Throughout our operations, Coastal seeks to maximize the competitive advantage of our strategically integrated and diverse base of energy assets and operations; focus on core geographic areas where our assets and expertise bring unique strengths; maintain a strong balance sheet to provide the financial flexibility necessary to take advantage of rapidly emerging opportunities; allocate capital to generate growth, both long- and short-term, while sustaining a solid foundation of earnings and cash flow.
The Coastal Corporation, based in Houston with operations in several energy markets, is a Fortune 500 energy company that owns outright or through joint venture natural gas pipelines covering over 18,000 miles across the United States. The company's principal business segments consist of the gathering, processing, storage, and distribution of natural gas; oil refining and marketing; oil exploration and production; electric power production; and coal mining. With the second largest natural gas storage facilities in the United States, Coastal was handling about 13 percent of the country's total consumption of natural gas in the late 1990s. The company's ANR Pipeline subsidiary operates about 18,000 miles of domestic pipeline as well as 14 natural gas processing plants and 27 underground storage facilities. Coastal's exploration and production division, which operates primarily in the Gulf of Mexico, south Texas, and Utah, has interests in more than 3,000 wells. This segment expanded into international exploration in the 1990s. The company also owns four refineries and provides gasoline in 34 states through more than 1,500 branded retail outlets.
Rapid Development and Expansion in the 1950s and 1960s
To a great extent Coastal's success can be attributed to the dynamic leadership of founder Oscar Wyatt. Wyatt served in World War II as a bomber pilot, earned a degree in mechanical engineering from Texas A & M University, and gained experience in the oil business as a partner in Wymore Oil Company. In 1955 Wyatt founded Coastal States Gas Producing Company in Corpus Christi, Texas. Compared to the monolithic enterprise it became in later years, Coastal States began business in modest circumstances, with 68 miles of pipeline and 78 employees.
From the beginning Wyatt demonstrated an almost intuitive understanding of the energy business. His pipeline company purchased small amounts of gas from a number of producers, packaged it, and then sold it in larger volumes. Gas gathering became the company's primary business. Wyatt developed effective pipeline systems that connected both buyers and sellers and still left room for profits. Most pipeline owners set output quotas to make an oil field last for up to 20 years. Wyatt ignored this convention and generally purchased as much gas from producers as they could pump. The practice enraged other pipeline owners, but the arrangement worked to Coastal's advantage, and by 1960 revenues exceeded $17.6 million.
As the U.S. economy grew in the 1960s, dependence on energy sources, notably oil and gas, also increased, and Coastal took full advantage of the soaring demand. By the early 1960s Coastal's newly created subsidiary, LoVaca Gathering Company, supplied gas to San Antonio, Austin, Corpus Christi, and other cities in south Texas. In 1962 Coastal purchased 800 miles of crude oil pipeline from Sinclair Oil Corporation, including a major refinery in Corpus Christi with a capacity for almost 30,000 barrels of oil per day. Later, as oil refining became one of its principal activities, Coastal extended this capacity.
Much of Coastal's subsequent expansion came through takeovers--often hostile--of rival companies. Wyatt acquired a reputation as a tough business competitor and corporate raider. In 1968 Coastal acquired a 965-mile system from United Pipeline Company. In the same year Wyatt won control of Rio Grande Valley Gas Company. In June 1970 the company announced plans to link its west Texas natural gas reserves to the Dallas area.
Continued Expansion and Rising Controversy in the 1970s
In the early 1970s events in the Middle East overshadowed the triumphant rise of Coastal. The Arab-dominated Organization of Petroleum Exporting Countries (OPEC), by presenting a united front, began to win price increases. In 1971 OPEC cut production and raised prices by 70 percent, and by 1974 prices had quadrupled, leading to the energy crisis of the mid-1970s.
LoVaca, Coastal's pipeline subsidiary, had signed fixed-price contracts to supply cities in south Texas with natural gas. With energy prices soaring and supplies dwindling, LoVaca could not meet its contractual obligations, and at one point it cut off gas supplies to the cities of San Antonio and Austin during the winter. Wyatt then obtained regulatory permission to increase prices beyond the limits specified in the contracts.
LoVaca was the target of lawsuits by outraged customers, and the problems of the subsidiary came to haunt Coastal for years. After much wrangling, Coastal finally settled $1.6 billion in lawsuits by agreeing to spin off LoVaca. The spinoff, Valero Energy Corporation, which was formed on December 31, 1979, from LoVaca and other Coastal assets, had annual revenues of about $1 billion. The customers suing Coastal received 55 percent of Valero's stock, with the remaining split among Coastal shareholders, not including Wyatt. At the plaintiffs' insistence, he was excluded from the agreement.
