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Sempra Offers $510M for EnergySouth to Expand Gulf Storage

San Diego-based Sempra Energy last week announced an agreement last Monday to acquire Mobile, AL-based EnergySouth for $510 million in cash, greatly expanding the western energy holding company's storage infrastructure in the Gulf of Mexico. Under the terms of the deal EnergySouth shareholders are to receive $61.50/share.

In addition to acquiring majority ownership of two large, multi-cycle underground natural gas storage facilities, Sempra would acquire Mobile Gas Service Corp., an Alabama gas distribution utility with about 93,000 customers in the southwest part of the state. When the deal closes, the holding company's Sempra Pipelines & Storage unit, the operator of Liberty Gas Storage in Louisiana, will operate the EnergySouth assets.

In response to the proposed deal, Standard & Poor's Ratings Services (S&P) revised to "negative" the ratings outlook on Sempra Energy, citing the deal's provision that Sempra assume $283 million of EnergySouth debt. S&P affirmed the company's "BBB+" corporate credit rating and its "A" rating on Sempra's California utility subsidiaries' which recently won a precedent-setting general rate case decision locking in phased power and gas retail increases during each of the next four years.

Sempra said the transaction is expected to close by the end of the year, and the respective boards of the two companies have approved the merger. The EnergySouth board recommended that its stockholders approve the transaction in a vote still to be taken. Regulatory approvals will include the federal Department of Justice and the Alabama Public Utilities Commission, a Sempra spokesperson said.

Sempra CEO Donald Felsinger said the acquisition supports his company's natural gas strategy by expanding its Gulf Coast operations in what he called "key markets" where gas demand is outpacing national averages for growth. "This merger is an important step in moving our company forward as it creates value for shareholders while developing energy infrastructure vital to the nation's natural gas delivery system," Felsinger said.

In contrast, S&P stressed the potential downside of the deal for Sempra's financial position, saying the added debt for the acquisition "will pressure the company's consolidated financial profile." As a result, S&P predicted that key credit measures will decline "markedly" through next year. "EnergySouth has a notably weaker business profile than Sempra's, and its growth strategy is almost entirely related to gas storage expansion."

Self-described as "central" to the deal are the two large gas storage operations that are still being developed. When fully developed, they collectively will have a capacity of 57 Bcf for serving what Sempra said are the fastest-growing natural gas markets.

In the jointly announced deal, Energy South CEO Dean Liollio described his company as going through an "unprecedented period of growth," and that the proposed merger is "an important step in moving forward as it creates value for shareholders while developing energy infrastructure vital to the nation's natural gas delivery system."

From Sempra's standpoint as the acquiring company, Felsinger said the transaction is expected to be "slightly accretive" to 2009 earnings and produce a 30 cents/share contribution to Sempra's profits by 2012. Sempra intends to fund the purchase from operating cash flow and debt, and the company will continue its previously announced $1.5 billion share-repurchase programs.

George Liparidis, CEO for Sempra Pipelines & Storage, touted the advantages of EnergySouth's storage operations for being high-cycle and strategically located. Liparidis compared them to Sempra's Liberty operation in Louisiana, noting the EnergySouth "salt-dome storage caverns allow maximum flexibility to inject, withdraw and reinject gas several times a year, providing customers ample opportunity to hedge against market volatility."

EnergySouth has two principal operating units -- EnergySouth Midstream Inc. and Mobile Gas Service. The former is the general partner and 91% owner of Bay Gas Storage Co., a facility located 40 miles north of Mobile and operated as the easternmost storage facility in the Gulf region serving the growing Florida market. The second facility is Mississippi Hub LLC in Simpson County, MS, in which EnergySouth holds a 60% interest.

Plans call for the Bay Gas Storage facility to expand out to 27 Bcf of total capacity; it currently has 11.4 Bcf of working capacity that is fully contracted, and another 5 Bcf is 92% contracted and under construction with a scheduled start date in the first quarter of 2010. Mississippi Hub eventually will grow to 30 Bcf capacity, and its first 6 Bcf phase is under construction with 4 Bcf of that capacity already under contract, Sempra said.

EnergySouth Midstream also has an intrastate gas transmission pipeline, and the unit, which is based in Houston, offers storage, pipeline transportation and midstream services.

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