PG&E to buy Valero's natural gas unit

Barbarba Saunders
Staff Writer

Texas Gas assets PG&E si acquiring [34883 bytes]

In the newest marriage of electric utility and natural gas company partners inspired by electricity deregulation and converging energy markets, giant California utility Pacific Gas & Electric Corp. has offered to acquire Valero Energy Corp.'s gas unit in a deal valued at $1.5 billion.

Valero since December has been seeking a partner for its gas business in order to focus on core refining operations, which it plans to spin off as a separate entity (OGJ, Dec. 9, 1996, p. 25). Assets include a 7,500-mile gas pipeline system with capacity to carry more than 3 bcfd and eight gas processing plants in Texas. Valero, San Antonio, also has strong gas electric power marketing operations.

Under the terms of the Valero-PG&E deal, the electric utility will issue $722.5 million of common stock, subject to closing adjustment, in exchange for outstanding shares of Valero common stock. Valero shareholders will receive about 0.63 share of PG&E common stock for each Valero share, based on a PG&E closing stock price of $22.77/share on Jan. 30. Valero's shareholders also will receive one share of the spun-off refining and marketing business. The new refining company will retain the Valero name.

The proposed merger with Valero's gas unit marks the third significant acquisition of Texas gas assets in recent months for San Francisco-based PG&E. In December, PG&E acquired Houston-based gas marketer Energy Source Inc. Last week, PG&E also completed purchase of Corpus Christi-based Teco Pipeline Co.

Combining the three Texas companies will create one of the top 10 gas marketing operations in the U.S., with average sales volumes of 3.6 bcfd in 1996 (see map this page).

PG&E strategic move

Acquiring gas assets is particularly important to electric utilities in California, where deregulation is proceeding at a rapid pace. Since last summer, a total of six $1 billion-plus combinations of utilities and gas pipelines/distributors have been proposed, counting the new PG&E/Valero deal (OGJ, Feb. 3, 1997, p. 19).

"The combination of our two companies is a natural fit. We share the same vision of the convergence of the gas and electric energy markets and the key attributes the company of the future must bring to the marketplace," said Stanley T. Skinner, PG&E chairman and chief executive officer.

Texas is a key strategic move for PG&E, the company said: "Texas has a strong intrastate market and connections that link the state through the (interstate) pipeline system to markets in the east."

Valero's strategy

Bill Greehey, chairman and CEO of Valero: "This transaction will enable us to accomplish one of the primary goals of our strategic plan-increasing the critical mass of the natural gas services segment...(and) positioning it for future growth."

Spinning off the refining and marketing company as a separate entity also will give more value to each of the businesses, Greehey added.

"I think it's a lovely deal," said John Olson of Merrill Lynch in Houston. "It's a victory for Valero stockholders and an attractive combination for the fledgling PG&E gas marketing and pipeline business here. I think it's a logical outcome, given the different dynamics of refining and natural gas business. Refining is a struggle, and it's a buyer's market, but natural gas assets are very much in demand."

Valero has said it hopes to expand its downstream operation, perhaps by acquiring another refinery. The company now owns a 171,500 b/d refinery in Corpus Christi that converts low-cost, high-sulfur residual oil into reformulated gasoline and other premium products.