ENSI Energysouth (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

Filed by the Registrant þ
Filed by a Party other than the Registrant o

		Check the appropriate box:
þ		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a- 6(e)(2) )
o		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

ENERGYSOUTH, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

		Payment of Filing Fee (Check the appropriate box):
o		No fee required.
þ		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

(1)

Title of each class of securities to which transaction applies:

          EnergySouth, Inc. common stock, par value $0.01 per share

(2)

Aggregate number of securities to which transaction applies:

          (a) 8,115,733 shares of common stock outstanding as of August 8, 2008 proposed to be acquired in the merger for the per share merger consideration of $61.50, (b) 361,262 shares of common stock issuable pursuant to outstanding options as of August 8, 2008 with exercise prices below the per share merger consideration of $61.50 and (c) 27,060 shares of common stock representing performance share awards, performance-based restricted stock unit awards and phantom stock units entitled to receive the per share merger consideration of $61.50.

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

          Calculated solely for purposes of determining the filing fee. The transaction value was determined by adding (a) $499,117,580, the product of 8,115,733 shares of common stock that are proposed to be acquired in the merger multiplied by the merger consideration of $61.50 per share, plus (b) $9,802,232, the amount expected to be paid to holders of outstanding stock options to purchase shares of common stock with an exercise price of less than the merger consideration of $61.50 per share, plus (c) $1,664,190, the amount expected to be paid to holders of performance share awards, performance-based restricted stock unit awards and phantom stock units entitled to receive the per share merger consideration of $61.50 for each such right. In accordance with Section 14(g) of the Securities and Exchange Act of 1934, as amended, the filing fee is equal to $39.30 per million dollars of transaction value.

(4)

Proposed maximum aggregate value of transaction:

          $510,584,602

(5)

Total fee paid:

          $20,066

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

(1)

Amount Previously Paid:

(2)

Form, Schedule or Registration Statement No.:

(3)

Filing Party:

(4)

Date Filed:

 

PRELIMINARY PROXY STATEMENT — SUBJECT TO COMPLETION, DATED AUGUST 8, 2008

 

 

2828 Dauphin Street

Mobile, Alabama 36606

 

PROPOSED MERGER — YOUR VOTE IS VERY IMPORTANT

 

To the Stockholders of EnergySouth, Inc.:

 

You are cordially invited to attend a special meeting of the stockholders of EnergySouth, Inc. to be held on [ • ], 2008, at 10:00 a.m., local time, at the Auditorium at the principal office of the company, 2828 Dauphin Street, Mobile, Alabama 36606.

 

At the special meeting, you will be asked to consider and vote upon an Agreement and Plan of Merger, dated July 25, 2008, which we refer to as the merger agreement, by and among EnergySouth, Sempra Energy and EMS Holding Corp., a wholly-owned indirect subsidiary of Sempra Energy. Pursuant to the merger agreement, EMS Holding Corp. will be merged with and into EnergySouth, with EnergySouth surviving as a wholly-owned, indirect subsidiary of Sempra Energy.

 

If the merger is completed, you will be entitled to receive $61.50 in cash, without interest and less any applicable withholding tax, for each share of EnergySouth common stock that you own, unless you have sought and properly perfected your appraisal rights under the Delaware General Corporation Law (under which we are incorporated). The $61.50 in cash for each share of EnergySouth common stock you own represents a 22.6% premium over the last reported sale price of EnergySouth’s common stock before the July 28, 2008 public announcement of the merger and a 21.8% premium over the average reported last sale price of EnergySouth’s common stock over the 90 days prior to July 23, 2008. After the merger, you will no longer have an equity interest in EnergySouth.

 

Your vote is very important, regardless of the number of shares you own. We cannot complete the merger unless the holders of a majority of all outstanding shares of EnergySouth common stock entitled to vote on the matter vote to adopt the merger agreement and approve the merger. Therefore, if you do not return your proxy card, submit your proxy via the Internet or telephone or vote in person at the special meeting, it will have the same effect as if you had voted “AGAINST” the adoption of the merger agreement and the approval of the merger. Our board of directors has unanimously approved the merger agreement and determined that the merger agreement and the merger are advisable and in the best interests of EnergySouth and our stockholders. Our board of directors unanimously recommends that you vote “FOR” the adoption of the merger agreement and approval of the merger. In arriving at its recommendation, the board of directors carefully considered a number of factors described in the accompanying proxy statement.

 

The accompanying proxy statement provides you with detailed information regarding the special meeting and the proposed merger and includes the merger agreement as Annex A. We encourage you to read the proxy statement and merger agreement carefully.

 

Sincerely,

 

C.S. “Dean” Liollio
President and Chief Executive Officer

 

Mobile, Alabama

[ • ], 2008

 

The accompanying proxy statement is dated [ • ] , 2008 and is first being mailed to stockholders of EnergySouth on or about [ • ] , 2008.

 

2828 Dauphin Street

Mobile, Alabama 36606

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD [ • ], 2008

 

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of EnergySouth, Inc., a Delaware corporation, will be held at the Auditorium at the principal office of the company, 2828 Dauphin Street, Mobile, Alabama, at 10:00 a.m., local time, for the following purposes:

 

 

Stockholders of record at the close of business on [ • ], 2008 are entitled to receive notice of and to vote at the special meeting and any adjournments. We hope that you will be able to attend the meeting. To ensure your representation at the special meeting, we urge you to complete, date and sign the enclosed proxy and return it in the enclosed postage-prepaid envelope or submit the proxy via the Internet or telephone so that it will be received no later than [ • ], 2008, whether or not you plan to attend the special meeting in person. By submitting your proxy promptly, you can help us avoid the expense of further proxy solicitations. If you attend the special meeting in person, you may vote in person even if you have already properly returned a proxy or submitted a proxy via the Internet or telephone.

 

Your prompt submission of your proxy will be greatly appreciated.

 

By Order of the Board of Directors,

 

G. Edgar Downing
Secretary

 

Mobile, Alabama

[ • ], 2008

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE PROPOSED MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE PROPOSED MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

 

 

TABLE OF CONTENTS

 

ENERGYSOUTH, INC.

 

PROXY STATEMENT FOR

 

SPECIAL MEETING OF STOCKHOLDERS

 

 

 

 

 

The following questions and answers are intended to briefly address some questions regarding the merger, the special meeting and other matters to be considered by EnergySouth’s stockholders at the special meeting. These questions and answers may not address all questions that may be important to you as a stockholder. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement.

 

Except as otherwise specifically noted in this proxy statement, “we,” “our,” “us” and similar words refer to EnergySouth, Inc. In addition we refer to EnergySouth, Inc. as “EnergySouth” or the “Company,” to Sempra Energy as “Sempra Energy” and to EMS Holding Corp. as “Merger Sub.”

 

 

 

 

 

This summary highlights selected information from this proxy statement and does not contain all of the information that is important to you. To understand the merger fully and for a more complete description of the legal terms of the merger, you should read carefully this entire proxy statement and the documents we refer to herein. See “Where You Can Find More Information.” The merger agreement is attached as Annex A to this proxy statement. We encourage you to read the merger agreement as it is the legal document that governs the merger.

 

Parties to the Merger (See page   )

 

EnergySouth, Inc.
2828 Dauphin Street
Mobile, Alabama 36606
(251) 450-4774

 

We are an energy services holding company. Our subsidiaries distribute natural gas and engage in a diversified range of related natural gas operations. Our Mobile Gas Service Corporation subsidiary, or “Mobile Gas,” has provided natural gas in Southwest Alabama since 1933 and currently serves approximately 93,000 customers in Southwest Alabama. Our EnergySouth Midstream, Inc., or “Midstream,” subsidiary owns and operates underground natural gas storage and related pipeline facilities and provides natural gas marketing, trading and risk management activities.

 

Sempra Energy
101 Ash Street
San Diego, California 92101
(619) 696-2034

 

Based in San Diego, Calif., Sempra Energy is a Fortune 500 energy services holding company with 2007 revenues of more than $11 billion. With 13,500 employees, Sempra Energy companies develop energy infrastructure, operate utilities and provide related products and services to more than 29 million customers around the world.

 

EMS Holding Corp.
c/o Sempra Energy
101 Ash Street
San Diego, California 92101
(619) 696-2034

 

EMS Holding Corp., which we refer to as Merger Sub, was formed on July 23, 2008 for the sole purpose of completing the merger with EnergySouth. Merger Sub is not engaged in any business except as contemplated by the merger agreement. Merger Sub is a wholly-owned indirect subsidiary of Sempra Energy.

 

The Special Meeting (See page   )

 

 

The special meeting is scheduled to take place on [ • ], 2008, at 10:00 a.m., local time, at the Auditorium at the principal office of the Company, 2828 Dauphin Street, Mobile, Alabama.

 

•  Matters to be Considered at the Special Meeting (See page   )

 

At the special meeting, you will be asked to vote on a proposal to adopt the merger agreement and approve the merger. Pursuant to the merger agreement:

 

 

You may also be asked to vote to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies in support of the proposal to adopt the merger agreement and approve the merger if there are not sufficient votes at the special meeting to do so.

