Midwest Electric AEP Acquires Louisiana Gas

In a move to build up the natural gas side of its business and become a Btu trading power, American Electric Power subsidiary AEP Resources agreed to buy the midstream gas operations of Equitable Resources, principally the Louisiana Intrastate Gas (LIG) system, for $320 million in cash. The addition will be AEP's first midstream gas holdings.

The convergence move by the midwestern power monolith into the Louisiana intrastate gas industry was reminiscent of that of California's electric giant PG&ampE jumping into the Texas intrastate gas market, acquiring Teco and Valero Gas Transmission in 1996 and 1997. The sale, imposing a new out-of-state owner on the Louisiana properties, also served as an acknowledgement by the Pittsburgh-based Equitable that its reach had exceeded its grasp.

"The trading group views this acquisition as a great platform to expand that business and make gas as big a part of our trading organization as power. This is a great strategic opportunity for us," said Steve Lewis, senior vice president of AEP Energy Services.

AEP Resources currently trades more than one Bcf of gas per day, but the deal marks the company's first foray into the actual acquisition of gas assets. "These assets give us a unique window into the gas market at a very strategic location," said Paul Addis, AEP's executive vice president who helped negotiate the transaction. Since the "vast majority of our nation's gas flows through Louisiana," the acquisition of Equitable Resources' intrastate pipeline and other midstream assets "will give us access to much of the nation's gas as it goes into its different geographic markets and its different market sectors," he noted.

The purchase is especially important in the face of a volatile power market and as AEP Resources' parent, American Electric Power, awaits FERC approval of its merger with Dallas-based Central and South West, which would make the combined company the nation's third largest consumer of gas used in the generation of electricity, Addis said. It will enable the newly merged, $28 billion (assets) company to better hedge its risks in the electricity market, he noted.

"Sometimes what drives the price [of electricity] to go up or down is the price of fuel... So anything we can do to hedge our risk is helpful. This gives us the ability to hedge more of our natural gas fuel exposure risks," Addis said.

The deal gives AEP a fully integrated gas gathering, processing and storage operation in Louisiana and an energy trading and marketing business based in Houston. Assets include Louisiana Intrastate Gas, a 2,000-mile intrastate pipeline; four gas processing plants that straddle the pipeline, plus an expansion of one of the facilities; the 3.6 Bcf capacity Jefferson Island Storage facilities, which include an existing salt dome storage cavern and a second cavern under construction, directly connected to the Henry Hub. The pipeline is interconnected to 12 interstate pipelines running to the major consumption markets in the Northeast, Midwest and Southeast. The Equitable Resources' package included a 500 MMcf/d Department of Energy (DOE) oil line that was converted to transport natural gas.

The sale marked a big shift in strategy for Equitable Resources when it put the midstream assets on the auction block in March (See Daily GPI March 23, 1998). "This could be the beginning of the liquidation of Equitable Resources as best we can tell," Merrill Lynch analyst Donato J. Eassey said at the time. But he has since changed his mind, explaining that Equitable Resources was without a CEO and CFO when he made that statement.

New Management, New Directions

"Now Equitable has Murry Gerber [as CEO] and Dave [Porges as CFO] over there. These are young entrepreneurial type of individuals that are driven to, I think, see this company succeed. I'm not so much in the camp anymore that this company's up for sale. But I will say that with $320 million coming in the door, [which is] not all that high for this company, they are certainly vulnerable, if you will, [to] being approached as a whole company..."

Given this amount of money "coming into the till," Eassey thinks Gerber and Porges will attempt to "right size" the company by doing some cost shaving "here and there" and by reducing the level of personnel. "I think that'll be positively viewed. Also, they will most likely buy back some shares" and could acquire some E&ampP assets.

AEP announced the acquisition during the 17th Congress of the World Energy Council in Houston last week. CEO E. Linn Draper Jr. said it advances four of the company's five main strategies. They are to grow and expand the core business; create a global presence; be a global trading player, particularly in North America; expand retail services; and add assets, pipes, wires, generation and gas properties. "We think the real value of this asset is integrated into our system of both physical assets and our trading capabilities. We view it as a strategic location."

Donald M. Clements, president of AEP Resources, said the enhancement to energy marketing and trading is "absolutely strategic. It is a step to becoming an energy company instead of just an electric company."

When Equitable acquired LIG and planned the construction of the Jefferson Island storage its intention was to involve the company in "every piece of the transaction as the Btu of energy moved from the source to our customers. The midstream assets were supposed to help us do that, but the competitive situation and other considerations have brought us to the conclusion that Equitable can derive greater margin and most likely a greater return on our invested capital by looking at those businesses where we think we have a competitive advantage," an Equitable spokesman said when the properties were put on the block earlier this year.

The merged AEP and Central and South West would have 4.6 million U.S. customers and 4 million customers outside the United States, developments in 11 states and more than 10 countries, and installed generating capacity of 38,000 MW.

Susan Parker, Washington; Joe Fisher, Houston

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