Editor's notebook

Pipeline & Gas Journal, Jan, 2006 by Jeff Share

"Deal track record is solid, but strategy articulation needs work. SUG remains our favorite value name, but can be a 'tough love.'

That's a quote from leading analyst Sam Brothwell who heads Wachovia's Securities Power and Gas Team in his review of Southern Union's latest billion-dollar acquisition. After listening to Southern Union officials, especially Chairman/CEO George L. Lindemann, try to describe the purchase of Sid Richardson Energy Services for $1.6 billion, I was just as baffled as Brothwell and everyone else on the conference call. What is Southern Union trying to do? If someone knows, will they give me a call?

During the natural gas industry's fire sale of the last three years, there has been no company more active than Southern Union, with the possible exception of Warren Buffett's MidAmerican Energy. From its headquarters in Wilkes-Barre, PA, Southern Union has grown into a natural gas behemeth. The Web site says they have nearly 1 million natural gas end-use customers in Missouri, Pennsylvania, Rhode Island and Massachusetts.

They own approximately 18,000 miles of interstate pipelines including Panhandle Eastern, Trunkline (both of which they bought from CMS Energy along with Trunkline LNG in Lake Charles, LA), and the CrossCountry Energy pipelines which include the former Enron assets of Transwestern Pipeline and Florida Gas Transmission (co-owned with El Paso Corp.) GE Commercial Finance Energy Financial Services partnered with them in that $2.45 billion deal.

Last month Southern Union took another step, buying the Bass family's interests in Sid Richardson's privately held company. This adds 4,600 miles of gathering and processing pipelines from the Permian Basin to Southern Union. If natural gas prices stay high, the move should pay off handsomely as it will provide a steady throughput into their well-located transmission systems.

That's all I can tell you about Southern Union's plans because that's all I've seen on their Web page and the analysts have just as many questions.

There seems to be a question of leadership here. Three presidents within a year does not thrill Wall Street. Right after Stan Horton helped merge CrossCountry into Southern Union, he left for Cheniere Energy. On Nov. 9. Tom Karam, president and COO, quit. He is largely credited as the dealmaker behind the energy M&A activity. The company has also seen several other top executives leave in recent months. But maybe this is ultimately good for the company, which is now global in nature rather than regional, and needs stronger leaders.

So who's running the show? Lindemann named himself president before Karam had even walked out of the revolving door with his $5.8 million severance package. Why didn't Lindemann say they were looking around for a new president, COO or even a CEO rather than taking another title? Maybe the Palm Beach billionaire wants to cash out while the going is good and not have to buy any more executives? That $5.8 million could have bought a nice new yacht.

Lindemann is apparently a brilliant entrepreneur/investor (though he got hammered in the dot.com collapse) but he sounded totally clueless when he tried to explain Southern Union's plans for its burgeoning natural gas empire. He made his fortune as a patent holder of soft contact lenses and also built successful cable television and cell phone companies. He has an uncanny sense of when to get into and out of business ventures. Today it is natural gas pipelines. Will he dump his much less profitable LDCs to help pay off Southern Union's debt and boost the value of what many say is its under-appreciated stock?

Lindemann hasn't run a company in 17 years I'm told, and the rust shows. Moving into the midstream sector involves a new risk for Southern Union because they will be issuing equity and taking on debt. Moody's already has them BAA3--the lowest investment grade available and S&P gave them a negative rating, as expected. One reason the analysts are skittish is that Richardson has been notoriously secretive. There is uncertainty about those assets.

At a time when business transparency is mandatory and energy is so critical to our nation's prosperity, a company needs to be willing to clearly articulate its strategy. Southern Union's stock has doubled over the past two years, but this time the company is venturing into an area where the high volatility of natural gas can make or break it. Is Southern Union ready to evolve into a master limited partnership like most of its brethren in the midstream sector and benefit from substantial tax breaks? It's already starting to resemble Kinder Morgan. But it's also starting to sound like the old El Paso.

My guess is that anyone who was able to survive the downturn is going to make out very well. As Sam Brothwell notes, "Good Story, Bad Story Teller."