Issues & Analysis: AEP grabs major slice of Gulf Coast energy markets

Dwayne Hart, vice-president of American Electric Power's energy services unit, says it is becoming a major player in the growing Texas and Louisiana markets for wholesale gas and electric power.

Kate Thomas
OGJ Online

Ohio's American Electric Power Co. spent more than 2 years waging a high profile campaign to win regulatory approval to buy Central & South West Corp.

Completed in June 2000, the combination created a mega US electricity company with operations in 11 states, 38,000 Mw of generation, 224,000 miles of transmission and distribution lines, 4.8 million customers, and 2000 revenue of $13.7 billion.

But while most attention was focused on the combination of the two electric power companies, AEP also was pulling together an ambitious natural gas strategy that received much less fanfare. Company executives say it is a critical component to future growth.

In 1998, the company paid Equitable Resources Inc. $320 million for its Louisiana Intrastate Gas unit in spirited bidding. And in December, AEP reported it will buy the intrastate Houston Pipe Line Co. (HPL) and Bammel storage facility from Enron Corp. for an undisclosed price.

By mostly flying under the radar, AEP has positioned itself to become a major wholesale gas and power supplier in two of the most energy hungry regions of the US�the Houston Ship Channel and Texas Gulf Coast,and the Louisiana Gulf Coast and Mississippi River industrial complex.

Not only does the company own North America's second largest electric generating fleet, once the HPL deal gets regulatory approval, AEP will be a major player in the gas industry with 6,300 miles of pipeline in Texas and Louisiana, plus major storage facilities with connections to Henry Hub and the Katy Hub market centers.

Bundled products
"We were looking for an intrastate system," says Dwayne Hart, vice-president of business development and strategy for AEP's Energy Services unit. With both gas and power assets, AEP can now sell bundled products. "We want to work more on the customer side of the business."

With a 7.2% market share, AEP is already the second largest US power trader after Enron Corp. Net revenue from wholesale power trading rose 226.5% in 2000 to $337.3 million, while net revenue from nonaffilated power sales was up 30.6% to $438.8 million.

In addition to power, gas is now integral to the company's wholesale marketing and trading strategy. AEP is the 14th largest trader of gas and plans to keep growing. Trading volume has risen to 4 bcf/day from 0.5 bcf/day in the first quarter of 1998. Net revenue from wholesale gas trading rose 223.1% to $123.1 million in 2000.

Company executives project the wholesale marketing and trading segment will grow at a double-digit rate in 2001-2002. Wholesale margins were 41�/share higher in 2000 than in 1999.

Hart says Houston Pipe Line will be a good platform to propel AEP into the top 10 of gas marketing and trading this year. With 4,400 miles of main line and gathering systems, 60 interconnects, and capacity of 2.4 bcf/day, HPL is the largest intrastate pipeline in Texas with access to major gas producing basins in South Texas, the Gulf Coast, and East Texas.

The Bammel storage facility, third largest in the US, has 118 bcf of capacity and peak delivery capability of 1.4 bcf/day. It serves the Houston Ship Channel market area, the Houston metropolitan area, and interstate pipelines to the Northeast and Midwest.

Louisiana Intrastate operates 2,000 miles of pipeline with capacity of 600 MMcfd and connections to 12 interstate and 24 intrastate pipelines, five natural gas processing plants, and the 10-bcf Jefferson Island high deliverability salt dome storage facility. The gas assets give the company valuable market intelligence, say company officials.

Gas growth
Growing its gas business is central to the company's wholesale energy strategy, and to do that, "We believe you need assets," says Hart. He says it's a natural extension of the company's philosophy. Up until its purchase of Central & Southwest (CSW), AEP's plants burned very little gas.

The company made deals around coal, barges, and trains. Of the 25,000 Mw generating capacity the company expects to be unregulated by 2002, it said 23% is gas fueled, 71% coal, and 6% by other fuels.

There are fundamental similarities between the gas and electricity business, Hart says. "We are transporting over pipes not wires. But it's energy and it has the same components." AEP's goal is to take advantage of the synergies between the HPL and Louisiana Intrastate acquisitions, he says.

While the company doesn't plan a physical link between the pipelines, they will be linked through a central control system and decisionmaking will be made around the pipeline systems. Hart says AEP expects marketing benefits when it talks deals with gas producers.

"We try to take an asset, human capital, and add IT (information technology)," he says, with the objective of "customizing energy solutions for our customers." The real-time aspects of the trading and marketing business require sophisticated IT systems to manage a risk portfolio and deliver gas and power across multiple states.

HPL is a "pretty full pipe," Hart says, but AEP would like to increase throughput "if it makes economic sense." Part of the value of the pipeline is the ability to increase economic opportunities with arbitrage, peaking opportunities, and underutilized capacity, according to company executives.

While AEP has been on the acquisition trail, executives say market alternatives and its analysis of forward price curves do not support large-scale investment in new electric generating capacity. Instead, the company is linking its engineering organization, gas pipeline assets, and marketing organization to capitalize on commercial opportunities. The goal is to add capacity without taking on unacceptable commercial and market risk.

In January, for example, AEP struck a 20-year deal with Tractebel Energy Marketing Inc., the North American trading arm of Tractebel SA, to buy all the output from a 900 Mw cogeneration plant AEP is building at Dow Chemical Co.'s complex in Plaquemine Parish, La. Gas to fuel the plant will come from AEP's Louisiana Intrastate Gas system. Dow will operate the plant under a separate agreement.

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