El Paso's Relentless Spending Spree Crosses Texas, Reaches CA
If El Paso continues on its current path, there may be no
pipelines left to buy. After announcing an agreement to merge with
Coastal Corp. only a week earlier, the Houston-based energy giant
announced two more major purchases last week.
The first is a huge transaction covering all of PG&E Corp.'s gas transmission,
processing and storage assets in Texas --- basically the former Valero Natural
Gas Business Unit. The purchase cost $840 million in stock and debt (see
related story this issue). It includes 8,500 miles of Texas gas transmission
pipelines that transport 2.8 Bcf/d, nine processing plants that currently
process 1.5 Bcf/d, and a 7.2 Bcf natural gas storage field.
The second buy covers a portion of the All American Pipeline, a
crude oil line El Paso plans to convert to transport gas. The line
runs 1,088 miles to Emidio, CA, from McCamey, TX. Pending completed
engineering studies, El Paso said it expects the pipe to flow
200-300 MMcf/d from Texas to California.
El Paso is getting good exercise opening its wallet. The Houston-based company
completed a purchase of Sonat Inc. last month, and just a few weeks ago announced
intentions to merge with Coastal Corp. (see NGI, Jan.
Donato Eassey, an analyst with Merrill Lynch, said he, too,
wondered about El Paso's meteoric growth strategy. "When I asked
them about their insatiable appetite, they said 'We're being
selective, but we don't dictate when particular assets become
attractive.' I agree. All of their moves make sense. I have
confidence that they are not buying just to grow. After the math is
done, I especially like the Coastal and the PG&E deals. I think
after the dust settles and people see how these moves will bolster
El Paso's bottom line, El Paso's strategy won't be questioned as
The Federal Trade Commission required El Paso to sell three major pipelines
to obtain approval of the Sonat merger (see NGI, Jan.
10). It was required to divest its interest in East Tennessee Pipeline,
which was spun off to Duke Energy Gas Transmission. It also had to sell the
Sea Robin Pipeline to CMS Energy, and its share in the Destin Pipeline was
sold to an undisclosed buyer.
If its latest deals go through, the new El Paso will own or have
interest in the following major pipelines: El Paso Natural Gas,
Midwestern Gas Pipeline, Southern Natural Gas Pipeline, Mojave
Pipeline, Tennessee Gas Pipeline, Florida Gas Transmission,
multiple Texas intrastates, ANR Pipeline, Colorado Interstate Gas,
Great Lakes Gas Transmission, Wyoming Interstate, and the All
Despite all of the movement over the past three weeks, neither
management nor John Olson, a consultant with Sander, Morris &
Mundy, see anything that might cause the FTC to pause again. "There
might be some points where these PG&E assets conflict with some
Coastal assets, but nothing of any significance," Olson said.
Adding Access to CA
The All America Pipeline was bought to increase El Paso Natural
Gas' access to the California market. It paid $129 million for the
pipe to Plains All American Pipeline L.P. and plans to invest $75
million to convert a segment of it from an oil pipeline to a gas
pipeline upon FERC approval. The purchase also includes any fiber
optic rights that All American has along the entire 1,233 miles of
The conversion from oil to gas will allow El Paso to replace
existing gas compression facilities with more efficient pipeline
looping, reducing operating, maintenance, and fuel costs for its
customers, El Paso said. On the east end of El Paso's system, the
pipeline will allow greater inlet capability in response to the
increasing flows on the southern system. The converted pipeline is
planned to go into service during the first quarter 2001.
"The purchase of these facilities presents El Paso Natural Gas
with a unique opportunity to add additional flexibility on its
pipeline system that is both operating expense and fuel efficient,"
said Patricia A. Shelton, president of El Paso Natural Gas Co.
"This purchase helps ready El Paso Natural Gas for the coming
decade with efficiency gains to accommodate the clockwise shift in
the flow of gas in North America."
After taking into account estimated costs to remove certain
equipment and underground piping at various crude oil pump stations
and associated transaction costs, Plains All American estimated net
sale proceeds to be $120 million to $124 million. Net proceeds will
be used to reduce outstanding bank debt.
In November 1999, Plains All American announced its intention to
sell 5.2 million barrels of crude oil line fill located in this
segment of the line. The line fill sale and the associated purging
process are expected to be completed this month.
"The sale of this underutilized pipeline segment represents
another very positive step for the partnership. When completed, the
proceeds will enable us to reduce debt and improve our overall
financial flexibility without a material reduction in our earnings
capacity," said Greg Armstrong, Plains All American's CEO.