NGC Corporation

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NGC Corporation

13430 Northwest Freeway
Houston, Texas 77040
U.S.A.
(713) 507-6400
Fax: (713) 507-3871
Web site: http://www.ngccorp.com

Public Company
Incorporated: 1984 as Natural Gas Clearinghouse
Employees: 1,185
Sales: $3.66 billion (1995)
Stock Exchanges: New York
SICs: 1921 Natural Gas Liquids; 4923 Gas Transmission & Distribution; 6719 Holding Companies, Not Elsewhere Classified

NGC Corporation is North America’s leading energy commodity and service provider, offering “one-stop” gathering, processing, marketing, and transportation of natural gas, natural gas liquids, crude oil, and electricity. Led almost since its formation by Chairman and CEO Charles L. (Chuck) Watson, NGC has achieved its market dominance through two major mergers: the 1995 merger of Natural Gas Clearinghouse with Trident NGL Holdings Inc.; and the 1996 merger of all of NGC with most of Chevron Corporation’s natural gas and gas liquids businesses, including its Warren Petroleum Company subsidiary. NGC acts as a holding company conducting its activities through two primary subsidiaries: Natural Gas Clearinghouse, which, with its subsidiaries, handles the company’s natural gas and electric power marketing activities; and Warren Petroleum, formerly Trident NGL, under which NGC conducts its natural gas liquids (NGL), crude oil, and natural gas transmission business. NGC is also active in Canada, through its joint venture with Nova Corporation, and in Europe, through its joint venture with British Gas pic. The company has made plans to expand operations into Mexico. NGC is owned by Nova Corporation, British Gas, and Chevron, each of which controls approximately 25 percent of the company; NGC management and other shareholders control the remaining shares of the company. Watson himself holds nearly seven percent of NGC.

NGC’s marketing arm essentially acts as an energy services middleman. NGC arranges for the purchase of natural gas supplies from as many as 600 different suppliers ranging from major natural gas producers to small independents. The company generally purchases or negotiates for the purchase of specific volumes of natural gas through fixed short-term and long-term contracts and arranges for their transmission or transportation through company-owned and third-party pipeline systems. Supplies purchased are aggregated by the company and resold to the company’s customers, including local distribution companies, energy utility companies, power plants, and retail and industrial end-users. Through NGC’s Electric Clearinghouse, Inc. subsidiary, the company has also entered the emerging electric services market. NGC complements its marketing activities with the gathering, processing, fractionation (that is, separation into component parts), and transmission of natural gas liquids, crude oil, and other petroleum and gas-based products, such as butane. The company’s growing assets include ownership or operating interests in 33 gas processing plants and nearly 11,000 miles of natural gas gathering pipeline systems, located primarily in Kansas, Louisiana, Oklahoma, and Texas.

The Chevron merger has allowed NGC to increase its share of the natural gas marketing market from a six percent share to an industry-dominant 14 percent share. The company’s daily volume is expected to rise from approximately seven billion cubic feet to more than 11 billion cubic feet, placing NGC ahead of close competitors Enron Corporation and Amoco Corporation, which handle approximately nine billion cubic feet per day and six billion cubic feet per day, respectively. The Chevron merger also makes NGC the continent’s second largest natural gas liquids producer and is expected to double the company’s 1995 two billion cubic feet per day natural gas processing volume and 84,000 barrels per day natural gas liquids volume. The merger of Chevron’s $3 billion natural gas revenues into NGC should also double the company’s revenues, which neared $3.7 billion in 1995.

Negotiating the Deregulation of the 1980s

The natural gas industry was tightly regulated until the late 1970s, with the gathering, transportation, and marketing of natural gas dominated by a few companies and pricing restrictions that kept gas prices below market value. Prior to deregulation, natural gas was typically sold on a flat-rate, long-term contract basis. Gas producers sold to interstate pipeline companies, which sold the gas to distributors, which in turn marketed the gas to end-users. The National Gas Policy Act (NGPA) of 1978 began the process of deregulation, loosening restrictions on the transmission, marketing, and production of natural gas, and establishing new pricing layers, which removed price controls from new gas production. Over the next decade and a half the NGPA would be implemented by a series of orders promulgated by the Federal Energy Regulatory Commission (FERC), beginning with Order 380, introduced in 1984, which allowed third-party marketers to sell gas at prices competitive with the gas producers. This was followed by Order 436, which allowed transportation of natural gas over interstate pipelines and opened the way for market-responsive pricing.