 

 

You are entitled to vote at the special meeting if you owned shares of our common stock as of the close of business on [ • ], 2008, which is the record date for the special meeting. You will have one vote at the special meeting for each share of EnergySouth common stock you owned at the close of business on the record date. On the record date, there were [ • ]  shares of EnergySouth common stock issued, outstanding and entitled to vote at the special meeting.

 

 

Adoption of the merger agreement and approval of the merger requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote on the merger. Failures to vote, abstentions and broker non-votes (meaning proxies submitted by brokers or banks as holders of record on behalf of their customers that do not indicate how to vote on a non-routine proposal such as the vote on the merger) will have the effect of a vote “AGAINST” the adoption of the merger agreement and approval of the merger.

 

Adjournment of the special meeting, if necessary, to solicit additional proxies requires the affirmative vote of the holders of a majority of the shares of our common stock present in person or represented by proxy and entitled to vote at the special meeting. Abstentions will have the effect of a vote “AGAINST” the proposal to adjourn the special meeting for the solicitation of additional proxies, but a failure to vote will have no effect on the proposal to adjourn the special meeting.

 

 

After carefully reading and considering the information contained in this proxy statement, you should respond by completing, signing and dating your proxy card and returning it in the enclosed postage-prepaid envelope or by submitting your proxy via the Internet or telephone as soon as possible so that your shares may be represented at the special meeting.

 

If you hold your shares in “street name” (that is, through a broker, bank or other nominee), your broker or bank will not be able to vote your shares on the proposal to adopt the merger agreement and approve the merger without instructions from you. You should instruct your broker or bank to vote your shares by following the procedure provided by your broker or bank. Without instructions, your shares will not be voted for that proposal, which will have the same effect as if you voted “AGAINST” adoption of the merger agreement and approval of the merger. Your broker or bank will be able to vote your shares in its discretion on the proposal to adjourn the special meeting if necessary, even if you do not provide instructions to your broker or bank on how to vote.

 

If you vote by proxy, you may still revoke your proxy in one of three ways:

 

 

If you choose the first method or submit a new later-dated proxy card, we must receive your notice of revocation or your new proxy card prior to the commencement of the special meeting. If you submit a new later-

dated proxy via the Internet or telephone, we must receive your new proxy by     p.m., Eastern Time,           2008.

 

The Merger and the Merger Agreement (See page   , page    and Annex A)

 

 

The principal purpose of the merger is to permit our stockholders to realize a cash value for their shares of EnergySouth common stock at a 22.6% premium over the last reported sale of our common stock before the public announcement of the execution of the merger agreement on July 28, 2008 and a 21.8% premium over the average reported last sale price of our common stock over the 90 day period prior to July 23, 2008. Our board of directors believes that the merger offers our stockholders the greatest value for their shares in light of our long-term prospects and the available strategic alternatives.

 

 

If the merger is completed, each share of EnergySouth common stock owned by you at the effective time of the merger will be automatically cancelled and converted into the right to receive $61.50 in cash, without interest and less any applicable withholding tax; except that, alternatively, if you perfect your appraisal rights in accordance with Delaware law, your shares will be subject to appraisal by a court in accordance with Delaware law.

 

 

Each outstanding option to acquire EnergySouth common stock (whether vested or unvested) which is not exercised will be cancelled at the effective time of the merger in exchange for a cash payment, without interest, equal to the product of (1) the number of shares of EnergySouth common stock subject to such option multiplied by (2) the amount that $61.50 exceeds the option exercise price per share of common stock subject to such option, less any required withholding taxes.

 

 

Our board of directors has unanimously approved the merger agreement and declared the merger agreement and the merger advisable and in the best interests of EnergySouth stockholders. Our board of directors unanimously recommends that you vote “FOR” adoption of the merger agreement and approval of the merger and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

 

J.P. Morgan Securities Inc., which we refer to as JPMorgan, has rendered an opinion to the board of directors, that as of July 25, 2008 and based upon and subject to the various considerations set forth in the JPMorgan opinion letter, the consideration to be paid to the holders of EnergySouth common stock in the merger was fair, from a financial point of view, to such holders. The full text of JPMorgan’s written opinion, dated July 25, 2008, which sets forth, among other things, assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by JPMorgan in rendering its opinion, is attached as Annex B to this proxy statement and is incorporated into this proxy statement by reference. JPMorgan provided its opinion for the information and assistance of the board of directors in connection with its evaluation of the merger, and its opinion is not a recommendation as to how any stockholder should vote with respect to the merger or any other matter.

 

 

Payment by Sempra Energy of the cash merger price of $61.50 per share is not subject to any financing conditions or contingencies. Sempra Energy has represented to us that it has sufficient cash available, either through cash on hand or through committed availability under existing credit facilities, to pay the aggregate cash merger consideration.

 

Before completion of the merger, certain closing conditions must be satisfied or waived. These conditions are discussed in detail under “The Merger Agreement — Conditions to the Merger” and include, among others:

 

 

 

We have agreed that neither we, nor any of our subsidiaries nor any of our representatives will directly or indirectly solicit, initiate, knowingly encourage or knowingly facilitate a third party takeover proposal or participate in negotiations with respect to such a takeover proposal. However, in certain circumstances we are permitted to engage in negotiations with and furnish nonpublic information to a third party that makes a bona fide written takeover proposal so long as:

 

 

Our board of directors is generally not permitted to change adversely its recommendation in favor of the adoption of the merger agreement and approval of the merger or to adopt or recommend any competing takeover proposal unless:

 

 

 

Subject to certain exceptions, the merger agreement may be terminated and the merger abandoned at any time prior to the effective time of the merger in any of the following ways:

 

 

 

The merger agreement provides that, in general, all direct costs and expenses incurred by the parties in connection with the merger agreement and the merger will be borne by the party incurring such cost or expense. The merger agreement requires, however, that we pay Sempra Energy a termination fee of $25 million if:

 

 

 

 

The closing sale price of EnergySouth common stock on the Nasdaq Global Select Market on July 25, 2008, the last trading day prior the public announcement of the execution of the merger agreement, was $50.16 per share. The $61.50 per share in cash to be paid as merger consideration constituted a 22.6% premium to the closing price on July 25, 2008.

 

Completion of the merger is subject to various risks, including, but not limited to the following:

 

 

As a result of these risks, there can be no assurance that the merger will be completed.

 

This proxy statement, including the documents incorporated by reference in it, contains forward-looking statements, which you can identify by forward-looking words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “grow,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “strive,” “will” and similar expressions that convey uncertainty of future events or outcomes. Although we believe that the beliefs, expectations, goals, objectives, plans and prospects reflected in or suggested by our forward-looking statements are reasonable in view of the information currently available to us, those statements are not guarantees of performance. They involve uncertainties and risks, including but not limited to those set forth in the bullets above, and we cannot assure you that our beliefs, expectations, goals, objectives, plans and prospects will be achieved. Actual results may differ materially from those in our forward-looking statements.

 

Any forward-looking statement contained in this proxy statement or in the documents to which we refer speaks only as of the date it was made. We undertake no obligation to publicly update or revise any forward-looking statement that we may make in this proxy statement or elsewhere except as required by law.

 

If the merger is not completed for any reason, we expect that our board of directors and current management will continue to manage EnergySouth as an ongoing business. You should review the risk factors contained in our annual report on Form 10-K/A for the fiscal year ended September 30, 2007, incorporated by reference into this proxy statement, for a description of the risk factors associated with the continued operation of our business.

 

This proxy statement is furnished in connection with the solicitation of proxies by the EnergySouth board of directors for a special meeting of holders of our common stock to be held on [ • ] , 2008 at 10:00 a.m., local time, at the Auditorium at the principal office of the Company, 2828 Dauphin Street, Mobile, Alabama 36606, or at any adjournment of the special meeting.

 

The purpose of the special meeting is to consider and vote upon proposals to (1) adopt the Agreement and Plan of Merger, dated as of July 25, 2008, by and among Sempra Energy, EMS Holding Corp. and EnergySouth, and approve the merger contemplated therein, pursuant to which EnergySouth will become a wholly-owned indirect subsidiary of Sempra Energy and each share of EnergySouth common stock will be converted into the right to receive $61.50 in cash, without interest and less any applicable withholding tax, and (2) adjourn the special meeting, if necessary or appropriate, to solicit additional proxies in support of the proposal to adopt the merger agreement and approve the merger if there are not sufficient votes at the special meeting to do so.

 

Our board of directors has set the close of business on [ • ] , 2008 as the record date for determining stockholders of EnergySouth entitled to notice of, and to vote at, the special meeting. As of the record date, there were [ • ]  shares of common stock outstanding. Each outstanding share entitles its holder to one vote on all matters properly coming before the special meeting. Any stockholder entitled to vote may vote either in person or by properly executed proxy. A majority of the outstanding shares of common stock entitled to vote, present in person or represented by proxy, will constitute a quorum at the special meeting. Abstentions and broker non-votes will be counted for the purpose of establishing a quorum at the special meeting.

 

Adoption of the merger agreement and approval of the merger requires the affirmative vote of the holders of a majority of the outstanding shares of EnergySouth common stock entitled to vote at the special meeting. Adjournment of the special meeting, if necessary, to solicit additional proxies requires the affirmative vote of the holders of a majority of the shares of EnergySouth common stock present in person or represented by proxy at the special meeting, whether or not a quorum is present.

