Sempra to Buy Natural Gas Pipeline Operator
Sempra Energy will announce today that it has agreed to buy the nation’s second-largest natural gas pipeline operator for nearly $2 billion in stock and cash, a deal that would vault little-known Sempra of San Diego into the top ranks of energy services companies.
The boards of Sempra and KN Energy Inc. of Lakewood, Colo., voted late Friday to approve the deal, which the two companies valued at a total of $6 billion, including the assumption of debt.
Sempra was created only eight months ago through the merger of Los Angeles-based Pacific Enterprises, parent of Southern California Gas Co., and San Diego-based Enova Corp., parent of San Diego Gas & Electric Co. Although Sempra, through its two separately run utilities, serves more customers than any other utility company and employs 12,000 people, it operates in relative anonymity and has been seeking to boost its standing lately through several high-profile deals.
KN Energy was on a buying spree of its own during the last few years but was tapped out in 1998 by high debt and tumbling natural gas prices. The purchase would double the size of Sempra, take it deeper into unregulated businesses and extend the geographic reach of the largely California company into the nation’s heartland. KN Energy operates in 16 states in the Midwest.
The transaction also illustrates the changing nature of the U.S. energy industry, as creeping deregulation of previously monopolistic businesses pushes electricity and natural gas specialists together to form utility powerhouses that could serve a variety of customer needs, including telecommunications.
Sempra was attracted to KN Energy’s complementary assets and objectives, said Sempra Chairman and Chief Executive Richard D. Farman, noting that the deal marries KN Energy’s extensive natural gas pipeline and storage system with Sempra’s power generation and distribution projects.
“We think together we can aggressively pursue the considerable opportunities in the energy services marketplace much better than either company could on an individual basis,” Farman said in an interview.
KN Energy Chairman and Chief Executive Larry Hall said the merger agreement grew out of talks about a joint venture between the companies to build a series of gas-fired electricity plants along a KN Energy pipeline in the Midwest.
“The more we talked, the more it became clear that the strategic vision of our companies were very similar,” said Hall, who would join the Sempra board after the merger and become an advisor to the company.
KN Energy has made nearly 30 acquisitions during the last eight years, including the $3.4-billion purchase of the Midcon Corp. natural gas pipeline business from Occidental Petroleum early last year. Like Sempra, the company has been exploring ways to sell its customers new products such as long-distance phone service and Internet access.
But KN Energy’s aggressive growth combined with falling natural gas prices hurt earnings and its stock price, leaving the company vulnerable to takeover.
Through the proposed merger, Sempra intends to cut $30 million to $50 million in annual costs by next year. The savings would come through greater efficiency in business operations and purchasing and by eliminating an estimated 200 to 300 of the 15,000 jobs at the combined company, Farman said.
Most of those jobs would be headquarters and staff positions. Sempra hopes to reduce the need for layoffs with hiring cutbacks, attrition and other measures, Farman said.
“This combination is about growth, and growth that will produce new jobs,” Farman said.
Under the agreement, Sempra would pay either $25 in cash or 1.115 shares of Sempra stock for each of the nearly 70 million shares of KN Energy. KN Energy shareholders would be able to choose cash, stock or a combination, so that ultimately 70% of the KN Energy shares would be converted into Sempra stock and 30% into cash.
The price represents a 24% premium over the average closing price of KN Energy’s stock last week on the New York Stock Exchange. But Sempra would be paying considerably less than it would have before the collapse in natural gas prices sent KN Energy’s stock plummeting late last year.
The merger would create a company with assets, based on 1998 results, of more than $20 billion and revenue of about $9.9 billion. The company, which would continue to be called Sempra Energy and would retain its headquarters in San Diego, would have a market value of $7.1 billion and debt of $7.2 billion.