The immediate effect of the NGPA was to increase drilling activities, as producers sought to develop gas resources that could be sold without pricing restrictions. But, in 1982, with the onset of a national recession, demand for natural gas collapsed. This situation opened the way for a new method of selling gas, spot pricing, and, with the deregulation of the industry, gave rise to an industry of third-party marketers. The Natural Gas Clearinghouse was set up in June 1984 as a broker for negotiating spot market transactions between producers and end-users. The Clearinghouse itself would not take title to the gas it brokered. The Clearinghouse was formed as a joint venture by investment banker Morgan Stanley, New York law firm Akin, Gump, Strauss, Hauer & Feld, and Transco Energy Company, an interstate natural gas pipeline company with a 10,000-mile system reaching an 11-state market. By October 1984, the Clearinghouse was in business, arranging its first spot market sale of 200 million daily cubic feet of natural gas. The company also negotiated with other pipeline systems to link up with the Clearinghouse.

The venture struggled in its first year. Then Transco and other pipeline companies defected, believing they could negotiate better pricing on their own. Morgan Stanley bought out Transco and Akin, Gump in 1985 for $24 million and recruited Chuck Watson to head up the company. Watson, then 35 years old, had gained 13 years of experience in the energy industry at Conoco Oil. Born at the Great Lakes Naval Academy in Illinois, Watson graduated with a business degree from Oklahoma State University and went to work for Conoco. Considered a rising star at the company, Watson received a series of promotions around the company, giving him a wide range of exposure to pipeline transportation and operations and to the marketing of natural gas and natural gas liquids. When Morgan Stanley hired him as president and CEO of the Natural Gas Clearinghouse, Watson set out to change the company’s focus. Instead of merely acting as a broker, Watson used Morgan Stanley’s financial backing to buy and then resell gas, while also beginning to build the company’s own transmission, distribution, and processing infrastructure through a series of acquisitions. Meanwhile, new orders promulgated by FERC began to increase the volumes of gas the independent marketers were allowed to handle. The Clearinghouse quickly gained a leadership position in the gas marketing field, seeing sales rise to 1.3 billion daily cubic feet by 1988 and top two billion daily cubic feet the following year, making the Clearinghouse the country’s largest independent natural gas marketer.

The Bill Gates of Gas in the 1990s

Watson sought further growth for the company. In 1989, he arranged to sell the Clearinghouse to two oil and gas exploration and production companies, Apache Corporation and Noble Affiliates, Inc., gaining those companies’ financial backing to fuel expansion. Watson remained as president, CEO, and now chairman of the Clearinghouse. At the end of 1989, he arranged for the Clearinghouse to acquire Apache’s Nagasco, Inc. gas gathering system, boosting the Clearinghouse’s natural gas volume to 2.55 billion daily cubic feet. The following year, the Clearinghouse, which had been developing natural gas futures, began trading gas futures at the New York Mercantile Exchange. By 1990, the Clearinghouse was posting annual revenues of $1.7 billion.

By the beginning of the 1990s, however, margins on sales of natural gas were dropping from a high of 25 cents per 1,000 cubic feet to the single-digit range in the 1990s, reaching a low of two to three cents per 1,000 cubic feet in the 1990s. Watson responded by expanding the Clearinghouse beyond natural gas marketing into gathering, processing, and marketing natural gas, as well as other fuel oils, building the Clearinghouse into a “one-stop energy store.” The company formed its NGC Oil Trading and Transportation subsidiary and began expanding its gathering and processing capacity through acquisitions and contracts of facilities. Between 1990 and early 1994 the company spent some $150 million buying gathering systems and processing and storage facilities. Financing the company’s expansion came from selling it, adding Dekalb Energy Company to the list of owners. Then, in 1992, the company, which had revenues of nearly $2.1 billion in 1991, with an operating profit of $78.5 million, was sold to Louisville Gas & Electric Company and British Gas, each of which controlled a one-third share of the company; management retained control of the remaining one-third. In that year, FERC Order 636 took away the last of the regulatory restrictions on the natural gas industry. In response, the Clearinghouse, through a new subsidiary, Hub Services, Inc., joined with three gas utility companies to form Enerchange LLC, which would own and operate three natural gas marketing hubs. The hubs, which were located at the intersection of interstate pipelines, offered various transaction services to customers, including taking deliveries from multiple suppliers and arranging sales to a range of distributors and end-users.