 

Failure to vote, abstentions and broker non-votes (meaning proxies submitted by brokers or banks as holders of record on behalf of their customers that do not indicate how to vote on a non-routine proposal such as the vote on the merger) will have the effect of a vote “AGAINST” the adoption of the merger agreement and approval of the merger. Abstentions also will have the effect of a vote “AGAINST” the proposal to adjourn the special meeting for the solicitation of additional proxies, but a failure to vote will have no effect on the proposal to adjourn the special meeting. Because the proposal to adjourn the special meeting is a routine proposal, there will be no broker non-votes with regard to it.

 

EnergySouth’s directors and executive officers beneficially owned [990,151] shares of EnergySouth common stock on [ • ] , 2008, the record date for the special meeting. These shares represent in total approximately [11.9]% of the shares of EnergySouth common stock outstanding and entitled to vote as of the record date for the special meeting. Although none of the members of the board of directors or the executive officers have executed voting agreements, based solely on its discussions with its board of directors and executive officers, EnergySouth currently expects that all of its directors and executive officers will vote their shares in favor of the adoption of the merger agreement and approval of the merger.

 

If your shares are registered in your name, you may cause your shares to be voted by returning a signed proxy card or may vote in person at the special meeting. Additionally, you may submit a proxy authorizing the voting of your shares over the Internet or telephonically. You must have the enclosed proxy card available and follow the instructions on the proxy card, in order to submit a proxy over the Internet or telephone. Based on your Internet and telephone proxies, the proxy holders will vote your shares according to your directions. If you plan to attend the special meeting and wish to vote in person, you will be given a ballot at the meeting. If your shares are registered in your name, you are encouraged to vote by proxy even if you plan to attend the special meeting in person.

 

Shares that are entitled to vote and are represented by a properly submitted proxy that is received at or prior to the special meeting, unless subsequently properly revoked, will be voted in accordance with the instructions indicated thereon. If a proxy is dated, signed and returned without indicating voting instructions for a matter coming before the special meeting, shares represented by the proxy will be voted “FOR” that matter. The board of directors is not currently aware of any business to be acted upon at the special meeting other than as described in this proxy statement.

 

If your shares are held in “street name” through a broker or bank, you may vote through your broker or bank by completing and returning the voting form provided by your broker or bank, or via the Internet or telephone through your broker or bank if such a service is provided. If your shares are held in “street name” through a broker or bank

and you wish to attend the special meeting and vote in person, you will need to obtain a proxy from your broker or bank. If you do not return your bank’s or broker’s voting form, do not vote via the Internet or telephone through your broker or bank, if possible, or do not attend the special meeting and vote in person with a proxy from your broker or bank, it will have the same effect as if you voted “AGAINST” adoption of the merger agreement and the approval of the merger.

 

If you have submitted a proxy, you may revoke it by:

 

 

EnergySouth, Inc.
P.O. Box 2248
Mobile, Alabama 36652
Attention: G. Edgar Downing, Jr., Secretary
(251) 450-4631, or

 

 

If you choose the first method, we must receive your new proxy card or your notice of revocation before the start of the special meeting. If you choose the second method, we must receive your new proxy by     p.m., Eastern Time, on           2008. With regard to the third method, attendance at the special meeting will not by itself constitute the revocation of a proxy; to revoke a proxy in person at the special meeting you must vote in person at the meeting.

 

If you have instructed a broker or bank to vote your shares, follow the directions received from your broker or bank to change your vote.

 

EnergySouth will bear the expenses in connection with the solicitation of proxies. Upon request, we will reimburse brokers and banks, or their nominees, for reasonable expenses incurred in forwarding copies of the proxy materials to the beneficial owners of shares of EnergySouth common stock that such persons hold of record. Solicitation of proxies will be made principally by mail. Proxies may also be solicited in person or by telephone, fax, or email by our officers and employees. Such persons will receive no additional compensation for these services but will be reimbursed for any transaction expenses incurred by them in connection with these services.

 

We have engaged Morrow & Co., Inc. as our proxy solicitor to assist in the dissemination of proxy materials and in obtaining proxies and to answer your questions. We will pay them $8,500 and reimburse them for their expenses.

THE MERGER (PROPOSAL NO. 1)

 

As part of their ongoing management and oversight of our business, the board of directors and senior management regularly review and discuss EnergySouth’s business, strategic direction, performance and long range plans with a view toward actions that will increase stockholder value. Over the last several years, EnergySouth has been transitioning from a pure-play natural gas utility, Mobile Gas, to a company focused primarily on the natural gas midstream business, with a particular emphasis on the development of salt dome caverns for the storage of natural gas through its wholly-owned Midstream subsidiary.

 

The strategic plan for EnergySouth developed by management and approved by the board in October 2006 called for the aggressive growth of the Midstream business. However, the board and management also recognized that the implementation of this strategic plan would significantly increase EnergySouth’s short-term and long-term

capital needs and subject us to a number of risks associated with the expansion of the Midstream business. These risks would include:

 

 

In the fall of 2007, we entered into an agreement to purchase 60% of Mississippi Hub LLC, a natural gas storage cavern facility under development. In anticipation of the closing of this acquisition, a special meeting of the board of directors was held on October 1, 2007. At this meeting, the board authorized us to enter into a new $195 million, 364-day revolving credit facility. The board acknowledged, however, that this was only a short-term solution and that permanent financing would have to be obtained. The board discussed a number of alternatives for permanent financing, including the issuance of equity by EnergySouth, the creation of a master limited partnership consisting primarily of our Midstream business or the sale of Mobile Gas.

 

At a regularly scheduled board meeting held on October 26, 2007, at the invitation of management, representatives from JPMorgan, one of the lenders under our credit facility, made a presentation to the board regarding long-term financing alternatives. The board, senior management and representatives from JPMorgan discussed a number of financing alternatives, including increased leverage, the issuance of common stock, the creation of a master limited partnership, the sale of Mobile Gas and entering into a financial relationship with a private equity investor.

 

On December 7, 2007 at a regularly scheduled board meeting, the board continued its discussion of long-term financing alternatives. At the recommendation of management, the board authorized us to retain Berenson & Company, a leading investment banking firm with a prominent energy practice, in connection with a general financial advisory engagement. We entered into an engagement letter with Berenson regarding that engagement later that day.

 

In January 2008, C.S. Liollio, our President and Chief Executive Officer, was contacted by representatives from a leading private equity firm who expressed an interest in exploring an acquisition of EnergySouth at a preliminary valuation of between $65 and $70 per share. This proposal was made prior to the private equity firm having conducted, and was subject to the completion of, substantial due diligence, as well as the negotiation of definitive documentation and obtaining suitable financing. Mr. Liollio immediately advised the members of the board of this proposal. The board subsequently authorized us to enter into a confidentiality agreement, which was executed on January 23, 2008, and an exclusive negotiation agreement, which was entered into on January 24, 2008, providing for a 30-day exclusivity period during which the private equity firm would perform due diligence on EnergySouth. On March 5, 2008, the private equity firm advised us that although it remained interested in EnergySouth, the continued deterioration of conditions in the financial markets made it unable to make a definitive proposal for a transaction with EnergySouth at that time.

 

We continued to evaluate long-term financing alternatives and as a part of that effort, on March 10, 2008, we entered into a new agreement with Berenson to serve as our financial advisor in connection with any proposed sale of all or a substantial portion of the assets of Mobile Gas. This agreement replaced the engagement letter entered into on December 7, 2007.

 

As part of our ongoing evaluation of financing alternatives, we continued to evaluate a potential issuance of debt or equity. On March 14, 2008, a special meeting of the board of directors was held, with senior management present. At this meeting, Charles P. Huffman, our Executive Vice President and Chief Financial Officer, discussed with the board both short-term and long-term financing needs. As part of this discussion, recent developments were reviewed including the results of a marketing “open season” at our Mississippi Hub facility, escalating capital costs and the upcoming need to construct additional pipelines to coincide with the completion of the first storage cavern at

Mississippi Hub. Mr. Huffman also discussed EnergySouth’s corporate structure and the nature of borrowings that had been done at the various subsidiaries, as well as the potential for further borrowings. Cash needs and sources for each subsidiary were reviewed and discussed as well as projected in-service dates for the Midstream business’ storage caverns at both Mississippi Hub and Bay Gas. At this meeting, the board approved the filing of a universal shelf registration statement with the SEC to enable us to access alternative sources of financing.

 

Also at this meeting the board discussed the possibility of merging EnergySouth with a buyer that would have greater financial resources with which to execute our development plan for Midstream. The board noted that such a transaction would potentially allow our stockholders to receive a premium for their shares of common stock, while at the same time avoiding the significant development risks associated with Midstream. To that end, the board authorized management to retain the services of Berenson and JPMorgan to conduct a structured bid solicitation process to determine the viability of a potential sale of EnergySouth or Mobile Gas. The board also established a special committee of the board, consisting initially of John C. Hope (chairman), Harris V. Morrissette and J.D. Woodward, as a committee of convenience to interact with our financial advisors and to review and analyze their recommendations and to report to the board on both developments and their recommendations.

 

During March and April 2008, senior management worked with representatives of Berenson and JPMorgan to prepare a confidential descriptive memorandum regarding EnergySouth and the structured bid solicitation process, as well as a financial model for EnergySouth and an electronic data room for potential bidders.

