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PG&E Gas Transmission Scouts Sale of TX Assets

PG&E Gas Transmission Scouts Sale of TX Assets

PG&E Corp. is exploring the possibility of selling its Texas-based natural gas pipeline, processing and liquids assets, according to an 8-K form filed at the Securities and Exchange Commission last week.

The announcement came as no surprise as corporate officials have hinted during the past months that they were in the market to talk to buyers interested in the PG&E Gas Transmission-Texas operations. PG&E Gas Transmission President Tom King said the company was investigating the sale in an effort to lighten the large debt load it assumed when it bought the operations two years ago. The debt, he noted, has been a drain on earnings. Also, some of the operations, such as the gas liquids assets, were no longer core to PG&E's strategy, he said.

King estimated the operations netted a negative 18 cents/share last year, and will come close to that this year. In addition to the debt load, the low basis differentials in the gas market between Waha in West Texas and Katy and the Houston Ship Channel in East Texas, along with volatile liquids prices, have combined to dampen profitability.

For the third quarter, the Texas gas operations posted a negative two cents per share, which was actually an improvement over a negative six cents/share recorded for the same period last year. In contrast, PG&E's gas pipeline network in the Pacific Northwest is a "very good business," reporting earnings of 5 cents/share in the third quarter.

Nevertheless, "They're great assets. They're strategically located in the Texas market. The processing plants operate at about 99.6% efficiency, which is way above the industry norm." PG&E put the same assets on the market a year ago, when liquids prices tanked along with oil, but then changed its mind (or didn't get adequate bids) and said they were off the market again. (See NGI, Sept. 28, 1998) The company originally paid $1.5 billion for Valero Energy's gas unit and $380 million for Teco Pipeline Co. in 1997 when liquids were booming.

PG&E never had much of a shot at the Texas pipeline and liquids businesses because it wasn't in them "full tilt," said Donato Eassey, first vice president of natural gas research for Merrill Lynch. "I just think it's difficult to take a particular strategy and make a go of it if you're not in it 100%. I mean you really got to have substance and size in this business today to make it work for you. And having a little piece here and a little piece there doesn't do it," he noted.

He thinks PG&E's decision to explore a sale is a smart one. "I'm disappointed when companies don't continually evaluate the kinds of returns they're getting on the dollars invested. If you've decided you're not going to be able to make a go of it, then you ought to get out. And I think that's what they've clearly decided here." The PG&E exit from the midstream gas area is similar to an action recently announced by Enron which is selling its two-year-old venture into the electric distribution business, Portland General Electric. (See NGI, Oct. 18)

PG&E's move came as no surprise to Ed Tirello, utility analyst for Deutche Banc Alex. Brown. The company has been "losing money hand over fist" as a result of its Texas operations, for which it paid "far too much," he said. "The problem they have is that their stock is suffering because of these losing properties." PG&E is projecting it will lose about 12 cents/share this year as a result. The company wants to achieve annual growth of about 8-10%, Tirello said, but it "can't do this with those properties on its back."

PG&E has hired Lehman Brothers as a financial adviser to help investigate whether "we should sell all or part of our Texas-based pipeline business or come up with some other strategic business combination," said Sandra McDonough, a spokeswoman for the company.

Its Lone Star state operations include 8,000 miles of intrastate gas pipelines with more than 3.5 Bcf/d of throughput, natural gas liquids production capacity in excess of 100,000 b/d from nine plants and a 500-mile NGL pipeline network.

PG&E purchased 7,500 miles of gas pipeline and eight gas processing plants from Valero Natural Gas in 1997, and a 500-mile Waha-to-Katy pipeline from Teco Pipeline the same year. The deal also included Teco's investments in gas processing facilities and a gas marketing company.

"There will be a lot of parties that will be interested" in PG&E's facilities, Eassey believes. He said "one of the best fits" would be between Texas Utilities' Lone Star assets and the 7,500-mile system that PG&E acquired from Valero. "Strategically, it seems to make a lot of sense." Reliant Gas Transmission also "might make some sense for them, but I think they're more interested in distribution at this point," he said. Moreover, "new player entrants and some of the MLPs might be interested....."

PG&E's King estimated the book value of its operations at $2.5 billion. It hopes to sell the Texas facilities at a prevailing market rate by the end of 2002, he said, adding that PG&E Gas Transmission already is talking to prospective buyers. He noted the company wasn't limiting negotiations to just buyers in the Texas market.

Assuming the sale occurs, it would not mean a total pull-out from the Texas market for the company. Its PG&E Energy Trading business will continue to be located in Houston, and PG&E Generating will be "looking at its options" in the state. "We intend to stay very active and interested in the Texas market," said McDonough.

The company would redeploy any proceeds from a sale into its national energy businesses, which include PG&E Generating, PG&E Energy Trading, PG&E Energy Services and PG&E Gas Transmission's pipeline operations in the Pacific Northwest. The corporation's goal is to achieve 30% of its earnings from its national energy businesses by the end of 2002.

Susan Parker

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