Gas pipelines now stand as Enron's main assets

HOUSTON -- Enron began life as a natural gas pipeline company saddled with heavy debt, and it could end up in much the same form after it emerges from Chapter 11 bankruptcy.

The decimated company likely will try to rebuild with its pipelines as the main assets, said Curt Launer, managing director of equity research at Credit Suisse First Boston.

"Enron started out in the late 1980s as a pipeline company with an 83 percent debt-to-capital ratio, and it could find itself back there again," Launer said.

Enron's interstate natural gas pipelines, with their federally regulated rate of return, have never been flashy earners for the company, which made its reputation in the past decade as an energy trading powerhouse.

The pipelines are part of Enron's only line of businesses not hit when the company announced a series of write-offs that triggered its rapid decline. And when the company desperately needed cash, the pipelines were used as collateral to establish a $1 billion line of credit before the company filed for bankruptcy.

There has always been the sense that no matter what new line of business the company embarked upon, it would hang on to its pipelines.

Enron's pipelines were some of the few hard assets the company retained after it began to pursue its "asset lite" strategy of shedding plants, oil, and gas reserves and equipment in favor of energy trading, sales and financing. Ultimately, this strategy left the company with few sources of ready cash to check the rapid decline that analysts refer to as the "death spiral." "This is what can happen when most of your assets are financial and you lose the confidence of the financial community," Launer said.

The crown jewel of Enron's pipelines is the Northern Natural Gas system. The system has gained a measure of fame as the asset at the center of a bitter legal battle between Enron and Dynegy that has followed their failed merger agreement.

Enron's lawsuit against failed suitor Dynegy asks the court to nullify Dynegy's option to acquire Enron's ownership of its Northern Natural Gas system. Dynegy acquired the option to buy the system by injecting $1.5 billion into Enron. The infusion was to keep Enron alive until Dynegy could take over Enron.

While Dynegy officials have said that represents fair value, Jeff Dietert, energy analyst with Simmons & Co. International in Houston estimates it has a market value of from $2 billion to $2.5 billion.

The uncertain outcome of the legal battle with Dynegy wouldn't be the only problem with rebuilding the company around pipelines again. They are not part of the bankruptcy, but their fate is far from certain because reviving the company's trading business is no sure thing.

The company has pledged to keep its core energy trading and pipelines businesses, but it has effectively shut down its trading business indefinitely, leaving only the low-growth business of pipelines as Enron's main going concern and source of cash flow. "While Enron will dispose of a significant number of its noncore assets, the company has decided to preserve both the short- and long- term viability of its transmission business," the company said.

If Enron were reduced back to a pipeline company, it would be tough for it to attract investors and compete with rivals such as El Paso Corp. and Williams, which have added unregulated businesses such as gas storage and power plants. Pipeline companies that earn added profits from diverse lines of business would have an edge over a new Enron with just pipelines.

Northern Natural Gas is Enron's largest interstate system, with about 17,000 miles of pipeline and the ability to move 4.2 billion cubic feet of natural gas a day. It serves about 70 utilities. This system has been part of the company since it was formed.

Enron acquired the Northern Natural Gas system as part of the merger of InterNorth and Houston Natural Gas that created Enron. The line had been owned by InterNorth. Its line spans from the Permian Basin to the Great Lakes and goes through the most prolific oil and gas producing basins in the Plains and Midwest. It was expected to undergo an expansion in the next two years. The company recently conducted an "open season" on the system, gauging customer support for an expansion, and received interest from potential customers for an additional 368 million cubic feet of gas on the system per day, Enron spokeswoman Gina Taylor said.

Enron also owns the Transwestern Pipeline, a 2,700 mile system that delivers 1.7 billion cubic feet of natural gas per day to Southern California Gas, Pacific Gas & Electric and Mojave Pipeline Co. at the California border and to Southwest Gas and Citizens Utilities in Arizona. The company also owns and operates the Florida Gas Transmission system, which moves natural gas for third parties from the Texas Gulf coast to Miami. Enron also holds a stake, along with TransCanada and Williams Cos., in the Northern Border pipeline system, which moves gas from the Canadian border just north of Montana into Indiana.

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