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Gas-Electric Mergers: Money Well Spent?

Fortnightly Magazine - March 1 2000

maximize profit, but the value creation for our customers," says Priory.

"[For example], we sold our Midwest pipelines - the Panhandle Eastern Pipeline Co. and Trunkline Gas Co. It was our belief that the markets in the Midwest were getting tighter and tighter from the pipeline's perspective, in that there was an abundance of pipeline capacity," he notes.

"Every time we wanted to [renew] a contract with customers they were beating us over the head because they had five other offers from other suppliers. We thought [we'd] rather be a renter than an owner."

In the end, Priory's biggest customer bought the pipeline to create a vertical integration. CMS Energy paid $2.2 billion for Duke Energy's pipeline assets and the storage related to those systems and the Trunkline LNG Co. Terminal.

"We sold and re-deployed [the $2.2 billion] in other market areas where we think there is excellent growth potential," he says.

Meanwhile, in a similar strategy, PG&E Corp. is selling its pipeline assets.

"While we will be selling, it shouldn't send any message [contrary] to our belief in convergence and opportunities around natural gas and power associated with generation assets and pipeline assets," PG&E Energy Trading's Flinn says. "It really has more to do with the liquids business attached to that system."

Flinn concludes, "We looked at that along with the price paid for that, and [the pipeline] didn't look to be the right value proposition for us. Not because of the pipe, but really because of the overall business that was mainly tied to the liquids piece."

PG&E will retain PG&E Northwest, an interstate pipeline, he says. "Of the Texas assets most of that is going to be sold."

Flinn explains, "[In] the Texas intrastate area there is over-capacity to meet market needs, and yet you don't have rate-based security around that business like you would on an interstate business. That has gotten very competitive.

"I think the value proposition is a bit different around an interstate [pipeline], assuming that you paid the right amount for it. I would say [that] on these intra-state [pipelines], we are seeing right now a pretty large consolidation effort take place in Texas and we will see some of that continue in Louisiana," he says.

Flinn describes some of his considerations for determining whether to acquire pipeline assets.

"We look at is not just the ownership of a pipeline but we look at our capability to access long-term pipeline capacity. We may get that a number of ways. Instead of buying a company to do it, we may sign up for a long-term lease," he says.

"Also, another avenue that we have to assess is that we see unbundling take place at the state level, where utilities go to migrate away from the merchant function ¼ and open up their markets," he says.

Flinn says utilities will be looking to relieve themselves of their long-term commitments with pipelines.

"We will be participating in that unbundling process and looking at strategic pieces of capacity that do integrate with our generation business. So we will look