Major energy distribution firms plan mergers

Two major planned mergers have been announced that point to accelerating competition and consolidation in the natural gas, power, and energy services sectors.

Sempra Energy and KN Energy Inc. have signed a definitive merger agreement that would form a major, integrated energy company with combined assets of $20 billion. Under terms of the deal, valued at $6 billion, KN will be merged into Sempra.

Southern Union Co. (SU) has confirmed it submitted a merger proposal to Southwest Gas Corp.'s (SGC) board. SU said last week it was performing due diligence regarding its plans to acquire the outstanding stock of SGC for $32/ share.

This merger would create the U.S.'s largest gas-only distribution company, says SU. SGC is already targeted for acquisition by Oklahoma-based integrated energy firm Oneok Inc. In December, Oneok offered $28.50/share for SGC in a merger deal since approved by both firms' boards.

Sempra-KN deal

San Diego-based Sempra is an energy services holding company. Its subsidiaries include Southern California Gas Co. and San Diego Gas & Electric.

Sempra, formed in June 1998 by the merger of Enova Corp. and Pacific Enterprises, says it has the largest customer base in its industry, at 21 million. KN, based in Lakewood, Colo., is an integrated natural gas company. It operates 25,000 miles of natural gas transmission and distribution pipeline and is planning to build several gas-fired power generation stations along its pipeline network in the next 5 years. KN says it is the U.S.'s second largest gas pipeline/storage operator and sixth largest integrated gas firm.

Both boards unanimously approved the merger, which calls for Sempra to acquire all KN shares at a fixed exchange ratio of 1.115 Sempra shares per KN common, or for $25/share cash. KN shareholders have the option to choose cash, stock, or a combination of the two, subject to proration, such that 70% of the outstanding KN shares will be converted to Sempra stock and 30% will be converted to cash.

Sempra Chairman and CEO Richard D. Farman said the merger "will allow the combined company to aggressively pursue the considerable opportunities of the energy services marketplace and the convergence of natural gas and electricityellipseAs the energy markets continue opening to competition, customer connectivity and economies of scale will be the critical factors in determining which companies will be the ultimate winners."

Sempra Vice-Chairman, COO, and Pres. Stephen L. Baum called the deal "a breakout strategy that overnight strengthens our business profile while dramatically increasing the percentage of revenues and profits derived from non-state-regulated businesses."

California utilities now are responsible for 90% of Sempra's cash flow, leaving only 10% to unregulated areas. Following the merger, however, unregulated businesses will account for 29% of operating cash flow. The firms expect to save $30-50 million/year from elimination of duplication and from efficiency improvements in operations, business processes, and purchasing. The firms said they would attempt to minimize layoffs through reduced hiring, attrition, and other means.

Gas distribution merger

Austin-based SU serves 1 million customers in Texas, Missouri, Florida, and Mexico. Las Vegas's SGC serves 1.2 million customers in Nevada, Arizona, and California. SU's proposed acquisition of SGC is valued at about $1 billion. SU Chairman and CEO George L. Lindemann says his offer constitutes "a significant premium" over Oneok's.

Oneok Chairman and CEO Larry Brummett said, "Obviously, we were surprised by the SU offer. We based our offer on due diligence, consultation with investment advisers, and sound business judgement. We believe our offer is fair, competitive, and still valid." A merger with Oneok would create an even larger company than one with SU, in terms of gas distribution service areas-2.6 million customers vs. 2.2 million, respectively.