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Buying EnergySouth Will Cost Sempra $735 Million

July 29, 2008

By Dean Calbreath, The San Diego Union-Tribune

Jul. 29–San Diego’s Sempra Energy strengthened its growing grip on the natural gas market yesterday with an agreement to spend nearly $735 million to acquire a gas storage and distribution company in Alabama.

Sempra said it will spend $510 million in cash buying the stock of EnergySouth Inc. and $224 million paying off EnergySouth’s debts.

Donald Felsinger, Sempra’s chairman and chief executive, said the deal fits into the company’s strategy of expanding into areas such as the Gulf Coast, “where gas demand outpaces the national average.”

EnergySouth is the majority owner of two major underground salt-dome storage facilities for natural gas near the Gulf Coast: Bay Storage Gas Co., which has an 11 billion-cubic-foot storage facility about 40 miles north of Mobile, Ala., and Mississippi Hub, which is developing a 30 billion-cubic-foot facility in Simpson County, Miss.

“We’ve wanted to do a lot more with natural gas storage, particularly in the Gulf Coast,” said George Lipardis, president and chief executive of Sempra Pipelines & Storage, the Sempra division that is spearheading the Alabama and Mississippi acquisition.

Lipardis said demand for natural gas is especially strong in Florida, which has stopped building coal-fired power plants. He said Bay Storage — which has plans to develop an additional 16 billion cubic feet of storage — is the closest major natural gas facility to the Florida market.

Sempra will pay $61.50 per share for EnergySouth, a 23 percent premium to EnergySouth’s closing price of $50.16 on Friday. The Sempra bid helped push the stock price to $59.60 yesterday.

Sempra shares slid 25 cents, or 0.46 percent, to close at $54.23.

Wall Street analysts were split on how the acquisition would affect Sempra.

Moody’s analyst A.J. Sabatelle said EnergySouth’s storage facilities offered “strategic complementary benefits” to Sempra’s growing natural gas operations.

On the other hand, Standard & Poor’s analyst William Ferrara said EnergySouth “has a notably weaker business profile than Sempra’s. Its growth strategy is almost entirely related to gas storage expansion, with its concomitant execution risk and less predictable cash flow.”

Dean Liollio, president and chief executive of EnergySouth, predicted his company would generate a steady cash flow for Sempra.

“We had long-term, seven-year contracts in our storage caverns,” he said. “Every cavern we have is very strongly subscribed. And the cavern that we’re developing now (in Mississippi) is 92 percent sold out, with contracts that cover the next five years.”

In addition to its storage facilities, EnergySouth also distributes natural gas to 93,000 customers in southwestern Alabama through its subsidiary, Mobile Gas Service Corp.

Sempra has a broad array of natural-gas-related businesses.

Its subsidiary Southern California Gas is the nation’s largest natural gas utility, with more than 20 million consumers. In Mexico, Sempra operates a liquefied natural gas terminal in Ensenada and natural gas utilities in Chihuahua and Mexicali. It also manages natural gas and electricity distribution in Argentina, Chile and Peru.

Last month, Sempra signed a deal to buy a 25 percent stake in the Sunstone Pipeline, bringing natural gas from the Rockies to Oregon. In January, Sempra and Kinder-Morgan began operating the Rockies Express, a pipeline transporting natural gas from Colorado to Missouri. By next summer, the pipeline is scheduled to reach Ohio.

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