Despite the impact of the energy crisis, Coastal maintained its profitability and continued to expand throughout the 1970s. Expansion was not confined to Texas. In 1973 Coastal acquired Colorado Interstate Gas Company, along with its three refineries, in a $182 million hostile bid. With the acquisition Coastal became a truly national company. In 1973 Wyatt renamed the company Coastal States Gas Corporation.
In the first half of the decade, Coastal also sought to diversify into other energy markets. In 1973 Coastal entered the coal mining field with the acquisition of Southern Utah Fuel Company. Also in 1973, with the acquisition of Union Petroleum Corporation, renamed Belcher New England, Inc., Coastal began the marketing and distribution of petroleum products. By 1975 revenues had reached $1.9 billion. Coastal's expansion continued in 1976 with the purchase of Pacific Refining Company's plant in Hercules, California, which increased Coastal's refining capacity to about 300,000 barrels per day. In 1977 Coastal acquired Miami-based Belcher Oil Company, one of the largest marketers of fuel oils in the Southeast.
Ups and Downs Amid Numerous Acquisitions in the 1980s
In 1980 Wyatt changed the company's name to Coastal Corporation, and in the same year revenues exceeded $5 billion. Yet Wyatt, in his enthusiasm to secure profits for Coastal, overstepped the law. In 1980 in Houston, Wyatt and two other oil executives pleaded guilty to criminal violations of federal crude oil pricing regulations. Wyatt and the president of Coral Petroleum were each fined $40,000 for the misdemeanors. Each company was required to refund $9 million to the U.S. Department of the Treasury, and each incurred $1 million in civil penalties.
The early 1980s witnessed a temporary setback in Coastal's successful profit record. Economic recession and an oversupply of oil and natural gas, as well as conservation by consumers, led to Coastal's first loss, which amounted to $96.4 million for the year 1981. Wyatt responded to the crisis with characteristic forcefulness. He trimmed the workforce and cut the budget, and within six months he had restored the company to profitability.
In the mid-1980s the U.S. government sought to foster competition in the natural gas industry through deregulation. The new government policy, together with falling prices, created difficulties for many energy companies. Coastal not only survived deregulation but also took full advantage of the competitive atmosphere by launching hostile takeover bids for other struggling energy companies. The mere threat of a takeover by Coastal could send the stock price of a target company soaring. In 1983, for example, Coastal's attempt to secure Texas Gas Resources failed, yet Coastal's initial investment in the company generated a total of $26.4 million in profits. Intervening companies that came to the rescue of Texas Gas Resources were forced to buy up shares held by Coastal at inflated prices. Wyatt's unsuccessful attempt to take over Houston Natural Gas in 1984 yielded a similar return of $42 million. In 1985 Wyatt set about acquiring American Natural Resources (ANR), one of the most profitable natural gas pipelines in the Midwest. Despite ANR's initial determination to stay free of Coastal's clutches, Wyatt soon pushed through an all-cash deal of $2.45 billion, which ANR shareholders could not refuse. The acquisition transformed Coastal into a major power in the U.S. gas business.
While Coastal's success and profitability drew the admiration of many in the business community, some of Coastal's activities skirted the spirit of the law. In 1987, despite sanctions prohibiting U.S. companies from dealing with Libya because of its terrorist connections, Wyatt negotiated a deal in which Libya supplied oil to Coastal's refinery in Hamburg, Germany. Wyatt's deal was legal because foreign subsidiaries of U.S. companies were exempt from U.S. regulations.
In the late 1980s Coastal took advantage of improved economic relations between the United States and the People's Republic of China. In 1988 Coastal concluded an agreement with China National Chemicals Import and Export Corporation (Sinochem) for joint ownership of Coastal's Pacific Refining Company. Coastal and Sinochem each held a 50 percent interest in the West Coast refiner. The agreement provided certain advantages for both sides. Sinochem obtained an opportunity to invest in the United States as well as a long-term outlet for crude oil, and Coastal secured a dependable supply of crude oil in a volatile world oil market. This joint venture represented the first investment in U.S. energy assets by China.
A key to the company's successful strategy was the continued high productivity of all Coastal employees, from unskilled workers to those in management. Coal workers employed by Coastal produced twice the industry average, and the expectations for Coastal's management staff were high. Indeed, the constant pressure for results led to a high management turnover, with Coastal's refinery business alone having five different managers between 1980 and 1989.
