Unable to Turn a Profit, PG&E Unloads Texas Assets
After three years of attempts to generate profitability from its Texas
gathering and liquids businesses, PG&E National Energy Group finally
threw in the towel last week and announced the sale of these assets to
El Paso Energy Field Services for $840 million in stock and debt.
The assets serve all major metropolitan areas, the largest industrial
load centers, and numerous natural gas trading hubs, El Paso said. They
are also well positioned to serve many of the state's existing and planned
gas-fired electric generation facilities. Included in the transaction are
8,500 miles of natural gas transmission pipelines that transport approximately
2.8 Bcf/d, nine processing plants that currently process 1.5 Bcf/d, and
a 7.2 Bcf natural gas storage field. The transaction also includes significant
natural gas liquids pipelines and fractionation facilities.
"The market prices for natural gas transportation and natural gas liquids,
combined with the price we paid to acquire these businesses, resulted in
a significant drag on earnings despite recent improvement in operational
and financial performance," said Thomas Boren, CEO of PG&E's National
Energy Group. "This transaction will eliminate a negative impact on our
earnings and will help the National Energy Group achieve its financial
goals by 2002."
A Steal for El Paso
Industry experts agree El Paso bought the assets at a discount. "PG&E
sold at a very ripe price," said Donato Eassey, an analyst with Merrill
Lynch. "Their book value is anywhere from $2.5 billion to $2.7 billion,
and El Paso got them for $800 million and change."
The deal is expected to be completed by the middle of this year. It
requires FTC and third-party approvals and will result in a one-time charge
against 1999 earnings of $890 million, or $2.42/share, that will be reflected
in National Energy Group's financial results of operations for the year.
PG&E originally bought the facilities from Valero Energy and Teco
in 1997 for a total of $1.02 billion. At the time, wide basis differentials
blessed the west-east gas transportation market and PG&E paid a premium
price to enter this volatile business.
Since then, the basis between Waha in West Texas and Katy and the Houston
Ship Channel in East Texas has tightened. PG&E's effort to become a
major liquids and gatherer player in Texas hit a major roadblock it could
not overcome. "They conceded defeat on this project months ago," said John
Olson, a consultant with Sanders, Morris & Mundy. "[Last week's] announcement
just brought a sad end to a brave venture PG&E had embarked upon years
Rumors of the sale had been circulating throughout the industry for
months. When Robert Glynn was hired as PG&E's CEO in September 1998,
he first mentioned the possibility of selling the Texas assets. The company
finally stated in an 8-K form filed last December that it was ready to
sell (see NGI, Dec. 6, 1999).
For the third quarter ended Sept. 30, the Texas gas operations posted
a loss of negative 2 cents/share, which was actually an improvement over
negative 6 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.
PG&E appears to be going back to its traditional roots, emphasizing
electricity, although a San Francisco-based corporate spokesperson said
last week the company expects "to continue to have a strong presence in
Texas through its Houston-based trading operations."
Nationally, the strategy is to focus on developing gas-fired merchant
electricity generating plants, a business it has been in for more than
a decade through predecessors to its current PG&E Generating Co. That
will include looking for possible generating projects in Texas where PG&E
Generating currently has no plants, said Greg Pruett, vice president and
"We have said before we are going to concentrate on the development
of our generation portfolio," Pruett said. "We've already said this to
analysts and publicly at the beginning of December. Bob Glynn talked about
the focus on four regions in the U.S. and particularly focusing on growing
the generation business nationally.
"It doesn't preclude us for the interim - maybe even in the near future
- from acquiring gas assets where we find a strategically located pipeline
or pipeline company in one of the four U.S. regions we're focusing on."
A California-based energy marketer for a Texas-headquartered international
company noted that at the time (1996-97) that PG&E acquired its Texas
gas assets, his firm was looking at the deal and questioning why PG&E
would want it. As it turned out, this marketer noted, the timing was very
bad because within months of the closing, the gas price differentials between
west and east Texas evaporated.
"So they paid billions of dollars for something that all of a sudden
was only worth a fraction of that," the San Francisco-based marketer said.
"Now it looks like they are going to have to bite the bullet and write
it off. Even though things have gotten somewhat better in the past year
to the extent that someone [El Paso] is now interested in buying the assets.
"A year ago it would have been worse. I don't think they could have
sold it back then. I think they decided now it is as good as it can get
for the future. So with a book loss they get behind, but they can go forward
without having it be a drag on earnings."
PG&E's Pruett noted that "the market values today would not support
the price we paid back in 1997. So ultimately, we hired Lehman Brothers
to see if there was interest on behalf of third parties in acquiring those
While PG&E suffered with these assets, analysts believe El Paso
will thrive. It is expected to be immediately accretive to El Paso's earnings.
Also, El Paso is an experienced player in the liquids game, whereas it
was not the core business of PG&E. In a teleconference after the deal
was announced, El Paso said that 70% of the cash flow generated by these
assets comes from stable fee-based activities with the balance from processing.
Using the experience from its El Paso Field Services division, the company
believes it can actively manage the risk associated with the non-fee-based
With this purchase, El Paso will be in the position to compete with
the yet-to-be-formed Duke Energy Field Services (DEFS). The creation of
DEFS, which was announced in December, will create the largest gas liquids
company in the country (see NGI, Dec. 20).
"They will clearly be in contention," Olson said. El Paso will have more
Richard Nemec; John Norris