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Tenaska to Reassume Control of Gas Marketing, Look for New Partner

Once Tenaska Inc. repurchases the half interest of its North American natural gas marketing arm currently owned by affiliates of American International Group Inc. (AIG), it likely will be looking for a new partner "sooner rather than later," a company executive said last week.

The decision by Tenaska to buy back the 50% share in Tenaska Marketing Ventures, Tenaska Marketing Canada and Tenaska Gas Storage -- known collectively as TMV -- comes as AIG is forced to restructure its business (see NGI, Oct. 6). AIG Financial Products Corp. (AIG-FP) in 2007 purchased a 50% stake in TMV (see NGI, March 19, 2007). At the time, AIG ironically said the joint venture would combine its financial strength and financial structuring and risk management capabilities with Tenaska's gas marketing prowess.

However, Omaha, NE-based Tenaska was financially strong before AIG came aboard and it's even stronger now, TMV President Fred Hunzeker told NGI.

"We control our own destiny now," Hunzeker said. "We were well positioned to run it before AIG became a partner and we're in even better shape now."

TMV, which was formed in 1991, "has always been a key operating division for Tenaska," Hunzeker noted. "AIG was a good partner, and we enjoyed having them as a partner. We brought them in to augment the long-term growth of the company and to support Tenaska's long-term strategy. We grew a little bit, but now that they're gone, we're fine..."

TMV is actually in better financial shape today than it was when AIG bought a stake in the unit, Hunzeker noted. "We actually have much larger liquidity than we did before AIG..." because of Tenaska's growing business.

Long before it partnered with AIG, Tenaska was a perennial top North American gas marketer in NGI's quarterly survey. In 2Q2008 TMV sold 5.10 Bcf/d (see NGI, Sept. 22).

As a privately held company, Tenaska never disclosed what sort of financial support it received from the short-term AIG partnership, and Hunzeker did not offer any new details on what his company will pay to reacquire the 50% stake. But he said Tenaska has been preparing for the buyback for a few months.

Beginning in September, AIG's financial problems were "well announced on CNBC every day, and it was obvious that their investments in things like TMV were on the list of things to be divested of," said Hunzeker. "It was obvious they wanted to exit [the partnership], and Tenaska approached them and said we would be willing to repurchase the interest, and they were happy with the price."

Even though there are problems in the global financial markets, Tenaska has been paying close attention to new opportunities for its marketing unit, said the TMV president.

Since September, when the bottom fell out of the financial markets, several of NGI's top marketers have begun to exit the business, including Lehman Brothers Holdings, which declared bankruptcy in September. Lehman's trading arm has been taken over by EDF Trading North America (see NGI, Nov. 3). Bank of America and Merrill Lynch & Co. asked federal regulators for approval to combine their energy marketing arms in October (see NGI, Oct. 27). And in early November Constellation Energy, which may be taken over by MidAmerican Energy Holdings (see related story), said it would sell its Houston-based gas trading operations (see NGI, Nov. 10).

Asked whether TMV might want to partner with another gas marketer, Hunzeker said, "The answer is probably yes, but there is no urgency to do that. We would be selective and look for the right partner to invest in us, that would join us in a common strategy to run the business..."

TMV now employs around 150 people who are based in Dallas, Denver and Calgary. It "actively moves gas" on more than 100 gas pipes spread across North America, taking care of the physical gas needs for customers across the United States, into Canada and at the Mexican border.

"Just in general if you look at the top marketers on [NGI's] list of the top 20, there are several people on that list that are exiting the business in some form or fashion, and some are scaling back and returning to the position where we always have been, and they don't want to overextend themselves," said Hunzeker. "Some may be considering leaving the business, and customers are looking for people to buy from and sell to..."

With the upheaval in the gas marketing business, "there are a lot of opportunities out there to dial up the growth a little bit, and I think sooner rather than later would be good for grabbing more growth, with more investors on board..."

Taking back the AIG stake will be "totally seamless for our customers," said Hunzeker. "We were already operating with Tenaska's support," and since the news about AIG broke, "we've been informing our customers that we would be taking care of their needs with no disruptions...With Tenaska's support and liquidity, we've really been running this [business] since September anyway."

This is the second time in just a few years that TMV has witnessed a revamp of the gas marketing sector. Hunzeker remembers the fallout from Enron Corp.'s bankruptcy, a period in which Tenaska's gas marketing business survived and even thrived.

"We lived through 2001 and 2002, and you would have thought people would have learned and not charged off and expanded beyond their ability to support their business," Hunzeker said. "I always attribute our success back to the private ownership aspects. We have a total alignment of and the shareholders are one and the same. We won't allow the business to expand beyond our ability to support it."

Tenaska's strength to guard TMV's business model is "sound despite the current conditions in U.S. financial markets," said Hunzeker. "Thanks to Tenaska's conservative approach to business, Tenaska is well positioned to repurchase AIG's interest and assume full ownership of TMV. Our cash and committed revolver facilities are more than adequate to support our current business commitments. We will continue to operate TMV with substantial liquidity, maintaining total maximum exposure to counterparties at or below the amount of available TMV and Tenaska resources."

Once the repurchase is completed, anticipated by Jan. 2, Tenaska's employee owners would again own 100% of TMV.

AIG Chief Restructuring Officer Paula Reynolds said last week her company had "benefited from its investment in TMV. That investment, however, does not fit with our strategic insurance focus and the businesses in which we intend to remain as we restructure."

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