Steady Acquisitions and Growth in the 1990s
The U.S. government took action against Coastal's agreement with Libya in 1991 by prohibiting U.S. citizens from working for the venture. This act did not dissuade Wyatt from further deals with countries in the Middle East, however. Coastal bought large amounts of Iraqi crude in the 1980s, and prior to the commencement of the Persian Gulf War, Wyatt offered to sell Iraqi President Saddam Hussein part of the company's international marketing and refining operations. U.S. sanctions against Iraq following the war prevented Coastal from purchasing Iraqi oil, but Wyatt maintained close relations with Iraq in hopes of gaining access to the oil at some time in the future. These controversial actions did not make Wyatt a popular player in the U.S. oil industry, but he viewed the dealings as pragmatic and necessary for Coastal's business.
In 1992 Coastal shut down its refinery in Kansas when its refining and marketing division reported an operating loss of $192 million, but the company continued to grow, seeking acquisitions and joint ventures to streamline operations. In the following year, in fact, Coastal adopted an aggressive growth strategy. Through its subsidiary ANR Pipeline Company, Coastal completed construction on the Empire State Pipeline, a 156-mile line that ran from Niagara Falls to Syracuse, New York. ANR held a 50 percent interest in the pipeline, and Union Enterprises Ltd. held the remaining half. Also in 1993 the company acquired Soldier Creek Coal Co. and Sage Point Coal Co., both subsidiaries of Sun Co., Inc.
Wyatt gave up his post as CEO in 1995 but continued as chairman. David A. Arledge, the company president, became its CEO as well. In early 1995, through subsidiary Coastal Oil & Gas Corp., Coastal gained an interest in several producing fields off the coast of Louisiana from Koch Hydrocarbons, Inc. The company also acquired working interests in two dozen wells in the Utah area from Snyder Oil Corporation and bought the marketing assets of Exxon Corporation's subsidiary Esso Petrolera, S.A., located on the Caribbean island of Aruba.
In 1996 Coastal entered into discussions with Westcoast Energy Inc. to form a joint venture to market natural gas and electricity and to provide energy management services. The venture, which would create one of the largest marketers of natural gas and electricity in North America, was named Engage Energy. To procure funds for additional ventures, Coastal sold its Utah coal mining operations for approximately $610 million in late 1996. The company planned to keep its coal operations in the eastern United States.
When Wyatt stepped down as chairman in 1997, Arledge gained the additional post. In that year Coastal acquired an 11 percent interest in the 1,900-mile Alliance Pipeline, designed to move natural gas from western Canada to the Chicago region. Construction of the pipeline continued through the late 1990s. In 1999 Coastal announced plans to develop a 700-mile pipeline running from Mobile, Alabama, to Tampa Bay, Florida. The proposed Gulfstream Natural Gas System pipeline was designed to serve the growing natural gas and energy demand in Florida. It was projected that the pipeline would be completed by 2002.
In the late 1990s Coastal focused on its natural gas business. With excess reserves of crude oil and low refining margins, the global oil industry was in a state of chaos. The North American natural gas market, on the other hand, was a regional market, largely unaffected by global oil market conditions. In addition, according to Coastal, by 2010 the demand for natural gas was expected to grow considerably, from 22 trillion cubic feet to 30 trillion cubic feet per year. The company therefore chose to invest heavily in its natural gas operations, targeting the primary natural gas supply areas, which included the Gulf of Mexico, south Texas, the Rocky Mountains, and Canada. In June 1998 the company acquired additional interest in natural gas assets in Alabama, including a processing plant and a pipeline.
To bolster its exploration and production operations, Coastal upped its exploration and production budget by $100 million in 1998 and by $290 million in 1999. Coastal acquired oil and gas assets in northeastern Utah and western Colorado in late 1998. The company also acquired properties in the Texas Coastal Plain, a region that accounted for 45 percent of Coastal's net gas production in 1998. By February 1999 Coastal had seven oil rigs in operation. In the Gulf of Mexico region, Coastal built five drilling and production platforms in 1998. Coastal also sought international opportunities for its exploration and production operations in the late 1990s. The company announced plans to start exploration in Australia, and in October 1998 Coastal signed a deal with Petrobras, Brazil's national oil company.
