Look for NGC to focus its efforts on growing the powergeneration segment of its energy store concept of providing gas,power and gas liquids, CEO Chuck Watson told reporters in Houstonlast week. “We are going to optimize and strategically grow ourpower generation assets. Greater than 50%, probably almost 75% ofour available cash flow in this company over the next several yearswill be in power generation, either greenfield projects, merchantplants, or in possibly acquiring some of these plants that are spunoff from the utilities over the next several years.”

Watson touted the company’s efforts to acquire power plants inCalifornia, noting he was surprised NGC won bids for two of 20divested California plants. The California generation figures intoNGC’s recent buy-up of capacity on El Paso.

“In California, we bought some generation assets through Destec,again, all gas-fired. We have some indigenous Chevron [gas] supplyin California, and we’ve got some leased storage. So we’ve gotsupply, we’ve got transportation, we’ve got leased storage, andwe’ve got demand. The acquired generators are swing plants, Watsonsaid, so NGC needs the capacity flexibility it acquired on El Paso.”If you’re going to swing and make money doing it, you’ve got tohave gas supply. You’ve got to have the capability of handling thatkind of swing. We had the inherent gas supply capability, but wedidn’t have the pipeline capacity. That was the piece we weremissing, so we had to go out and get pipeline capacity. On thesurface, far in excess of what people saw that we needed.”

Additionally, the company markets about 1 Bcf/d in California.”We’re the largest marketer in California anyway, have been for along time.” Watson said those who criticized the company for buyingup the El Paso capacity didn’t realize how big NGC is inCalifornia.

NGC’s rapid growth in California and everywhere else is part ofthe reason the company stumbled last year, Watson admitted. “We had12 straight years of double-digit growth, double-digit earningsgrowth. Last year was sort of a disaster for us, frankly, from afinancial standpoint.” Last year NGC integrated the Chevron gasbusiness and Warren Petroleum into the company Both were acquiredin 1996. “We actually integrated both of those fully into NGCduring 1997. We tripled the size of this company in 18 months.”Unfortunately, the back office didn’t keep up. As a result, NGC hasembarked on a campaign to acquire better management systems.Spending on technology should peak this year at about $45 millionand taper off to about $17 million a year thereafter, Watson said.

In March 1997, NGC announced hedging and inventory costs relatedto its gas liquids business would cause up to $28 million incharges in the first quarter of 1997. “NGC had been really wellknown for its ability to manage assets and manage gas inventory,and that’s really what our forte had been for years. Yet we boughta liquids company and had a write-off the first full quarter afterwe had done the deal with Warren [Petroleum]. What happened is thatyou’ll find in the liquids business that Warren and Trident [NGL,acquired in 1995] were actually both managed as what we call sortof just-in-case inventory. Just-in-case means that you’ve gotplenty of inventory just in case the worst thing happens.”

Both Warren and Trident were service organizations of theirformer parent companies, the chemical businesses of Chevron andOccidental, respectively. Watson said under their former parents,the businesses could hold large inventories because they didn’tnecessarily have to make money. That’s not the case at NGC. “Ifwe’re going to go out and take an inventory position in the future,our customers are going to know it and they’re going to pay for it,and they’re going to help us take on some of that risk.”

Joe Fisher, Houston

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