NGC/Destec merger latest in BTU convergence

Richard WheatleyAssociate Managing Editor-News

In a move to leverage its position in the converging natural gas and electric power sectors as a bulk wholesaler of multi-commodity energy products, NGC Corp. will acquire independent power producer (IPP) Destec Energy in a stock purchase valued at about $1.2 billion.

Both are Houston-based.

Companies' rationale

Chuck Watson, NGC chairman and chief executive officer, said the deal gives NGC "a huge start" in participating in U.S. power deregulation, and "it fits our MO (modus operandi) over the last several years."

The merger of Destec into NGC, for about $21.65/share, is NGC's first power-generation asset purchase. Destec, the nation's second-largest IPP, is about 80% owned by Dow Chemical Co. It sells electricity via gas-fired cogeneration plants.

Charles F. Goff, chairman and chief executive officer of Destec, said the proposed merger represents outstanding value for its shareholders.

"We also believe the merger represents a good opportunity for Destec employees, since NGC is not presently in the independent power business and intends to continue to grow the business."

Company profiles

Destec has 576 employees in the U.S.; the rest work outside the U.S.

NGC is a gatherer, processor, transporter, and marketer of energy in North America and the U.K. and operates both Natural Gas Clearinghouse and Electric Clearinghouse. Through its "Energy Store," NGC offers multi-commodity energy products and services, including natural gas, gas liquids, electricity, and crude oil.

Its acquistion of Chevron Corp.'s natural gas business and Warren Petroleum Co. assets in 1996 made NGC the largest gas and gas liquids marketer in North America (OGJ, Sept. 9, 1996, p. 39).

After the announcement, Dow officials said the company will vote its shares in favor of the merger.

Deal specifics

The acquisition involves a joint-purchase arrangement with AES Corp., Arlington, Va.

AES intends to buy Destec's non-U.S. independent power assets, which include five plants that produce 954 MW of power net to Destec, for about $407 million.

NGC intends to acquire the remainder of Destec's stock and assets for $860 million and reduce that amount by $150 million cash currently on Destec's balance sheet, resulting in a transaction valued at about $700 million as of closing.

Closing is expected in about 60-90 days. Within 6-12 months, NGC intends to spin off some of Destec's assets. It already has a contract to sell Destec's 212-MW Tiger Bay plant at Fort Meade, Fla., to Florida Power Corp. for $300 million, which was termed "nonstrategic." Other plants will also be scrutinized for possible sale.

The merger is subject to approval by the Federal Energy Regulatory Commission and the U.S. Securities and Exchange Commission; and it must be reviewed for approval under Hart-Scott-Rodino antitrust regulations.

FERC approval, which NGC officials expect to be swift, is required under the Federal Power Act. Destec's FERC certificate, defining it as a utility and allowing it to market power, will be transferred to NGC. No state approvals are required.

What's involved

Destec has 20 U.S. independent power plants, producing about 1,800 MW net to Destec. It operates all but five of the plants, and its interests range from 8% to 100%. In addition to its five plants outside the U.S., it has a power marketing arm and natural resource assets.

Natural resource assets involve more than 120 bcf of proved natural gas reserves, mostly in the San Juan basin and the Antrim shale in Michigan. Also, Destec has more than 600 million tons of lignite reserves in the Texas and Louisiana area. NGC intends to sell most, if not all, of the natural resources.

Destec's U.S. IPP assets are located in Texas, California, Florida, Georgia, Michigan, Virginia, and Nevada. Also, it owns and operates the Wabash River synthetic gas plant at Terre Haute, Ind. The plant is located at Public Service of Indiana's Wabash River power station.

Destec's Texas plants are at Channelview, Freeport, and Port Arthur. Destec operates the Cogen Lyondell cogeneration complex and owns 100% interest. The plant produces 590 MW of power, part of which goes to ARCO Chemical Co. on the Houston Ship Channel. The remainder is fed into the gas grid for sale to Houston Lighting & Power Co. and other customers.

Cogen Lyondell consumes about 85-90 MMcfd of gas to produce electricity and steam for ARCO.

Destec has interests in 11 independent power plants in California and it operates 10 of those. The plants produce about 235 MW net to Destec.

The deal gives NGC about 3,000 MW of gross electricity production, net of about 1,800 MW in the U.S., virtually all gas-fired. Roughly one third of the net megawatts are not under contract and are available for NGC to market. Also involved is about 350 MMcfd of gas purchases-about half under long-term contracts, the remainder covered by spot contracts.

Strategies

Thomas M. Matthews, NGC president, said Destec gives NGC a "strategic platform" for growth in gas and power arbitrage in the U.S. and around the world. NGC carries out non-U.S. operations through its NGC Global Energy division.

Matthews said the geographic diversity of Destec's plants and their high efficiencies as low-cost power producers "will let us play a preeminent role in power marketing on both the wholesale and retail level as deregulation (of electricity) happens in different areas of the country."

NGC's principal focus, however, will be large industrial power users, not smaller retail/residential customers.

Matthews said, "We feel there will be great alliance opportunities with Dow as we grow the Energy Store with them on aspects of gas supply, liquids supply, feedstock supply, and power supply."