Seeking to add gas sales volumes and expand the reach of its marketing operations, Aquila Energy announced last week the purchase of U.S. Gas Transportation (USGT) for an undisclosed price. Both companies expect the deal to close by the end of the month.

Under the terms of the agreement, USGT will operate as an Aquila subsidiary called USGT/Aquila, LP. None of USGT’s 20 employees are expected to lose their jobs, and the marketing company will remain headquartered in Dallas.

The purchase will add significant volumes to Aquila’s gas sales. In 1999, USGT sold close to 700 MMcf/d. In 1998, the company earned revenues of $500 million from its gas sales operations.

Aquila dropped to third place from second last year in terms of North American gas sales volumes, selling 10.4 Bcf/d (see NGI’s marketer ranking this issue). Although it showed a significant increase over 1998’s total of 9.6 Bcf/d, Duke Energy raised its volumes even more, jumping from 8.4 Bcf/d in 1998 to 11 Bcf/d in 1999.

“[Aquila] has made no secret of the fact they will enlarge their marketing base if they find an attractive price,” said Ed Tirello, an analyst with Deutsche Banc Alex. Brown. “They are just following through with that strategy.”

Al Butkus, a spokesman for Aquila, said the purchase increases the company’s marketing activities in Texas. “Traditionally, Aquila has been a Midcontinent marketer. We’ve had operations in Texas, and this play will strengthen those operations.”

Following the acquisition, Nanci Mackenzie, the current president of USGT, will become president of USGT/Aquila and will oversee the company’s daily operations. Her husband and business partner, Len Mackenzie, will remain a USGT/Aquila executive vice president and provide marketing support to Aquila’s President, Ed Mills.

Nanci Mackenzie, who began USGT in 1987, called the union with Aquila “a great marriage. We’re incredibly excited about the future because now we have so many more products on the menu.”

In a separate transaction that also was announced last week, USGT sold the real estate and the rights to a potential 6 Bcf salt dome storage facility in the West Texas Permian Basin. This deal was completed in February, Butkus said. “We bought the rights to explore the option of whether we should build the facility. It’s in the extreme preliminary stages right now. We don’t even have any cost estimates yet.”

If Aquila does decide to build the storage field, it will mark the second major storage play for the company in Texas. Last year, Aquila bought the Katy Hub from Western Resources for $100 million. The company said that its interest in storage capacity in Texas has increased in the past year since state lawmakers passed energy deregulation legislation that requires power plants to be fueled 50% by natural gas.

“USGT provides us a good strategic advantage in a marketplace that is becoming more competitive,” said Mills, referring to the Southwest and California regions. “USGT also brings to us excellent relationships in a growing market segment.”

Besides its ability to access strategic market areas, the USGT play also fits into Aquila’s plan of increasing the presence of its non-regulated assets. In a speech given last month, Richard C. Green, Jr., the CEO of Utilicorp United, Aquila’s corporate parent, said the company aims to leverage its regulated assets in order to bolster its unregulated operations. “Some companies may have relied too much on trading to make a profit as opposed to selling something to the customer that has a market value you can put in your pocket,” Green said in his speech. On the natural gas side particularly, “the market has reached maturity, so we’re taking market share from others.”

Under the corporate umbrella of Utilicorp/Aquila, USGT will no longer qualify as a WMBE (Women and Minority-owned Business Enterprise) firm, Nanci Mackenzie acknowledged. WMBE status is often a key advantage in the California market where USGT does business because utilities there are required to buy a portion of their gas from such suppliers. However, Mackenzie does not expect the loss of WMBE status to hurt her company’s business, saying, “We have never promoted USGT as a WMBE firm anyway. We preferred to emphasize our services on an equal footing with all other gas suppliers.”

John Norris

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