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A court case produces a prosperous gas company

In the 1956 movie "Giant" the late James Dean played Jett Rink, a character who drills an oil well by himself on a piece of Texas cattle land given to him in a will. That first well becomes many wells, the wells become a prosperous oil company, and Rink becomes a multimillionaire.

That probably fits most people's idea of how a Texas energy company gets started.

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But it does not describe the beginnings of the San Antonio-based Valero Energy Corporation. In a world of corporate energy, Valero was the product of a court battle. And the stereotype does not accurately describe its business: Valero is a natural-gas distribution company; it does not sell oil.

And unlike Jett Rink, who began with a small loan and crude equipment, when Valero started on Jan. 1, 1980, it had a complete natural-gas distribution system, $649 million in assets, 1,400 employees, 40,000 shareholders, and a listing on the New York Stock Exchange. The new company was the result of an out-of-court settlement that spun Valero off from the Coastal States Gas Producing Company.

The attributes it began with, plus what one analyst describes as an "aggressive" management, combined with the high expectations for natural gas in the 1980s, have made Valero one of the "hot" items on the stock exchange this year. After entering the market at $11 a share, its stock was selling for between $25 and $30 in mid-September. "We've been one of the leading gainers," president and chief executive officer William E. Greehey says happily.

The investment community seems to agree. Reports by several brokerage houses see a number of reasons for a good outlook in future years, including higher gas transportation fees, new natural gas liquids plants, deregulation of certain gas products leading to higher prices, and the purchase of a wholesale supplier of pipe valves and fittings.

The passage of the Natural Gas Policy Act in the fall of 1978 was a big help, too. Prior to that, gas sold across state lines was subject to federal price regulation."There was no incentive for these companies to sell any surplus gas in another state," one analyst said. "The act was very bullish for the industry." Now, Valero and others can and do sell gas outside of Texas.

Another analyst said Valero's stock price may be expected to level off. "After such a large percentage jump, one would expect a rest period, which will probably occur soon. But after the rest, if the earnings momentum continues, I think the price will go up again."

The emergence of Valero marked the end of six years of uncertainty over the future of Coastal's gas-producing operations in Texas. In 1972-1973 prices of natural gas began to increase dramatically. Coastal found itself paying more for gas at the wellhead but unable to pass these higher prices along to customers, who were paying much lower rates set by contract years earlier. Coastal appealed to the Texas Railroad Commission, which regulates intrastate gas prices, for adjustment in its fixed-rate contracts. The commission granted some rate relief, but not enough for the company to make a profit, analysts say.

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But Coastal's customers sued to keep the rates where they were in the contracts. The two actions by Coastal and its customers touched off a series of legal battles that lasted until 1979. At that time, a modification of a plan Coastal had proposed in 1977 was adopted, after the Railroad Commission determined the needs of the customers would be met. One of the principal terms of this settlement was that Coastal would spin off to its shareholders its gas gathering, transmission, liquids extraction plants, and retail gas facilities in Texas. The spinoff was named Valero Energy.

In addition, a settlement trust involving cash and shares of stock in Coastal and Valero was set up for the benefit of Coastal's customers. The trust gained from the proceeds of another part of the settlement: Coastal was to carry out a sell the gas to Valero at a 15 percent discount. Valero, however, gets to sell the gas at prevailing market prices and the benefits of the discount go into the customers' settlement trust.

The settlement, a company spokesman said, was the only way Coastal could get out from under $1.6 billion in lawsuits.

Valero's primary task is the distribution and sale of gas within the borders of Texas, though it does sell some surplus gas across state lines. But the rapid growth of such home-state cities as Houston, Austin, and San Antonio provide plenty of demand for the company's 8,000-mile gas transmission system.

So far, Mr. Greehey says, finding enough gas to fill those pipelines has not been a problem for Valero's suppliers, although he adds, "you're never going to get the big increases in oil reserves and gas reserves you once did. The large fields in the United States have been found."

Still, the company has been able to meet its customers' needs -- even during this past summer's drought. Valero did have to work harder than usual during that period to meet those needs, he notes, as power companies scrambled to keep the area's almost omnipresent air conditioners running. "We sold more natural gas during the summer than we ever sold during the winter," he said. "The load has been absolutely unbelievable."

Down the road, Mr. Greehey says, "I don't see any problem in having enough gas. . . . The fact that some utilities are switching to coal helps, too."

About 1,000, or one-third, of the natural gas wells in the US are in Texas, Mr. Greehey says, and most of these are at the 5,500- to 6,000-foot depth. "but we think there's a lot of gas in deeper wells," he adds. "There are believed to be a lot of reserves at the 17,000 to 18,000-foot level." The fact that the price of gas from wells deeper than 15,000 feet has been deregulated should provide the incentive for more deep-well drilling, he believes.

Valero's San Antonio location was partially forced upon it, Mr. Greehey said. As part of the settlement, "the customers wanted Valero completely separated from Coastal," which was located in Houston. Valero executives were told they could move to Corpus Christi or San Antonio. The latter was chosen partly for its better "labor availability," he said.

Mr. Greehey is pleased with the move, for a number of reasons. But the thing that pleases him most is the lower turnover of personnel. It sometimes ran as high as 40 to 50 percent in Houston, with so many energy companies competing for workers. It has been cut to "almost nothing," here, he says.

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