PG&E Corp. and Ultramar Diamond Shamrock Corp. (UDS)announced yesterday they had signed a letter of intent to enterinto what is probably the largest energy purchase alliance to datein the industry, representing about $2 billion in electricity,natural gas and steam purchases over a seven-year period. UDS isone of the largest independent refiners in the U.S., with sevenrefineries in the U.S. and Canada processing 650,000 barrels perday, 6,400 branded retail gasoline/convenience stores, and a largehome heating oil business in the Northeast.
“This represents a new level of significant involvement on thepart of an energy consuming company, and a broad national energyservices company like PG&E,” said Robert D. Glynn, Jr.,PG&E chairman. The next largest deals announced so far havebeen in the range of several hundred million, Glynn told NGI.Although he had no firm figures, he reported that UDS was a largepurchaser of natural gas as well as electricity.
As part of the deal U.S. Generating Co., one of PG&E’sunregulated companies, will build a 750 MW cogeneration merchantplant on the site of UDS’s refinery in Three Rivers, TX, to meetthe steam and electricity requirements of the facility, with plansto sell excess electrons in the state of Texas. “Actually, thisproject is going to engage all four of our unregulated lines ofbusiness in one single project,” said Glynn. In addition to U.S.Gen, PG&E’s natural gas pipeline will transport gas for theproject, its energy trading will provide electricity, and PG&EEnergy Services will be deeply involved in improving efficiency atUDS facilities.
PG&E actually won’t be paid for the energy it provides toUDS but instead will receive a portion of the money it saves itsclient. “I call this a ‘Shared Savings’ plan,” said Glynn. UDSspends about $310 million a year in energy, and it expects to save15-25% a year in the deal. PG&E will earn a cut of the savings.Within the next 60 days he expects the two sides to nail downestimated energy savings potential within the first year, with atimetable and implementation plan for achieving those savings.
Although the exact percentages have yet to be worked out, “It’sa substantial financial opportunity for PG&E Corp.,” saidGlynn. Savings will come from several sources. The first involvesreducing energy demand by instituting more efficient equipment andprocesses in all of UDS’s facilities. The alliance will seeknon-recourse financing to change equipment and processes at thecompany’s seven refineries across the country, retrofit lighting inevery facility (including thousands of convenience stores), andinstall high-tech variable-speed motor technology at pumpingstations, along with a variety of other measures. [UDS needs tofinalize a merger with Petro-Canada before work can begin on itsCanadian refinery, but the alliance anticipates that the Canadianfacility will be part of the contract.]
Other savings will come from reduced commodity costs forelectricity, natural gas and process steam, as well as matching thereliability of those supplies as closely to the actual needs of thefacilities. Even though electric deregulation is not a reality yet,”One of the reasons we structured a long-term agreement was to makesure that UDS was going to be able to take advantage of thoseopportunities,” said Glynn.
“It’s an exciting opportunity to show, in a tangible form, whatthe national energy strategy of PG&E Corp. is,” added Glynn. Heexpects to be making other announcements about contracts with majorcompanies. So far PG&E has signed up McDonald’s, Safewaysupermarket chains, Rite-Aid/Thrifty drug stores, communitycolleges in California and Neiman Marcus department stores. “Overthe last year PG&E Energy Services went from a standing startto a company with well over 300 professionals working in offices in20 cities, steadily signing up a stream of clients.”
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