In a move to build up the natural gas side of its business andbecome a Btu trading power, American Electric Power subsidiary AEPResources agreed to buy the midstream gas operations of EquitableResources, principally the Louisiana Intrastate Gas (LIG) system,for $320 million in cash. The addition will be AEP’s firstmidstream gas holdings.

The convergence move by the midwestern power monolith into theLouisiana intrastate gas industry was reminiscent of that ofCalifornia’s electric giant PG&ampE jumping into the Texasintrastate gas market, acquiring Teco and Valero Gas Transmissionin 1996 and 1997. The sale, imposing a new out-of-state owner onthe Louisiana properties, also served as an acknowledgement by thePittsburgh-based Equitable that its reach had exceeded its grasp.

“The trading group views this acquisition as a great platform toexpand that business and make gas as big a part of our tradingorganization as power. This is a great strategic opportunity forus,” said Steve Lewis, senior vice president of AEP EnergyServices.

AEP Resources currently trades more than one Bcf of gas per day,but the deal marks the company’s first foray into the actualacquisition of gas assets. “These assets give us a unique windowinto the gas market at a very strategic location,” said Paul Addis,AEP’s executive vice president who helped negotiate thetransaction. Since the “vast majority of our nation’s gas flowsthrough Louisiana,” the acquisition of Equitable Resources’intrastate pipeline and other midstream assets “will give us accessto much of the nation’s gas as it goes into its differentgeographic markets and its different market sectors,” he noted.

The purchase is especially important in the face of a volatilepower market and as AEP Resources’ parent, American Electric Power,awaits FERC approval of its merger with Dallas-based Central andSouth West, which would make the combined company the nation’sthird largest consumer of gas used in the generation ofelectricity, Addis said. It will enable the newly merged, $28billion (assets) company to better hedge its risks in theelectricity market, he noted.

“Sometimes what drives the price [of electricity] to go up ordown is the price of fuel… So anything we can do to hedge ourrisk is helpful. This gives us the ability to hedge more of ournatural gas fuel exposure risks,” Addis said.

The deal gives AEP a fully integrated gas gathering, processingand storage operation in Louisiana and an energy trading andmarketing business based in Houston. Assets include LouisianaIntrastate Gas, a 2,000-mile intrastate pipeline; four gasprocessing plants that straddle the pipeline, plus an expansion ofone of the facilities; the 3.6 Bcf capacity Jefferson IslandStorage facilities, which include an existing salt dome storagecavern and a second cavern under construction, directly connectedto the Henry Hub. The pipeline is interconnected to 12 interstatepipelines running to the major consumption markets in theNortheast, Midwest and Southeast. The Equitable Resources’ packageincluded a 500 MMcf/d Department of Energy (DOE) oil line that wasconverted to transport natural gas.

The sale marked a big shift in strategy for Equitable Resourceswhen it put the midstream assets on the auction block in March (SeeDaily GPI March 23, 1998). “This could be the beginning of theliquidation of Equitable Resources as best we can tell,” MerrillLynch analyst Donato J. Eassey said at the time. But he has sincechanged his mind, explaining that Equitable Resources was without aCEO and CFO when he made that statement.

New Management, New Directions

“Now Equitable has Murry Gerber [as CEO] and Dave [Porges asCFO] over there. These are young entrepreneurial type ofindividuals that are driven to, I think, see this company succeed.I’m not so much in the camp anymore that this company’s up forsale. But I will say that with $320 million coming in the door,[which is] not all that high for this company, they are certainlyvulnerable, if you will, [to] being approached as a wholecompany…”

Given this amount of money “coming into the till,” Eassey thinksGerber and Porges will attempt to “right size” the company by doingsome cost shaving “here and there” and by reducing the level ofpersonnel. “I think that’ll be positively viewed. Also, they willmost likely buy back some shares” and could acquire some E&ampPassets.

AEP announced the acquisition during the 17th Congress of theWorld Energy Council in Houston last week. CEO E. Linn Draper Jr.said it advances four of the company’s five main strategies. Theyare to grow and expand the core business; create a global presence;be a global trading player, particularly in North America; expandretail services; and add assets, pipes, wires, generation and gasproperties. “We think the real value of this asset is integratedinto our system of both physical assets and our tradingcapabilities. We view it as a strategic location.”

Donald M. Clements, president of AEP Resources, said theenhancement to energy marketing and trading is “absolutelystrategic. It is a step to becoming an energy company instead ofjust an electric company.”

When Equitable acquired LIG and planned the construction of theJefferson Island storage its intention was to involve the companyin “every piece of the transaction as the Btu of energy moved fromthe source to our customers. The midstream assets were supposed tohelp us do that, but the competitive situation and otherconsiderations have brought us to the conclusion that Equitable canderive greater margin and most likely a greater return on ourinvested capital by looking at those businesses where we think wehave a competitive advantage,” an Equitable spokesman said when theproperties were put on the block earlier this year.

The merged AEP and Central and South West would have 4.6 millionU.S. customers and 4 million customers outside the United States,developments in 11 states and more than 10 countries, and installedgenerating capacity of 38,000 MW.

Susan Parker, Washington; Joe Fisher, Houston

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.