 

On April 7, 2008, we entered into engagement letters with Berenson and JPMorgan to serve as joint financial advisors to us in connection with a possible sale of EnergySouth or Mobile Gas.

 

During the fourth week of April 2008, representatives of Berenson and JPMorgan contacted potential strategic and financial buyers to inquire about their interest in submitting indications of interest.

 

On April 25 and 26, 2008, at a regularly scheduled board meeting at which senior management was present, representatives of Berenson and JPMorgan reported to the board on the expected timeline for the bid solicitation process. A review of 22 potentially interested strategic and financial buyers, which did not include Sempra Energy, was provided, with a focus on both competitive issues and the ability of these parties to meet financial obligations within the timeframe of the process. The financial advisors noted that in view of the current conditions in the credit markets, it might be difficult for financial buyers such as private equity firms to be competitive. The financial advisors also presented an overview of recent purchase and sale transactions in the natural gas industry.

 

A representative of Alston & Bird LLP, one of our two outside law firms, then reviewed with the directors a previously distributed memorandum discussing the board’s fiduciary duties under Delaware law in considering a business combination or sale of the business. Mr. Huffman updated the board regarding our financial needs and discussed the impact of issuing equity. Mr. Huffman also discussed the financial impact of a sale of Mobile Gas, noting that in such event, we likely would need to reduce the amount of or eliminate our regular cash dividend and would still need to issue equity to finance the planned growth of the Midstream business. Mr. Huffman and the representatives of Berenson, JPMorgan and Alston & Bird responded to questions from the directors.

 

The board of directors then discussed the outlook for EnergySouth and the benefits and risks associated with continuing to operate EnergySouth as a stand-alone entity and selling common stock to the public to raise capital, selling EnergySouth or selling Mobile Gas. Following this discussion, the board unanimously concluded that a sale of EnergySouth was the preferred alternative for maximizing stockholder value, followed by a sale of Mobile Gas as an alternative strategy. The board then authorized management to continue to work with Berenson and JPMorgan to pursue these strategies and appointed Robert H. Rouse as a fourth member of the special committee.

 

In the first and second weeks of May 2008, Berenson and JPMorgan distributed, to interested parties that had executed confidentiality agreements, the descriptive memorandum and a bid procedures letter requesting the submission of written initial non-binding indications of interest for the purchase of EnergySouth.

 

On May 22, 2008, at a meeting of the special committee at which members of senior management were present, representatives from Berenson and JPMorgan provided the committee with an overview of the solicitation process to date. The financial advisors reported that 24 parties had now been contacted and that the descriptive memorandum had been distributed to 17 of those parties. Five of these parties had submitted written initial non-

binding proposals to acquire the entire Company (from three bidders) or Mobile Gas (from two bidders). The three proposals to acquire EnergySouth had implied prices ranging from $58 to $64 per share in cash, were not subject to any financing condition and were generally subject to further due diligence, negotiation of mutually acceptable definitive agreements and other standard conditions.

 

The financial advisors reviewed the proposals of each of these five bidders with the special committee, followed by a discussion of a preliminary valuation of EnergySouth prepared by Berenson and JPMorgan. The committee members, with input from the financial advisors, then discussed at length the advantages and the disadvantages of continuing to operate EnergySouth on a stand-alone basis and selling common stock in a public offering, selling Mobile Gas or selling EnergySouth. The special committee unanimously determined that it was in the best interests of the stockholders to continue to pursue a sale of EnergySouth or, failing that, Mobile Gas. The committee then unanimously determined to allow four entities to proceed to the second round of the process.

 

On May 27, 2008, the financial advisors invited these four bidders to participate in the second round of the process, and the four parties were invited to a presentation by our management, were invited to visit our facilities and were granted access to an electronic data room for a detailed review of due diligence materials.

 

On May 27, 2008, another party who had previously been contacted by the financial advisors, but had not executed a confidentiality agreement, expressed an interest in participating in the bid solicitation process. After consultation with our board of directors, Mr. Liollio instructed the financial advisors to invite this party to participate in the process. On May 28, 2008, this party executed a confidentiality agreement and was furnished a copy of the descriptive memorandum. On May 30, 2008, this party made a preliminary proposal containing a preliminary bid of $62 per share, subject to further due diligence and other standard conditions. Based upon that preliminary proposal, this party was invited to participate in the second round of the process and was granted access to our electronic data room, as well as invited to a presentation by our management.

 

On May 28, 2008, representatives of Sempra Energy contacted Berenson and JPMorgan, expressing an interest in participating in the bid solicitation process. After consultation with our board of directors, Mr. Liollio instructed the financial advisors to invite Sempra Energy to participate in the process. On May 30, 2008, Sempra Energy executed a confidentiality agreement and was furnished a copy of the descriptive memorandum. On June 3, 2008, Sempra Energy made a preliminary proposal containing a preliminary bid range of $62 to $65 per share, subject to further due diligence and other standard conditions. Based upon that preliminary proposal, Sempra Energy was invited to participate in the second round of the process and was granted access to our electronic data room, as well as invited to a presentation by our management.

 

Throughout June and the first two weeks of July 2008, these six potential bidders accessed the electronic data room materials for operational, financial, accounting, tax, legal and other business due diligence. During the weeks of June 9 and 16, 2008, members of senior management made in-person management presentations to each of the six second round participants, including Sempra Energy. These management presentations generally included an overview of EnergySouth and its two business segments, the markets in which the two segments compete, and summary financial information. For bidders interested in Mobile Gas, the management presentation related only to that business. Members of our management team held additional, follow up due diligence meetings, in person and by telephone, with representatives from each of these six parties.

 

On June 18, 2008, Berenson and JPMorgan invited each of the six bidders to submit a firm and binding written offer for the purchase of EnergySouth. Alston & Bird then distributed a draft merger agreement to each of the six bidders for their review and comment.

 

On July 1, 2008, another party informed JPMorgan that it would like to either acquire Mobile Gas or to partner with another entity that desired to acquire the Midstream business so that it and such other entity would severally, but not jointly, purchase the entire Company. In response to this letter and after consultation with the financial advisors and the board of directors, as well as after execution of a confidentiality agreement, Mr. Liollio on July 2, 2008 instructed JPMorgan to arrange a management presentation for this party. On July 11, 2008, Mr. Downing, Mr. Huffman and Mr. Welch participated in a telephonic management presentation to senior management of this party. However, this party did not subsequently present a proposal for a transaction regarding EnergySouth or Mobile Gas.

On July 11, 2008, Sempra Energy and one other bidder submitted final offers to Berenson and JPMorgan and provided comments on the proposed form of merger agreement. Sempra Energy’s offer of $58.35 per share in cash was higher than the cash offer proposed by the other bidder and represented a 30% premium over the closing price of our common stock on July 10, 2008. Neither bidder’s offer contained a financing contingency. Both bidders confirmed that they had substantially completed their due diligence and were prepared to move quickly to a closing. Sempra Energy’s offer had been approved by its board of directors, but the other bidder’s offer was still subject to its board’s approval. A third bidder provided a range of prices that it might be willing to offer, but this range was significantly lower than the two final offers that had been received. This party did not submit a final offer.

 

On July 15, 2008 a meeting of the special committee was held, with senior management present, to discuss the terms and conditions of the two final bids for EnergySouth. Representatives of Berenson and JPMorgan reviewed the financial terms of the two offers, and a representative of Alston & Bird reviewed the material terms of the draft merger agreements submitted with the two offers, including the transaction structure, the treatment of stock options, performance share awards and stock unit awards, required approvals, our ability to accept a superior proposal, the match rights requested by the buyers, the conditions under which the merger agreement could be terminated and the termination fee that we could be required to pay under specified circumstances. The committee again discussed the three strategic alternatives available to EnergySouth. It was determined that if an acceptable agreement could be reached with Sempra Energy, it would represent the best course of action for the stockholders by allowing them to recognize a significant premium over the current price of the stock while eliminating their exposure to the development risks associated with the implementation of our strategic plan.

 

At the conclusion of these discussions, the special committee instructed Berenson and JPMorgan to contact representatives of Sempra Energy and inform them that while Sempra Energy’s bid of $58.35 per share was not acceptable, EnergySouth was willing to enter into an exclusivity agreement with Sempra Energy for a period ending at 5 p.m. Eastern time on July 25, 2008 to allow the parties to engage in further discussions to determine if an agreement on a price of at least $62.00 per share and other terms and conditions, including the amount of the termination fee payable under certain circumstances by EnergySouth to Sempra Energy, could be reached. On July 17, 2008, Sempra Energy proposed to increase its offer to $62.00 per share and the parties then entered into an exclusivity agreement prohibiting us from discussing an acquisition proposal with any third party during the exclusivity period.

 

On July 18, 2008, representatives of Sempra Energy, its outside counsel Latham & Watkins LLP, EnergySouth and Alston & Bird met to negotiate the provisions of the merger agreement. Subsequent to the meeting, the parties continued to negotiate the terms and conditions of the merger agreement, Sempra Energy continued its due diligence review of EnergySouth, and Sempra Energy and EnergySouth continued discussions regarding the offer price.

