Southern Union President Thomas F. Karam believes he got a steal with the purchase of Panhandle Energy from CMS Energy. In an interview with NGI last week, Karam said the new pipelines, storage fields and the nation’s biggest liquefied natural gas (LNG) import terminal will provide Southern Union with a 35-50% increase in earnings this year and a substantial increase in cash flow.

“These pipeline assets really don’t come on the market all that often and are by any stretch the premier assets in the sector,” Karam said. “We acquired them at a price that is immediately accretive to us. We are financing it in a manner that will within the next 12-18 months strengthen our balance sheet, dramatically improve our cash flow, increase in the first year our earnings by 35-50%, and doing it all while Southern Union will be almost entirely a regulated natural gas transporter. That to me is strategically simple. And in our environment right now, that is a pretty good story.”

In November 1998, CMS pledged $2.2 billion for the Panhandle properties, which Duke had bought as part of PanEnergy less than two years earlier for $7.7 billion. The CMS price included a cash payment of $1.9 billion and existing Panhandle debt of $300 million.

Southern Union ended up paying $584.3 million in cash plus three million in common stock (currently worth about $49 million). It also assumed $1.159 billion of debt. For that much smaller price, it got Panhandle Eastern Pipe Line, Trunkline Gas pipeline, Sea Robin Pipeline, Trunkline LNG and Southwest Gas Storage.

Opportunities like that, Karam said, don’t come around very often, and aren’t likely to pop up again anytime soon, but Southern Union plans to keep a close eye on the market.

“It seems to me that the wave of distressed sales have subsided a little bit and many companies have some breathing room,” he said. “I don’t know what the next couple years will bring. The stronger we are, the better we will be able to take advantage of opportunities if they do present themselves.”

CMS basically was forced into selling Panhandle after only four years of ownership because it was hard up for cash due to the market circumstances and industry turmoil created by Enron’s collapse and the subsequent demise of the energy trading business. CMS Energy sold its interests in the Guardian and Centennial pipelines and its Houston-based wholesale electric and natural gas trading businesses earlier this year. The company has sold or announced the sale of more than $3.8 billion in assets, including assumed debt, over the past 18 months.

Southern Union financed the Panhandle acquisition with $420 million in cash from the sale in January of its Texas operations, $125 million of the net proceeds from concurrent securities offerings, and with working capital.

What it got were two major pipelines, which have recovered substantially from their mid-1990s slump, and a major LNG import terminal in Lake Charles, LA, with a 20-year supply contract.

The Panhandle and Trunkline pipelines were facing declining throughput and difficult recontracting negotiations in the mid-1990s because of deregulation. But now their capacity is in high demand, Karam said.

“We’re getting the benefit of a lot of good things happening at once. The business profile of Trunkline is strengthening. The LDCs now have to shore up their capacity portfolios and lengthen their contracts because the deregulated marketplace that regulators helped to develop in the mid-90s never quite happened.

“Now you have those same state regulators going back to the LDCs saying, ‘Hey guys, you had better make sure you have enough capacity and your contracts are strong.’ Actually the business of Trunkline is strengthening in both length of contract and pricing of the capacity.”

The other thing benefiting pipeline throughput this year, Karam noted, is the need to refill storage, which was at a record low after last winter. LDCs currently are bringing gas up from the Gulf and Midcontinent as fast as possible and packing it in the ground at a record rate. Last week, the Energy Information Administration reported the largest weekly storage withdrawal in the last 10 years, 125 Bcf.

“That adds to the good confluence of issues that will allow us to take advantage of a firming of capacity in the summer months and stronger shoulder months into next winter,” said Karam.

As if those favorable circumstances weren’t enough, Southern Union now also finds itself holding the nation’s largest LNG terminal at a time when Federal Reserve Chairman Alan Greenspan is touting LNG as the potential supply savior of the gas industry (see related story).

Karam said Southern Union saw the tremendous value of the LNG terminal, but the main attraction was its stable revenue stream through a 20-year capacity agreement with British Gas. “The LNG facility is a great facility and they have contracted for all 1.2 Bcf,” he noted.

If there is one potential negative, it may be BG’s intention to bypass Trunkline’s pipeline system by building its own pipeline out of the LNG terminal to multiple other pipelines in the Gulf Coast region. BG currently is holding an open season to test market interest in the proposed 1 Bcf/d pipeline (see NGI, May 26).

“I have not yet had an opportunity to sit down and talk” with BG on its plan to build the pipeline, said Karam. “I understand some of their issues, but certainly we would be of the opinion that we would like to talk to them to see if we could resolve their issues. The relationship Panhandle has with BG is a good one and it’s getting better every day.”

Wilkes-Barre, PA-based Southern Union now owns and operates more than 10,000 miles of interstate pipelines that transport natural gas from the Gulf of Mexico, South Texas and the Panhandle regions of Texas and Oklahoma to major U.S. markets in the Midwest and Great Lakes region. Through its local distribution companies, Southern Union also serves 1 million natural gas end users in Missouri, Pennsylvania, Massachusetts and Rhode Island.

Karam said the company has its eye on further growth opportunities within its business development plan and capital budget and possibly through additional supply transactions. “We will certainly be a committed player in the pipeline business; we will reinvest in the business, and we will seek to take advantage of ways to grow both organically and by extension. First and foremost we have to make sure that we successfully integrate and complete this acquisition.”

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