to buy the midstream gas operations of Equitable
Resources, principally the Louisiana Intrastate Gas (LIG) system,
for $320 million in cash. The addition will be AEP's first
midstream gas holdings.
The convergence move by the midwestern power monolith into the
Louisiana intrastate gas industry was reminiscent of that of
California's electric giant PG&E jumping into the Texas
intrastate gas market, acquiring Teco and Valero Gas Transmission
in 1996 and 1997. The sale, imposing a new out-of-state owner on
the Louisiana properties, also served as an acknowledgement by the
Pittsburgh-based Equitable that its reach had exceeded its grasp.
"The trading group views this acquisition as a great platform to
expand that business and make gas as big a part of our trading
organization as power. This is a great strategic opportunity for
us," said Steve Lewis, senior vice president of AEP Energy
AEP Resources currently trades more than one Bcf of gas per day,
but the deal marks the company's first foray into the actual
acquisition of gas assets. "These assets give us a unique window
into the gas market at a very strategic location," said Paul Addis,
AEP's executive vice president who helped negotiate the
transaction. Since the "vast majority of our nation's gas flows
through Louisiana," the acquisition of Equitable Resources'
intrastate pipeline and other midstream assets "will give us access
to much of the nation's gas as it goes into its different
geographic markets and its different market sectors," he noted.
The purchase is especially important in the face of a volatile
power market and as AEP Resources' parent, American Electric Power,
awaits FERC approval of its merger with Dallas-based Central and
South West, which would make the combined company the nation's
third largest consumer of gas used in the generation of
electricity, Addis said. It will enable the newly merged, $28
billion (assets) company to better hedge its risks in the
electricity market, he noted.
"Sometimes what drives the price [of electricity] to go up or
down is the price of fuel... So anything we can do to hedge our
risk is helpful. This gives us the ability to hedge more of our
natural gas fuel exposure risks," Addis said.
The deal gives AEP a fully integrated gas gathering, processing
and storage operation in Louisiana and an energy trading and
marketing business based in Houston. Assets include Louisiana
Intrastate Gas, a 2,000-mile intrastate pipeline; four gas
processing plants that straddle the pipeline, plus an expansion of
one of the facilities; the 3.6 Bcf capacity Jefferson Island
Storage facilities, which include an existing salt dome storage
cavern and a second cavern under construction, directly connected
to the Henry Hub. The pipeline is interconnected to 12 interstate
pipelines running to the major consumption markets in the
Northeast, Midwest and Southeast. The Equitable Resources' package
included a 500 MMcf/d Department of Energy (DOE) oil line that was
converted to transport natural gas.
The sale marked a big shift in strategy for Equitable Resources
when it put the midstream assets on the auction block in March (See
Daily GPI March 23, 1998). "This could be the beginning of the
liquidation of Equitable Resources as best we can tell," Merrill
Lynch analyst Donato J. Eassey said at the time. But he has since
changed his mind, explaining that Equitable Resources was without a
CEO and CFO when he made that statement.
New Management, New Directions
"Now Equitable has Murry Gerber [as CEO] and Dave [Porges as
CFO] over there. These are young entrepreneurial type of
individuals that are driven to, I think, see this company succeed.
I'm not so much in the camp anymore that this company's up for
sale. But I will say that with $320 million coming in the door,
[which is] not all that high for this company, they are certainly
vulnerable, if you will, [to] being approached as a whole
Given this amount of money "coming into the till," Eassey thinks
Gerber and Porges will attempt to "right size" the company by doing
some cost shaving "here and there" and by reducing the level of
personnel. "I think that'll be positively viewed. Also, they will
most likely buy back some shares" and could acquire some E&P
AEP announced the acquisition during the 17th Congress of the
World Energy Council in Houston last week. CEO E. Linn Draper Jr.
said it advances four of the company's five main strategies. They
are to grow and expand the core business; create a global presence;
be a global trading player, particularly in North America; expand
retail services; and add assets, pipes, wires, generation and gas
properties. "We think the real value of this asset is integrated
into our system of both physical assets and our trading
capabilities. We view it as a strategic location."
Donald M. Clements, president of AEP Resources, said the
enhancement to energy marketing and trading is "absolutely
strategic. It is a step to becoming an energy company instead of
just an electric company."
When Equitable acquired LIG and planned the construction of the
Jefferson Island storage its intention was to involve the company
in "every piece of the transaction as the Btu of energy moved from
the source to our customers. The midstream assets were supposed to
help us do that, but the competitive situation and other
considerations have brought us to the conclusion that Equitable can
derive greater margin and most likely a greater return on our
invested capital by looking at those businesses where we think we
have a competitive advantage," an Equitable spokesman said when the
properties were put on the block earlier this year.
The merged AEP and Central and South West would have 4.6 million
U.S. customers and 4 million customers outside the United States,
developments in 11 states and more than 10 countries, and installed
generating capacity of 38,000 MW.
Susan Parker, Washington; Joe Fisher, Houston