 

On July 23, 2008, as a result of its continuing due diligence and due to concerns expressed by Sempra Energy regarding certain contracts relating to our Midstream business, Sempra Energy proposed to reduce its offer price to $61.00 per share. Through its financial advisors, EnergySouth countered with a price of $61.75 per share, and on July 24, 2008, the parties agreed on a price of $61.50 per share. During this period, the parties continued to negotiate the final terms and provisions of the merger agreement.

 

On the afternoon of July 24, 2008, the special committee, with senior management present, met with representatives of Berenson, JPMorgan and Alston & Bird and reviewed the financial and other terms of the Sempra Energy offer. The financial advisors presented a financial analysis of the transaction and a valuation of EnergySouth based on current market conditions. At the conclusion of the meeting, the special committee voted unanimously to recommend to the board of directors that we execute a merger agreement with Sempra Energy on the terms proposed.

 

On the morning of July 25, 2008, the board of directors of EnergySouth met with representatives of Berenson, JPMorgan and Alston & Bird to discuss the proposed transaction. At this meeting, management and the outside advisors updated the directors on the status of the bid solicitation process and reported that substantially all issues regarding the transaction with Sempra Energy had been resolved, subject to approval by our board of directors. Representatives of Berenson and JPMorgan presented an in-depth review and analysis of the financial terms of the proposed transaction, including the transaction premium and implied multiples and their relationship to comparable

transactions, followed by an in-depth review and analysis of the current valuation of EnergySouth. JPMorgan then rendered an oral opinion to the board of directors, later confirmed by delivery of a written opinion dated July 25, 2008, that, as of that date and based on and subject to the factors and assumptions in its written opinion, the $61.50 per share in cash to be paid to the holders of our common stock pursuant to the merger agreement was fair, from a financial point of view, to such holders. A copy of the written opinion of JPMorgan is attached as Annex B to this proxy statement.

 

G. Edgar Downing, Jr., our Senior Vice President, Secretary and General Counsel, and a representative of Alston & Bird then reviewed the material terms of the merger agreement with the directors, including the transaction structure, the treatment of stock options, performance share awards and stock unit awards, the terms of our representations, warranties and covenants, required approvals, our ability to accept a superior proposal, the match right provided to Sempra Energy, the conditions under which the merger agreement could be terminated and the termination fee that we could be required to pay under specified circumstances. The board then considered and discussed various factors that favored approval of the proposed merger and various factors that weighed against or presented risks with regard to the proposed merger, substantially as summarized in “Recommendation of the Board of Directors and Reasons for the Merger” below. After further discussion, the board of directors, having determined that it was advisable, fair to and in the best interests of EnergySouth and its stockholders for EnergySouth to enter into and perform the merger agreement, unanimously resolved to approve the merger agreement and the merger and other transactions contemplated by the merger agreement, to authorize management to enter into the merger agreement, to direct that the merger agreement be submitted to our stockholders for approval and to recommend to our stockholders that they adopt the merger agreement and approve the merger.

 

Following the approval of the merger agreement and the merger by our board of directors, EnergySouth and Sempra Energy executed and delivered the merger agreement on the evening of Friday, July 25, 2008. On the morning of Monday, July 28, 2008, prior to the opening of the market, Sempra and EnergySouth issued a joint press release announcing the execution of the merger agreement.

 

At a meeting of our board of directors on July 25, 2008, after careful consideration, including consideration of the unanimous recommendation of the special committee and consultation with financial and legal advisors, our board of directors unanimously determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and in the best interests of our stockholders.

 

Accordingly, our board of directors unanimously resolved to approve and adopt the merger agreement, to direct that it be submitted to our stockholders for approval, and to recommend to our stockholders that they vote “FOR” the adoption of the merger agreement and approval of the merger.   

 

In the course of reaching its decision to approve the merger agreement and the merger and to recommend that our stockholders vote to adopt the merger agreement and approve the merger, our board of directors consulted with our senior management, financial advisors and legal counsel, reviewed a significant amount of information and considered a number of factors, including, among others, the following factors that supported approval of the merger:

 

 

 

 

In the course of its deliberations, our board of directors also considered a variety of risks and other potentially negative factors, including the following:

 

 

 

 

The board of directors determined that the risks and negative factors were outweighed by the factors that supported the approval of the merger, and after considering all relevant factors (including those listed above), the board of directors unanimously approved the merger agreement and the merger.

 

This discussion of the information and factors that our board of directors considered is not intended to be exhaustive, but we believe this discussion includes all material factors considered by the board of directors. In view

of the wide variety of factors considered in connection with their respective evaluations of the merger and the complexity of these matters, our directors found it impracticable to, and did not, quantify or otherwise attempt to assign relative weight to the specific factors considered in reaching their determinations. Rather, each director made his or her judgment based on the total mix of information available to the board of directors of the overall effect of the merger on our stockholders compared to any alternative. The judgments of individual directors may have been influenced to a greater or lesser degree by their individual views with respect to different factors.

 

Based on the factors outlined above, the board of directors determined by unanimous vote:

 

 

Pursuant to an engagement letter dated April 7, 2008, EnergySouth retained JPMorgan as its financial advisor in connection with the proposed merger.

 

At the meeting of the board of directors of EnergySouth on July 25, 2008, JPMorgan rendered its oral opinion to the board of directors of EnergySouth that, as of such date and based upon and subject to the factors and assumptions set forth in its opinion, the consideration to be paid to EnergySouth’s common stockholders in the proposed merger was fair, from a financial point of view, to such stockholders. On July 25, 2008, JPMorgan confirmed its July 25, 2008 oral opinion in writing. No limitations were imposed by EnergySouth’s board of directors upon JPMorgan with respect to the investigations made or procedures followed by it in rendering its opinions.

 

The full text of the written opinion of JPMorgan dated July 25, 2008, which sets forth the assumptions made, matters considered and limits on the review undertaken, is attached as Annex B to this proxy statement and is incorporated herein by reference. EnergySouth’s stockholders are urged to read the opinion in its entirety. JPMorgan’s written opinion is addressed to the board of directors of EnergySouth, is directed only to the consideration to be paid in the merger and does not constitute a recommendation to any stockholder of EnergySouth as to how such stockholder should vote at the special meeting. The summary of the opinion of JPMorgan set forth in this proxy statement is qualified in its entirety by reference to the full text of such opinion.

 

In arriving at its opinions, JPMorgan, among other things:

 

 

JPMorgan also held discussions with certain members of the management of EnergySouth and Sempra Energy with respect to certain aspects of the merger, the past and current business operations of EnergySouth, the financial condition and future prospects and operations of EnergySouth (including the views of senior management of EnergySouth with respect to the risks and uncertainties of the Company achieving its projections), and certain other matters JPMorgan believed necessary or appropriate to its inquiry.

 

JPMorgan relied upon and assumed, without assuming responsibility or liability for independent verification, the accuracy and completeness of all information that was publicly available or was furnished to or discussed with JPMorgan by EnergySouth or otherwise reviewed by or for JPMorgan. JPMorgan did not conduct and was not provided with any valuation or appraisal of any assets or liabilities, nor did JPMorgan evaluate the solvency of EnergySouth or Sempra Energy under any state or federal laws relating to bankruptcy, insolvency or similar matters. In relying on financial analyses and forecasts provided to it, JPMorgan assumed that they were reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by management as to the expected future results of operations and financial condition of EnergySouth to which such analyses or forecasts relate. JPMorgan expressed no view as to such analyses or forecasts or the assumptions on which they were based. JPMorgan also assumed that the merger and the other transactions contemplated by the merger agreement will be consummated as described in the merger agreement and that the definitive merger agreement would not differ in any material respect from the draft thereof provided to JPMorgan on July 21, 2008. JPMorgan relied as to all legal matters relevant to the rendering of its opinion upon the advice of counsel. JPMorgan further assumed that all material governmental, regulatory or other consents and approvals necessary for the consummation of the merger will be obtained without any adverse effect on EnergySouth or on the contemplated benefits of the merger.

 

The projections furnished to JPMorgan for EnergySouth were prepared by the management of EnergySouth. EnergySouth does not publicly disclose internal management projections of the type provided to JPMorgan in connection with JPMorgan’s analysis of the merger, and such projections were not prepared with a view toward public disclosure. These projections were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including, without limitation, factors related to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in such projections.

 

JPMorgan’s opinion is based on economic, market and other conditions as in effect on, and the information made available to JPMorgan as of, the date of such opinion. Subsequent developments may affect JPMorgan’s written opinion dated July 25, 2008, and JPMorgan does not have any obligation to update, revise, or reaffirm such opinion. JPMorgan’s opinion is limited to the fairness, from a financial point of view, of the consideration to be paid to EnergySouth’s common stockholders in the proposed merger, and JPMorgan has expressed no opinion as to the fairness of the merger to, or any consideration of, the holders of any other class of securities, creditors or other constituencies of EnergySouth or the underlying decision by EnergySouth to engage in the merger. JPMorgan expressed no opinion as to the price at which the Company’s common stock will trade at any future time, whether before or after the merger.

 

In accordance with customary investment banking practice, JPMorgan employed generally accepted valuation methods in reaching its opinion. The following is a summary of the material financial analyses utilized by JPMorgan in connection with providing its opinion.

