Dynegy-El Paso Deal Breaks Even So far This Year
With San Juan Basin-Southern California border (bidweek) basis
averaging double what it was last year through November-36
cents/MMBtu compared with 18 cents-and rising, Dynegy's $70 million
deal for 1.3 Bcf/d of El Paso Natural Gas' firm pipeline capacity
is looking better all the time for the company, Dynegy President
Stephen Bergstrom said in an interview with NGI.
Bergstrom doesn't deny the El Paso deal is responsible for
driving up the value of transportation to the California market and
widening the basis. The capacity Dynegy purchased was going for
about 8 cents last year. Now it's valued at about 32 cents/Mcf,
excluding variable costs, while Dynegy is paying only 12 cents in
demand charges. But Bergstrom said the value of capacity last year
was driven down to artificially low levels because California
regulators forced the LDCs to dump all their unused capacity on the
market. "When capacity gets rationalized in an unfractured market,
you're going to get more of a true reflection of the value of the
Dynegy made $7.6 million on the pipe during the third quarter,
but most people may not know those profits offset a corresponding
$7.6 million loss during the first and second quarters.
"They look at the spreads and say 'gee you've got to be making a
boatload,' but what they don't look at is that we paid a lot of
money in the first six months of the year when there wasn't that
much demand," said Bergstrom. "Now we're just starting to get to a
point where demand is picking up so that we can start making some
of that back, let alone get a return on the risk investment that we
He said gas volumes transported on Dynegy's El Paso capacity
have ranged from a low of about 400 MMcf/d to a high of about 1
Bcf/d. "[I]t's all over the map depending on demand. We still like
the deal. We think it makes sense. But through about September we
were about break even on our costs. We're encouraged that as we get
into winter we think we're going to do pretty well, but remember we
put a $70 million bet down over a two-year period. We've got to get
$70 million back before we start making anything. Everyone kind of
forgets that we don't have rate base on that $70 million. If the
demand is not there and the spread is not there, we eat the whole
The $70 million Dynegy paid is broken up into $28 million in the
first year and $42 million in the second year. "That's a little
over a million each month [next year], just in demand charges."
"The demand looks pretty good. The last three months, we've been
averaging 750 to 800 MMcf/d. We think storage looks a little lean
out there. And when Northern Border comes on in the next few weeks,
we think you'll see gas get pulled out of [California] to go to the
Midwest and the demand for U.S. transportation, i.e., El Paso, will
be stronger than what we've seen in the past," he said.
"Our view is when Border comes on you're not going to have
enough gas out of Canada to feed both the Northern Border expansion
of 750 MMcf/d plus the TransCanada expansion of 400 MMcf/d starting
Dec. 1. Our view is something has to give. Some capacity is going
to go unutilized and if you look at variable costs, there's a
higher variable cost to California than there is to Chicago," he
said. "We think supply will migrate to the Chicago market,
particularly in the wintertime, and come out of California. If
you're a customer in California, then you have to go to El Paso to
either buy gas or buy capacity because you can't compete with the
The San Juan-SoCal border basis spreads this winter and next
year are going to be determined by the amount of snow this winter
in the Pacific Northwest, which will fuel hydro electric generation
in April, May and June, and how cold the winter is-how much stored
gas is used, he said.
Bergstrom said the forward basis market is offering only the
"high 30s," 30 cents/Dth for transportation from the San Juan Basin
to the Southern California border. "When you go back and look at
the [San Juan-SoCal border basis this year], you scratch your head
and say why would the forward market be high-30s when the last
three or four months has been mid to high 40s. That just tells you
there's not a lot of liquidity out there because it should be
[high-40s]. But the forward market doesn't really represent what
the current market dynamics are because there's just not that much
liquidity in the San Juan-to-SoCal spread."
The lack of forward market liquidity is partly the result of
power grid design. Many of the new owners and suppliers of
generating capacity in California have no reason to "forward buy
gas," said Bergstrom. "I don't see the generating guys [signing a
lot of long-term supply agreements]. Fuel is a pass through on
those must run [power generation] agreements so there's really no
reason for guys like Williams, Duke and HI to forward buy gas. When
they need it they just buy it on that day and it's a pass through.
They really have no risk."
The daily and monthly basis spreads have been wide but the
spreads don't mean anything unless you move volumes, he noted.
"Everybody else is full. Transwestern is full, Kern is full, PGT is
full and our capacity is the swing capacity into California."
But Bergstrom remains confident that over the long-run Dynegy's
El Paso contract will bring in a respectable rate of return. He
said Dynegy does plan to extend the two-year contract, which ends
in January 2000. El Paso also would like to extend it, he said,
because it transfers a tremendous amount of risk. "We have a lot
more capability of managing it because A) we're not an affiliate,
and B) we have such a large position in California. We still think
that we'll get a reasonable return."