Although Coastal concentrated on boosting its natural gas operations, the company continued to implement its growth strategy in other divisions. In Coastal's electric power business, the company increased its interest in a cogeneration plant in Midland, Michigan, from 10.9 to 20.4 percent in 1998. In 1999 Coastal announced plans to build a power plant in Colorado and indicated that it had reached an agreement with the Public Service Company of Colorado regarding the purchase of power. Coastal also participated in numerous international projects. In early 1999 Coastal purchased a 24.5 percent stake in a hydroelectric plant in Panama and also began operations at its Nicaragua plant. The company acquired a 66.7 percent interest in a power plant in Bangladesh and continued work on two projects in Pakistan, which were scheduled to be operational in 1999. Coastal hoped to have its Guatemala coal-fired power plant, which began construction in 1997, operational by early 2000. In September 1999 Coastal announced that, with GENER S.A., a South American electricity company, it had purchased 50 percent of the Itabo Generation Company from the Dominican Republic. Itabo owned six thermal plants near the country's capital.
Coastal's refinery facilities expanded operations in the late 1990s as well. In July 1998 the company signed a five-year deal with PMI Comercio Internacional, S.A. de C.V., a marketing subsidiary of Mexico's national oil company, Petroleos Mexicanos, in which PMI agreed to supply crude for Coastal's refinery in Aruba. Coastal began expanding the Aruba refinery in September. In 1997 Coastal entered into discussions with Venezuela's national oil company, Petróleos de Venezuela S.A. (PDVSA), regarding a venture involving Coastal's Corpus Christi refinery facilities. Coastal's refinery in Eagle Point, New Jersey, was busy in 1998 as well. In June Coastal finalized an agreement concerning the supply of crude with Norway's state oil company, Statoil Group.
In other 1998 developments, Coastal sold or closed nearly 100 retail stores, including 64 Coastal Mart stores in the Midwest, to adhere to the company's decision to dispense with nonessential businesses. The stores continued to operate under the Coastal brand name. Coastal joined Chevron Corp. and Mobil Oil Corp. in a $200 million deal to purchase crude oil from Iraq. The agreement was part of the United Nation's oil-for-food deal, in which the proceeds of the sales would be used to purchase food and medicine for Iraqi citizens, who had suffered significantly from economic sanctions in place against Saddam Hussein since 1991. Coastal also expanded its chemical operations with a newly established ammonia plant in Oyster Creek, Texas. In its coal division Coastal progressed with plans to transform the business from a processing and marketing company to one that mined, processed, and marketed its own coal.
Although Coastal's operating revenues dropped considerably between 1996 and 1998, from $12.17 billion to $7.37 billion, the company remained confident that its business strategies would propel Coastal to success. As demand for natural gas continued to rise, Coastal's emphasis on building its natural gas business appeared to be a prudent decision. Coastal increased production of natural gas by more than 16 percent during 1998 and intended to continue expanding exploration and production operations as the company approached the year 2000. Though Coastal planned to seek international projects and joint ventures abroad, the company remained committed to pursuing opportunities in the United States.
Principal Subsidiaries: ANR Pipeline Company; ANR Alliance Pipeline Company U.S., Inc.; ANR Independence Pipeline Company; ANR Storage Company; Colorado Interstate Gas Company; Wyoming Interstate Company, Ltd.; Coastal Field Services Company; Coastal Gas International Company; Coastal Gas Marketing Company; Coastal Gas Services Company; Coastal Aux Sable Products Company; Coastal Gas Australia Pty Ltd.; Engage Energy US, L.P. (50%); Engage Energy Canada, L.P. (50%); Blue Lake Gas Storage Company (75%); Empire State Pipeline (50%); Great Lakes Gas Transmission Limited Partnership (50%); Coastal Aruba Refining Company N.V.; Coastal Refining & Marketing, Inc.; Coastal Eagle Point Oil Company; Coastal Mobile Refining Company; Coastal Refining & Marketing, Inc.; Coastal States Trading, Inc.; Coastal Canada Petroleum, Inc.; Coastal Oil & Gas Corporation; ANR Production Company; Coastal Oil & Gas USA, L.P.; CIG Exploration, Inc.; Coastal Oil & Gas Australia Pty Ltd.; Coastal Power Company; Coastal Technology, Inc.; Coastal Coal Company, LLC.
Principal Competitors: Duke Energy Corporation; The Williams Companies, Inc.; Phillips Petroleum; BP Amoco Corp.; Chevron Corp.; Exxon Corp.; Shell Oil Co.; Mobil Oil Corp.; Texaco Inc.
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