 

Public Trading Multiples .   Using publicly available information, JPMorgan compared selected financial data of EnergySouth with similar data for selected publicly traded companies engaged in businesses which JPMorgan judged to be similar to those of EnergySouth. The companies selected by JPMorgan and viewed as relevant to EnergySouth’s natural gas midstream business were El Paso, Enbridge, Southern Union, Spectra Energy, TransCanada and Williams. The companies selected by JPMorgan and viewed as relevant to EnergySouth’s natural gas distribution business were AGL Resources, Atmos Energy, Laclede Group, New Jersey Resources, Nicor, Northwest Natural Gas, Piedmont Natural Gas, South Jersey Industries, Southwest Gas and WGL Holdings.

 

These companies were selected, among other reasons, because they share similar business characteristics to EnergySouth based on operational characteristics and financial metrics, as well as their significant exposure to the midstream and natural gas utility industry in the United States. However, none of the companies selected is identical or directly comparable to EnergySouth. Accordingly, JPMorgan made judgments and assumptions concerning

differences in financial and operating characteristics of the selected companies and other factors that could affect the public trading value of the selected companies.

 

For each of the selected companies, JPMorgan calculated Firm Value divided by the estimated earnings before interest, taxes, depreciation and amortization, or EBITDA, for the calendar years ending December 31, 2008 and 2009, which are referred to as Firm Value/EBITDA Multiples, as well as the stock price of common equity divided by the earnings per share, or EPS, for the same periods, which are referred to as Price/Earnings Multiples.

 

For this analysis, Firm Value of a particular company was calculated as market value of that company’s common stock based on fully diluted shares using the treasury method (as of July 21, 2008) plus the value of that company’s indebtedness, minority interest and preferred stock, minus that company’s cash and cash equivalents and marketable securities.

 

The following table reflects the ratios, Firm Value and public market multiples for each of the selected companies reviewed by JPMorgan:

 

Selected midstream asset operators

 

 

 

 

Selected natural gas utilities

 

 

 

 

Based on the results of this analysis and on JPMorgan’s judgment and experience, JPMorgan applied Price/Earnings Multiples ranging from 13.0x to 17.0x for calendar year 2008 EPS and 12.5x to 16.5x for calendar year 2009 EPS to EnergySouth’s natural gas midstream and natural gas distribution segments, which, using EnergySouth’s estimated EPS for such periods, implied ranges for EnergySouth’s common stock of $31.25 to $40.60 and $41.60 to $54.45 per share, respectively.

 

Further, JPMorgan applied ranges of 7.5x to 9.5x and 6.5x to 8.0x Firm Value/EBITDA Multiples to EnergySouth’s natural gas midstream and natural gas distribution segments, which, using EnergySouth’s estimates for calendar year 2008 EBITDA, implied a range for EnergySouth’s common stock of $9.40 to $20.25 per share.

Additionally, JPMorgan applied ranges of 7.0x to 9.0x and 6.0x to 7.5x Firm Value/EBITDA Multiples to EnergySouth’s natural gas midstream and natural gas distribution segments, respectively, using EnergySouth’s estimates for calendar year 2012 EBITDA. The resulting values were then adjusted for EnergySouth’s estimated calendar year 2010 year-end excess cash, total debt and minority interest and subsequently discounted back to present values, implying a range for EnergySouth’s common stock of $30.95 to $60.25 per share.

 

Selected Transaction Analysis .   JPMorgan analyzed publicly available information regarding the following selected midstream transactions:

 

 

JPMorgan analyzed publicly available information regarding the following selected gas utility transactions:

 

 

 

 

For each of the selected transactions, JPMorgan calculated the transaction value divided by the latest 12 months EBITDA, or LTM EBITDA, which ratio is referred to as Transaction Value/LTM EBITDA Multiple.

 

Based on the results of this analysis, JPMorgan applied ranges of 9.0x to 11.5x and 8.5x to 10.0x Transaction Value/LTM EBITDA Multiples to the natural gas midstream and natural gas distribution segments’ fiscal year 2012 projected EBITDA, respectively. The resulting values were then adjusted for EnergySouth’s estimated 2012 fiscal year-end excess cash, total debt and minority interest and subsequently discounted back to present values, implying a range for EnergySouth’s common stock of $49.45 to $78.40 per share, based on fully diluted shares using the treasury method.

 

Discounted Cash Flow Analysis .   JPMorgan conducted a discounted cash flow analysis for the purpose of determining the fully diluted equity value per share for EnergySouth’s common stock. JPMorgan calculated the unlevered free cash flows that EnergySouth is expected to generate during fiscal years 2009 through 2018 based upon financial projections prepared by the management of EnergySouth through the years ended September 30th. JPMorgan also calculated a range of terminal asset values of EnergySouth at the end of the 10-year period by applying perpetual growth rates ranging from 2.0% to 3.0% and 1.0% to 1.5% of the unlevered free cash flow of the natural gas midstream and natural gas distribution segments of EnergySouth, respectively, during the final year of the 10-year period. The unlevered free cash flows and the range of terminal asset values were then discounted to present values using a range of discount rates from 9.0% to 10.0% and 6.5% to 7.5% for EnergySouth’s natural gas midstream and natural gas distribution segments, respectively, which were chosen by JPMorgan based upon an analysis of the weighted average cost of capital of EnergySouth’s two business segments. The present value of the unlevered free cash flows and the range of terminal asset values were then adjusted for EnergySouth’s estimated 2008 fiscal year-end excess cash and total debt. Based on the management projections, the chosen discount rate range and fully diluted shares using the treasury method, the discounted cash flow analysis indicated a range of equity values of between $46.50 and $80.05 per share of EnergySouth’s common stock and a midpoint of $60.95 per share of EnergySouth’s common stock. EnergySouth management further provided JPMorgan with two sensitivity cases for management’s base financial projections, reflecting some of the risks and uncertainties of achieving management’s base financial projections. The two sensitivity cases were reflective of (i) delays in storage cavern in-service dates and increased gas prices and (ii) delays in storage cavern in-service dates, as well as increased gas prices and capital expenditures over the projection period. Based on the same discount rate and perpetual growth rate ranges detailed above and fully diluted shares using the treasury method, the discounted cash flow analysis indicated ranges of equity values of between $42.10 and $75.35, and $36.25 and $69.40, with midpoints of $56.41 and $50.50 per share of EnergySouth’s common stock for the two sensitivity cases, respectively.

 

Other Information .   JPMorgan also reviewed the 52-week, 3-month and 1-month trading ranges of EnergySouth’s common stock. JPMorgan noted that historical stock trading is not a valuation methodology but was presented merely for informational purposes.

 

The foregoing summary of certain material financial analyses does not purport to be a complete description of the analyses or data presented by JPMorgan. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. JPMorgan believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of the foregoing summary and these analyses, without considering all of its analyses as a whole, could create an incomplete view of the processes underlying the analyses and its opinion. In arriving at its opinion, JPMorgan did not attribute any particular weight to any analyses or factors considered by it and did not form an opinion as to whether any individual analysis or factor (positive or negative), considered in isolation, supported or failed to support its opinion. Rather, JPMorgan considered the totality of the factors and analyses performed in determining its opinion. Analyses based upon forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond the control of the parties and their advisors. Accordingly, forecasts and analyses used or made by JPMorgan are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses. Moreover, JPMorgan’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be bought or sold. None of the selected companies reviewed as described in the above summary is identical to EnergySouth, and none of the selected transactions reviewed was identical to the merger. However, the companies selected were chosen because they are publicly traded companies with operations and businesses that, for purposes of JPMorgan’s analysis, may be considered similar to those of

EnergySouth. The transactions selected were similarly chosen because their participants, size and other factors, for purposes of JPMorgan’s analysis, may be considered similar to the merger. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies compared to EnergySouth and the transactions compared to the merger.

 

As a part of its investment banking business, JPMorgan and its affiliates are continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for estate, corporate and other purposes. JPMorgan was selected to advise EnergySouth with respect to the merger on the basis of such experience and its familiarity with EnergySouth.

 

For services rendered in connection with the merger, EnergySouth has paid JPMorgan a fee of $1.5 million upon delivery of its written fairness opinion and will pay JPMorgan a fee in the amount of approximately $3.6 million upon consummation of the merger. In addition, EnergySouth has agreed to reimburse JPMorgan for its expenses incurred in connection with its services, including the fees and disbursements of counsel, and will indemnify JPMorgan against certain liabilities, including liabilities arising under the Federal securities laws. If EnergySouth receives a termination fee from Sempra Energy or from any other source as a result of the merger or any other transaction not being consummated, EnergySouth must pay JPMorgan 12.5% of such fee, which fee will not exceed the transaction fee that would have been payable to JPMorgan had the merger closed, and which fee will be reduced by the $1.5 million fee paid upon delivery of JPMorgan’s opinion. In addition, JPMorgan will be entitled to fees for any transaction involving the acquisition of EnergySouth consummated during the term of its engagement or 12 months after its expiration or termination. The engagement runs for 18 months from the effective date of the engagement letter, which is March 19, 2008.

