PG&E Gas Transmission Scouts Sale of TX Assets
PG&E Corp. is exploring the possibility of selling its
Texas-based natural gas pipeline, processing and liquids assets,
according to an 8-K form filed at the Securities and Exchange
Commission last week.
The announcement came as no surprise as corporate officials have
hinted during the past months that they were in the market to talk
to buyers interested in the PG&E Gas Transmission-Texas
operations. PG&E Gas Transmission President Tom King said the
company was investigating the sale in an effort to lighten the
large debt load it assumed when it bought the operations two years
ago. The debt, he noted, has been a drain on earnings. Also, some
of the operations, such as the gas liquids assets, were no longer
core to PG&E's strategy, he said.
King estimated the operations netted a negative 18 cents/share
last year, and will come close to that this year. In addition to
the debt load, the low basis differentials in the gas market
between Waha in West Texas and Katy and the Houston Ship Channel in
East Texas, along with volatile liquids prices, have combined to
For the third quarter, the Texas gas operations posted a
negative two cents per share, which was actually an improvement
over a negative six cents/share recorded for the same period last
year. In contrast, PG&E's gas pipeline network in the Pacific
Northwest is a "very good business," reporting earnings of 5
cents/share in the third quarter.
Nevertheless, "They're great assets. They're strategically
located in the Texas market. The processing plants operate at about
99.6% efficiency, which is way above the industry norm." PG&E
put the same assets on the market a year ago, when liquids prices
tanked along with oil, but then changed its mind (or didn't get
adequate bids) and said they were off the market again. (See NGI,
Sept. 28, 1998) The company originally paid $1.5 billion for Valero
Energy's gas unit and $380 million for Teco Pipeline Co. in 1997
when liquids were booming.
PG&E never had much of a shot at the Texas pipeline and
liquids businesses because it wasn't in them "full tilt," said
Donato Eassey, first vice president of natural gas research for
Merrill Lynch. "I just think it's difficult to take a particular
strategy and make a go of it if you're not in it 100%. I mean you
really got to have substance and size in this business today to
make it work for you. And having a little piece here and a little
piece there doesn't do it," he noted.
He thinks PG&E's decision to explore a sale is a smart one.
"I'm disappointed when companies don't continually evaluate the
kinds of returns they're getting on the dollars invested. If you've
decided you're not going to be able to make a go of it, then you
ought to get out. And I think that's what they've clearly decided
here." The PG&E exit from the midstream gas area is similar to
an action recently announced by Enron which is selling its
two-year-old venture into the electric distribution business,
Portland General Electric. (See NGI, Oct. 18)
PG&E's move came as no surprise to Ed Tirello, utility
analyst for Deutche Banc Alex. Brown. The company has been "losing
money hand over fist" as a result of its Texas operations, for
which it paid "far too much," he said. "The problem they have is
that their stock is suffering because of these losing properties."
PG&E is projecting it will lose about 12 cents/share this year
as a result. The company wants to achieve annual growth of about
8-10%, Tirello said, but it "can't do this with those properties on
PG&E has hired Lehman Brothers as a financial adviser to
help investigate whether "we should sell all or part of our
Texas-based pipeline business or come up with some other strategic
business combination," said Sandra McDonough, a spokeswoman for the
Its Lone Star state operations include 8,000 miles of intrastate
gas pipelines with more than 3.5 Bcf/d of throughput, natural gas
liquids production capacity in excess of 100,000 b/d from nine
plants and a 500-mile NGL pipeline network.
PG&E purchased 7,500 miles of gas pipeline and eight gas
processing plants from Valero Natural Gas in 1997, and a 500-mile
Waha-to-Katy pipeline from Teco Pipeline the same year. The deal
also included Teco's investments in gas processing facilities and a
gas marketing company.
"There will be a lot of parties that will be interested" in
PG&E's facilities, Eassey believes. He said "one of the best
fits" would be between Texas Utilities' Lone Star assets and the
7,500-mile system that PG&E acquired from Valero.
"Strategically, it seems to make a lot of sense." Reliant Gas
Transmission also "might make some sense for them, but I think
they're more interested in distribution at this point," he said.
Moreover, "new player entrants and some of the MLPs might be
PG&E's King estimated the book value of its operations at
$2.5 billion. It hopes to sell the Texas facilities at a prevailing
market rate by the end of 2002, he said, adding that PG&E Gas
Transmission already is talking to prospective buyers. He noted the
company wasn't limiting negotiations to just buyers in the Texas
Assuming the sale occurs, it would not mean a total pull-out
from the Texas market for the company. Its PG&E Energy Trading
business will continue to be located in Houston, and PG&E
Generating will be "looking at its options" in the state. "We
intend to stay very active and interested in the Texas market,"
The company would redeploy any proceeds from a sale into its
national energy businesses, which include PG&E Generating,
PG&E Energy Trading, PG&E Energy Services and PG&E Gas
Transmission's pipeline operations in the Pacific Northwest. The
corporation's goal is to achieve 30% of its earnings from its
national energy businesses by the end of 2002.