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 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 natural gasdaily, 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 to negotiate thetransaction over the weekend. Since the “vast majority of ournation’s gas flows through Louisiana,” the acquisition of EquitableResources’ intrastate pipeline and other midstream assets “willgive us access to much of the nation’s gas as it goes into itsdifferent geographic markets and its different market sectors,” henoted.

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 company tobetter hedge its risks in the electricity 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 our riskis helpful. This gives us the ability to hedge more of our naturalgas 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.

“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 thinksthat Gerber and Porges will attempt to “right size” the company bydoing some cost shaving “here and there” and by reducing the levelof personnel. “I think that’ll be positively viewed. Also they willmost likely buy back some shares,” and could acquire some E&Passets.

AEP announced the acquisition during the 17th Congress of theWorld Energy Council in Houston. CEO E. Linn Draper Jr. said itadvances four of the company’s five main strategies. They are togrow and expand the core business; create a global presence; be aglobal trading player, particularly in North America; expand retailservices; 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.”

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