 

JPMorgan and its affiliates have performed in the past, and may continue to perform, certain financial advisory, financing and other investment banking and commercial banking services for EnergySouth, Sempra Energy and one or more of their affiliates. During the two years preceding the date of its opinion, JPMorgan and its affiliates had commercial or investment banking relationships with EnergySouth and Sempra Energy, for which it and such affiliates received customary compensation. Such services during such period included acting as (1) lead manager for an offering of $55,000,000 in principal amount of Industrial Revenue Development Bonds in August 2007, the proceeds of which were loaned to a subsidiary of EnergySouth; (2) joint book-running manager for Sempra Energy’s offering of $500,000,000 in principal amount of notes in June 2008; (3) seller in a $161,000,000 share repurchase program by Sempra Energy of its common stock that concluded in September 2007; (4) lead manager and current remarketing agent for the offering of $161,000,000 in principal amount of Industrial Development Revenue Refunding Bonds by a subsidiary of Sempra Energy beginning in September 2006; and (5) commercial paper dealer for a $2,000,000,000 revolving commercial paper program issued by a joint venture in which Sempra Energy holds a minority interest beginning in June 2006. In addition, JPMorgan’s commercial banking affiliate is an agent bank and a lender under outstanding credit facilities of EnergySouth and Sempra Energy, for which it receives customary fees. In the ordinary course of their businesses, JPMorgan and its affiliates may actively trade the debt and equity securities of EnergySouth or Sempra Energy for their own accounts or for the accounts of customers and, accordingly, they may at any time hold long or short positions in such securities.

 

 

When considering the recommendation of our board of directors, you should be aware that our executive officers and members of our board of directors have interests in the merger other than their interests as EnergySouth stockholders generally, pursuant to agreements between such executive officers and directors and us and pursuant to the merger agreement. These interests may be different from, or in conflict with, your interests as EnergySouth stockholders. The members of our board of directors were aware of these additional interests, and considered them, when they approved the merger agreement.

 

Change of Control and Employment Agreements

 

We have entered into an employment agreement with each of Messrs. C. S. “Dean” Liollio and Benjamin J. Reese and a change of control agreement with each of Messrs. G. Edgar Downing, Jr., Charles P. Huffman, Gregory H. Welch

and other employees who are not executive officers. These employment agreements and change of control agreements provide for payments and benefits to the executive upon the termination of the executive’s employment following a change of control, as described below.

 

If the executive’s employment is terminated by the surviving corporation for any reason other than cause, or by the executive for good reason, within 24 months following the merger, he will receive a severance amount. In the case of Mr. Liollio, this severance amount is equal to three times the sum of his then-current base salary plus his annual bonus target for the performance year in which his termination occurs. In the case of Mr. Reese, this severance amount is equal to the sum of three times his then-current base salary plus (1) if the termination occurs following the determination of his individual performance award in 2008 but prior to the determination of his individual performance award in 2009, three times the amount of his individual performance award for 2008, or (2) if the termination occurs following the determination of his individual performance award in 2009, three times the average amount of his individual performance award for the most recent two years. In the case of Mr. Downing, this severance amount is equal to two times the sum of his then-current base salary plus his annual bonus target for the performance year in which his termination occurs. In the case of Messrs. Huffman and Welch, this severance amount is equal to 2.97 times the sum of his then-current base salary plus his annual bonus target for the performance year in which his termination occurs.

 

In addition to Mr. Liollio’s severance amount, if he is terminated for any reason other than cause, or by him for good reason, within 24 months following the merger, he would be entitled to receive any unpaid restoration compensation credit and cash performance award under his employment agreement. The unpaid restoration compensation credit equals $250,000, which otherwise would be payable on August 1, 2009. The unpaid cash performance award is an amount up to $500,000, equal to $250,000 times a fraction, the denominator of which is our average trading price over the five trading days prior to August 1, 2006 and the numerator of which is $61.50.

 

In addition to the severance amounts, in the case of each of Messrs. Liollio, Huffman and Welch, we, or the surviving corporation, as the case may be, will also continue the executive’s medical and life insurance coverage until the earlier of the three year anniversary of the termination or the executive’s re-employment with another employer. In the case of Mr. Downing, medical and life insurance coverage will continue until the earlier of the two year anniversary of his termination or his re-employment with another employer.

 

Executive Officers’ Stock Options

 

Our executive officers as a group hold “in the money” options to purchase 249,155 shares of our common stock as of August 8, 2008, having a weighed average exercise price of $32.30. Each outstanding option (whether vested or unvested) will be cancelled at the effective time of the merger in exchange for a cash payment, without interest, equal to the product of (1) the number of shares of EnergySouth common stock subject to such option, multiplied by (2) the amount by which $61.50 exceeds the option exercise price per share of common stock subject to such option, less any required withholding taxes. Accordingly, executive officers and non-employee directors with unvested “in the money” options may receive a benefit, in addition to that available to EnergySouth stockholders generally, by virtue of the acceleration of the unvested portion of such options. See “The Merger Agreement — Treatment of Stock Options, Performance Shares, Performance-Based Restricted Stock Units and Phantom Stock Units” on page   .

The value attributable to the cancellation and cash-out in connection with merger of all stock options held by our executive officers is approximately $7.3 million, as follows:

 

 

 

 

Executive Officers’ Performance Share Awards and Performance-Based Restricted Stock Unit Awards

 

Our executive officers as a group hold performance share awards and performance-based restricted stock unit awards with respect to an aggregate of 24,070 shares underlying such awards (at the target award level). Each performance share award and performance-based restricted stock unit award outstanding immediately prior to the effective time of the merger will be cancelled and the holder of such award will be entitled to receive from the surviving corporation an amount of cash, without interest, equal to the product of (1) the target number of shares underlying such award, multiplied by (2) the per share merger consideration of $61.50, less the amount of any required tax withholding. See “The Merger Agreement — Treatment of Stock Options, Performance Shares, Performance-Based Restricted Stock Units and Phantom Stock Units” on page   .

 

The value attributable to the performance share awards and performance-based restricted stock unit awards held by our executive officers is approximately $1.5 million, as follows:

 

 

 

 

Executive Officers’ Incentive Compensation Awards

 

If the effective time of the merger occurs prior to November 15, 2008, then immediately prior to the effective time, we will pay to each executive officer then actively employed by us or one of our subsidiaries any amounts due under outstanding awards granted under our executive incentive compensation plan, as applicable, with respect to the full fiscal year ending on September 30, 2008. However, the amount of each such payment will be determined by the compensation committee of our board of directors with regard to executives based on their available financial information in a manner reasonably consistent with the intent of the applicable compensation plan; provided that the aggregate payments under both our executive incentive compensation plan and employee incentive compensation plan must not exceed $4,800,000. However, this cap of $4,800,000 is exclusive of the bonus pool funding the team performance awards that are payable under the employment agreements with Messrs. Reese, Brown, and Pirraglia, which will be paid in accordance with the terms under their respective employment agreements.

 

If the effective time of the merger occurs on or after November 15, 2008, then immediately prior to the effective time, we will pay to each executive officer then actively employed by us or one of our subsidiaries any amounts due under the terms and conditions of such award and the executive incentive compensation plan for the full fiscal year ending September 30, 2008; provided that the aggregate payments under both our executive incentive compensation plan and employee incentive compensation plan must not exceed $4,800,000. See “The Merger Agreement — Treatment of Employee Compensation Plans” on page   .

 

Non-Employee Directors’ Phantom Stock Units

 

Our non-employee directors as a group hold 59,119 phantom stock units. At the effective time of the merger, the phantom stock units credited to each participating director’s account under the Second Amended and Restated EnergySouth, Inc. Non-Employee Directors Deferred Fee Plan and/or the 2005 Non-Employee Directors Deferred Fee Plan will be converted into a dollar amount equal to the product of (1) the number of phantom stock units credited to such participant’s account, multiplied by (2) the per share merger consideration of $61.50, rounded to the nearest cent. Such dollar amount will be credited to the participant’s cash account under the applicable plan, and the phantom stock units shall be debited from such participant’s plan account. Following the effective time of the merger, each participant’s plan account will be credited with interest when and as provided in the applicable plan. Under the Second Amended and Restated EnergySouth, Inc. Non-Employee Directors Deferred Fee Plan, balances in such accounts will be distributed in cash upon the completion of the merger if the participant elected such distribution under his or her distribution election. Under the 2005 Non-Employee Directors Deferred Fee Plan, participants will automatically receive a lump sum cash distribution of their account balances upon completion of the merger. The Company has amended these plans to provide that, as of the effective time of the merger, no further phantom stock units will be credited to the participants’ accounts and account balances will be distributed only in cash.

 

The value attributable to the phantom stock units held by our non-employee directors is approximately $3.6 million, as follows:

 

 

 

 

Post Merger Arrangements

 

The merger agreement provides that the officers of the Company immediately prior to the consummation of the merger will be the initial officers of the corporation surviving the merger, until the earlier of their resignation or removal.

