PG&E Corp. is exploring the possibility of selling itsTexas-based natural gas pipeline, processing and liquids assets,according to an 8-K form filed at the Securities and ExchangeCommission last week.

The announcement came as no surprise as corporate officials havehinted during the past months that they were in the market to talkto buyers interested in the PG&E Gas Transmission-Texasoperations. PG&E Gas Transmission President Tom King said thecompany was investigating the sale in an effort to lighten thelarge debt load it assumed when it bought the operations two yearsago. The debt, he noted, has been a drain on earnings. Also, someof the operations, such as the gas liquids assets, were no longercore to PG&E’s strategy, he said.

King estimated the operations netted a negative 18 cents/sharelast year, and will come close to that this year. In addition tothe debt load, the low basis differentials in the gas marketbetween Waha in West Texas and Katy and the Houston Ship Channel inEast Texas, along with volatile liquids prices, have combined todampen profitability.

For the third quarter, the Texas gas operations posted anegative two cents per share, which was actually an improvementover a negative six cents/share recorded for the same period lastyear. In contrast, PG&E’s gas pipeline network in the PacificNorthwest is a “very good business,” reporting earnings of 5cents/share in the third quarter.

Nevertheless, “They’re great assets. They’re strategicallylocated in the Texas market. The processing plants operate at about99.6% efficiency, which is way above the industry norm.” PG&Eput the same assets on the market a year ago, when liquids pricestanked along with oil, but then changed its mind (or didn’t getadequate bids) and said they were off the market again. (See NGI,Sept. 28, 1998) The company originally paid $1.5 billion for ValeroEnergy’s gas unit and $380 million for Teco Pipeline Co. in 1997when liquids were booming.

PG&E never had much of a shot at the Texas pipeline andliquids businesses because it wasn’t in them “full tilt,” saidDonato Eassey, first vice president of natural gas research forMerrill Lynch. “I just think it’s difficult to take a particularstrategy and make a go of it if you’re not in it 100%. I mean youreally got to have substance and size in this business today tomake it work for you. And having a little piece here and a littlepiece 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 thekinds of returns they’re getting on the dollars invested. If you’vedecided you’re not going to be able to make a go of it, then youought to get out. And I think that’s what they’ve clearly decidedhere.” The PG&E exit from the midstream gas area is similar toan action recently announced by Enron which is selling itstwo-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, utilityanalyst for Deutche Banc Alex. Brown. The company has been “losingmoney hand over fist” as a result of its Texas operations, forwhich it paid “far too much,” he said. “The problem they have isthat their stock is suffering because of these losing properties.”PG&E is projecting it will lose about 12 cents/share this yearas a result. The company wants to achieve annual growth of about8-10%, Tirello said, but it “can’t do this with those properties onits back.”

PG&E has hired Lehman Brothers as a financial adviser tohelp investigate whether “we should sell all or part of ourTexas-based pipeline business or come up with some other strategicbusiness combination,” said Sandra McDonough, a spokeswoman for thecompany.

Its Lone Star state operations include 8,000 miles of intrastategas pipelines with more than 3.5 Bcf/d of throughput, natural gasliquids production capacity in excess of 100,000 b/d from nineplants and a 500-mile NGL pipeline network.

PG&E purchased 7,500 miles of gas pipeline and eight gasprocessing plants from Valero Natural Gas in 1997, and a 500-mileWaha-to-Katy pipeline from Teco Pipeline the same year. The dealalso included Teco’s investments in gas processing facilities and agas marketing company.

“There will be a lot of parties that will be interested” inPG&E’s facilities, Eassey believes. He said “one of the bestfits” would be between Texas Utilities’ Lone Star assets and the7,500-mile system that PG&E acquired from Valero.”Strategically, it seems to make a lot of sense.” Reliant GasTransmission also “might make some sense for them, but I thinkthey’re more interested in distribution at this point,” he said.Moreover, “new player entrants and some of the MLPs might beinterested…..”

PG&E’s King estimated the book value of its operations at$2.5 billion. It hopes to sell the Texas facilities at a prevailingmarket rate by the end of 2002, he said, adding that PG&E GasTransmission already is talking to prospective buyers. He noted thecompany wasn’t limiting negotiations to just buyers in the Texasmarket.

Assuming the sale occurs, it would not mean a total pull-outfrom the Texas market for the company. Its PG&E Energy Tradingbusiness will continue to be located in Houston, and PG&EGenerating will be “looking at its options” in the state. “Weintend to stay very active and interested in the Texas market,”said McDonough.

The company would redeploy any proceeds from a sale into itsnational energy businesses, which include PG&E Generating,PG&E Energy Trading, PG&E Energy Services and PG&E GasTransmission’s pipeline operations in the Pacific Northwest. Thecorporation’s goal is to achieve 30% of its earnings from itsnational energy businesses by the end of 2002.

Susan Parker

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