The company’s revenues, aided by growing sales of natural gas liquids and crude oil, neared $2.5 billion in 1992 and $2.8 billion in 1993. The company’s operating profit, a key industry indicator, also remained strong, at $96.8 million in 1992 and $92 million in 1993. Net profits for these years were $44 and $46 million, respectively, highlighting the tight margins available in the industry. These margins were also leading to an industry shakeout, as the field of marketers began to narrow, and mergers and acquisitions among industry giants marked the industry’s consolidation. Canada’s Nova Corporation entered the U.S. field in 1994, paying $170 million for Louisville Gas & Electric’s share in the Clearinghouse; ownership was now split at 36.5 percent held by both Nova and British Gas and 17 percent held by Clearinghouse management. Terms of the Nova acquisition also brought the Clearinghouse into Canada, through a 50 percent joint venture in Novagas Clearinghouse Ltd., based in Calgary. Also in 1994, the Clearinghouse moved to enter the European market, then beginning its own deregulation, forming the Accord Energy joint venture with British Gas.

Watson, however, continued to steer the Clearinghouse toward his “energy store” concept. In 1995, the company took an important step toward increasing its capacity in products other than natural gas when it merged with publicly held Trident NGL Holdings Inc. The deal, worth more than $750 million in cash, stock, and the assumption of Trident’s debt, more than doubled the company’s natural gas liquids capacity. The merger also took the company public. The company’s name was changed to NGC Corporation, reflecting the company’s diversification from its natural gas marketing base. By 1995, natural gas marketing contributed only 65 percent of the company’s $3.7 billion in revenues. By then, Watson was already preparing to complete the company’s energy store concept, bringing NGC into selling electricity. Setting up its Electric Clearinghouse subsidiary in 1994, NGC was poised to take advantage of the coming deregulation of the electricity marketing industry, which, at an estimated $200 billion per year, was some three times larger than the natural gas market.

The energy store concept was not unique to NGC. The importance of being able to offer customers a full range of energy services was recognized throughout the industry. A new wave of mergers and acquisitions swept the industry. With the Trident merger, NGC’s share of the market had grown to eight percent, and the company began to forecast capturing as much as 12 percent during the second half of the decade. By the end of 1996, however, the company had easily surpassed its own forecast. In January 1996, NGC entered talks with industry giant Chevron Corporation to merge Chevron’s gas gathering, processing, and marketing operations with NGC. By June of that year the companies had reached agreement and, by September 1996, the merger was completed. NGC acquired Chevron’s Natural Gas Business unit and parts of its Warren Petroleum subsidiary; Chevron joined British Gas and Nova as owners of NGC, with each controlling approximately 25 percent of the company. NGC’s Trident subsidiary was renamed Warren Petroleum, and Chevron’s natural gas marketing activities were merged under the Natural Gas Clearinghouse subsidiary. The Chevron merger also added to the company’s electricity capacity, making NGC the country’s third largest independent power marketer.

With the merger, NGC also became the industry’s largest gas marketer, with daily volumes of ten billion cubic feet and daily sales of some 470,000 barrels of natural gas liquids taking a 14 percent share of the market. Analysts began comparing Watson, who had steered NGC to become one of the top 150 businesses in the country, with Microsoft’s Bill Gates. Watson stepped down as president in November 1996, but retained his chairman and CEO titles, promising to continue controlling day-to-day activities and continuing to identify the electricity industry as the key to NGC’s future growth. In January 1997, the company announced its intention to spend $650 million on capital improvements, investments, and acquisitions. NGC was well positioned to take a leadership share in the impending deregulation of the electricity industry.

Principal Subsidiaries

Accord Energy, Ltd. (United Kingdom; 50%); Electric Clearinghouse; Hub Services, Inc.; Natural Gas Clearinghouse; NGC Oil Trading and Transportation; Nova Gas Clearinghouse, Ltd. (Canada; 50%); Ozark Gas Pipeline; Warren Petroleum.