American Electric Power Buys Houston Pipe Line

American Electric Power announced last Thursday it has made a major move to expand its wholesale natural gas business in the Southwest, agreeing to acquire the 2.4 Bcf/d Houston Pipe Line (HPL) along with the Bammel storage field, one of the largest storage fields in North America, from Enron. AEP said since some details remain to be worked out, it was not disclosing the terms of the transaction at this time. AEP will be acquiring the stock of HPL and it expects to complete the deal in the next couple months.

HPL, one of the two original pipelines joined by Enron Chairman Ken Lay to form the company in the mid-1980s, has an extensive 4,400 mile transportation and gathering system through southern Texas. The 118 Bcf Bammel field, located near the Houston Ship Channel market area, has a 65.7 Bcf working gas capacity and is known for its fast in-and-out capabilities. It has a 1.4 Bcf/d peak withdrawal rate and a 365 MMcf/d injection capacity.

"Adding HPL to our natural gas asset portfolio will help us reach our goal of becoming a top-10 gas trader and marketer," said Paul Addis, executive vice president for AEP. The company currently is second in the U.S. in electricity volume. "HPL will enhance AEP's natural gas business with its multiple connections into the production areas of Texas, its numerous interconnects with intrastate and interstate pipelines and its position in and around Houston as a premier provider of natural gas."

AEP, headquartered in Columbus, OH, has power generation plants with 38,000 MW capacity in the Midwest and Southwest, including a number of gas-fired plants in Texas. Last June it completed the acquisition, begun in 1997, of Dallas-based Central and South West Corp. (CSW). In 1998 it bought the Louisiana Intrastate Gas (LIG) system. The company has more than 4.8 million customers in 11 states and more than 4 million customers outside the U.S. It has over 38,000 miles of transmission lines and 186,000 miles of distribution lines.

John Olson, energy analyst with Sanders, Morris & Mundy in Houston, said "for 55 years HPL has enjoyed a reputation as one of the strongest pipelines in the country. As a stand-alone operation it is first class. It's a very, very strong asset." He said HPL has been showing losses of $50 million a year or more in recent years, "but those numbers are meaningless" because Enron has been using it at discounted transportation rates to underpin its marketing efforts. Olson said the sale is a continuation of Enron's move to sell most of its hard assets and become a soft asset player. "They are emphasizing their trading. They are doing far better at trading."

For one Houston-based risk manager, the sale of HPL by Enron was a question of rate of return. The competition among intrastates in Texas is fiercely competitive and for gas delivered to the Houston Ship Channel it can be a game of half-cents, with a shipper on one of the multiple intrastates undercutting another to try to shave a profit, he said. Enron recognized this and wanted out, he speculated.

AEP has utility operations in Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. Its utility subsidiaries include Appalachian Power, Columbus Southern Power, Indiana Michigan Power, Kentucky Power, Kingsport Power, Ohio Power, and Wheeling Power. It acquired four others with the CSW acquisition: Central Power and Light, Public Service Company of Oklahoma, Southwestern Electric Power and West Texas Utilities.

Ellen Beswick

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