 

As of the date of this proxy statement, none of our executive officers has entered into any amendments or modifications to their existing severance agreements with us in connection with the merger. In addition, as of the date of this proxy statement, none of our executive officers has entered into any agreement, arrangement or understanding with Sempra Energy or any of its affiliates regarding the terms and conditions of compensation, cash-based incentives, or employment with the surviving corporation. We have been informed that Sempra Energy anticipates that it will, prior to the effective time of the merger, initiate discussions with members of our existing executive team relating to the terms and conditions of new agreements and amendments to existing severance agreements, so as to encourage their retention with the surviving corporation after the effective time of the merger. Although we believe members of our existing executive team are likely to enter into new agreements and agree to amendments to existing severance agreements prior to the completion of the merger and may participate in equity compensation plans of Sempra Energy after consummation of the merger, such matters are subject to further negotiations and discussion and no terms or conditions have been finalized.

 

Indemnification and Insurance

 

The merger agreement provides that after the effective time of the merger, Sempra Energy and the surviving corporation will indemnify and hold harmless the current and former directors and officers of EnergySouth and its subsidiaries for actions or omissions, occurring at or prior to the effective time of the merger, to the fullest extent permitted by law or as provided in our certificate of incorporation, bylaws, the organizational documents of any of our subsidiaries or any written indemnification contract between such directors or officers and us. Further, for six years following the effective time of the merger, the certificate of incorporation and bylaws of the surviving corporation will contain indemnification, advancement of expenses and exculpation provisions for acts or omissions occurring at or prior to the effective time of the merger that are no less favorable to our current and former directors and officers than those that are presently set forth in our certificate of incorporation or bylaws.

 

In addition, the merger agreement provides that prior to the effective time of the merger, we will use commercially reasonable efforts to purchase a six-year “tail” prepaid policy on our directors’ and officers’ liability insurance policy on terms no less favorable to our directors and officers than those of our current policy. If, however, we cannot or do not purchase such a “tail” policy, then Sempra Energy or the surviving corporation will purchase the tail policy promptly after the effective time. If, nevertheless, we, Sempra Energy and the surviving corporation all fail to obtain such a “tail” policy, Sempra Energy will, or will cause the surviving corporation to, maintain our current directors’ and officers’ liability insurance for acts or omissions occurring at or prior to the effective time of the merger. Sempra Energy may satisfy this obligation by (1) substituting its own policies containing terms no less favorable to such directors and officers or (2) requesting that the surviving corporation obtain such extended coverage under its existing insurance programs. If such insurance is unavailable, the surviving corporation will, and Sempra Energy will cause the surviving corporation to, purchase the best available coverage for such six-year period from an insurance carrier with the same or better credit rating as our current insurance carrier on terms at least as favorable as provided in our existing policies. Sempra Energy and the surviving corporation are not obligated to pay an amount that is more than 300% of our current annual premium for such insurance to procure the required coverage. If Sempra Energy and the surviving corporation cannot obtain the required coverage for that amount, the surviving corporation must provide the most coverage that can be obtained for that amount.

 

The following discussion summarizes the material United States federal income tax consequences of the merger that are generally applicable to holders of our common stock. This discussion is based on currently existing provisions of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, existing and proposed U.S. Treasury regulations promulgated under the Code, and current administrative rulings and court decisions, all of

which are subject to change. Any change, which may or may not be retroactive, could alter the tax consequences of the merger to the holders of our common stock.

 

The following discussion does not address the tax consequences that may be relevant to stockholders who receive special treatment under some U.S. federal income tax laws. Stockholders receiving this special treatment include but are not limited to:

 

 

Further, we do not address:

 

 

For purposes of this summary, a U.S. Holder is a person that is a beneficial owner of our common stock and is:

 

 

A Non-U.S. Holder is a person that is a beneficial owner of our common stock other than a U.S. Holder.

 

No rulings have been sought or will be sought from the U.S. Internal Revenue Service, which we refer to as the IRS, with respect to any of the U.S. federal income tax considerations discussed below. As a result, we cannot assure you that the IRS will agree with the tax characterizations and the tax consequences described below.

 

You should consult your own tax advisor concerning the U.S. federal income and estate tax consequences in light of your particular situation and any consequences arising under the laws of any other taxing jurisdiction.

 

Treatment of U.S. Holders

 

U.S. Holders who receive cash for their shares will recognize gain or loss for federal income tax purposes equal to the difference between the amount of cash received and the tax basis of the shares exchanged in the merger. If a U.S. Holder holds shares of our common stock as a capital asset, the gain or loss will be capital gain or loss. Any capital gain or loss will be long-term capital gain or loss if the stockholder’s holding period for the shares is more than one year. Long-term capital gain of an individual is generally subject to a maximum U.S. federal income tax rate of 15%. The deductibility of long-term capital losses is subject to limitations.

Treatment of Non-U.S. Holders

 

The following is a summary of U.S. federal tax consequences that will apply to you if you are a Non-U.S. Holder of shares of our common stock. As described above, a “Non-U.S. Holder” is a person that is a beneficial owner of our common stock other than a U.S. Holder.

 

Special rules may apply to certain Non-U.S. Holders such as “controlled foreign corporations,” “passive foreign investment companies,” corporations that accumulate earnings to avoid federal income tax or, in certain circumstances, individuals who are U.S. expatriates. The discussion below does not apply to such special circumstances. Such Non-U.S. Holders should consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them.

 

Any gain that a Non-U.S. Holder realizes upon the sale, exchange, redemption or other disposition of a share of our common stock generally will not be subject to U.S. federal income tax unless:

 

 

A Non-U.S. Holder who realizes gain described in the first and third bullet points above will be subject to U.S. federal income tax on the net gain derived. An individual Non-U.S. Holder described in the second bullet point above will be subject to a flat 30% U.S. federal income tax on the gain derived, which may be offset by U.S. source capital losses, even though the holder is not considered a resident of the U.S. A Non-U.S. Holder that is a foreign corporation and that realizes gain described in the first and third bullet points above will be subject to tax on the gain at regular graduated U.S. federal income tax rates and, in addition, may be subject to a “branch profits tax” at a 30% rate or a lower rate if so specified by an applicable income tax treaty.

 

Backup Withholding and Information Reporting

 

If you are a U.S. Holder of our common stock, information reporting requirements will generally apply to the cash proceeds you receive from the sale of your common stock in the merger, unless you are an exempt recipient such as a corporation. If you are not otherwise exempt and you fail to supply your correct taxpayer identification number, under-report your tax liability or otherwise fail to comply with applicable U.S. information reporting or certification requirements, the IRS may require us to withhold federal income tax from those proceeds at the rate set by Section 3406 of the Code.

 

In general, if you are a Non-U.S. Holder, you will not be subject to backup withholding and information reporting with respect to the cash proceeds paid to you in the merger, provided that we do not have actual knowledge or reason to know that you are a U.S. person, as defined under the Code, and you have given us a certification, under penalty of perjury, that you are not a U.S. person (which certification may be made on an IRS Form W-8BEN (or successor form)) and provide your name, address and certain other required information or certain other certification requirements or, if you hold your shares through certain qualified intermediaries, you satisfy the certification requirements of applicable U.S. Treasury regulations (special certification rules apply to holders that are pass-through entities).

 

Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished by you to the IRS.

 

EnergySouth, Inc.

 

We are an energy services holding company. Our subsidiaries distribute natural gas and engage in a diversified range of related natural gas operations.

 

Our Mobile Gas Service Corporation subsidiary is engaged in the purchase, distribution, sale and transportation of natural gas to approximately 95,000 residential, commercial and industrial customers in Southwest Alabama, including the City of Mobile. Mobile Gas’ service territory covers approximately 300 square miles. Mobile Gas also sells natural gas and other appliances to retail customers. Mobile Gas has provided natural gas in Southwest Alabama since 1933.

 

Our Midstream subsidiary, through its majority-owned subsidiary Bay Gas Storage Company, Ltd., owns and operates underground natural gas storage caverns and related pipeline facilities which are used to provide storage and transportation of natural gas for customers. Our storage and transportation operations are currently located in Southwest Alabama, with additional operations planned at our Mississippi Hub gas storage facility under development near Jackson, Mississippi. Additionally, Midstream, through an office in Houston, Texas, manages and optimizes transportation and storage assets through natural gas marketing, trading and risk management activities.

 

Our principal office address is 2828 Dauphin Street, Mobile, Alabama 36606, and our telephone number is (251) 450-4774.

 

Sempra Energy

 

Based in San Diego, Calif., Sempra Energy is a Fortune 500 energy services holding company with 2007 revenues of more than $11 billion. With 13,500 employees, Sempra Energy companies develop energy infrastructure, operate utilities and provide related products and services to more than 29 million customers around the world.

 

Sempra Energy’s principal office address is 101 Ash Street, San Diego, California 92101, and its telephone number is (619) 696-2034.

 

EMS Holding Corp.

 

EMS Holding Corp., which we refer to as Merger Sub, is a wholly-owned subsidiary of Sempra Energy formed on July 23, 2008 for the sole purpose of completing the merger with EnergySouth. Merger Sub is not engaged in any business except as contemplated by the merger agreement. Merger Sub’s principal office address is c/o Sempra Energy, 101 Ash Street, San Diego, California 92101, and its telephone number is (619) 696-2034.

 

The following is a summary of the material terms of the merger agreement but does not describe all of the terms of the merger agreement. This summary is qualified in its entirety by reference to the merger agreement, which is attached as Annex A to this proxy statement and incorporated herein by reference. You are urged to read the merger agreement in its entirety because it is the legal document that governs the merger.

 

The description of the merger agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about us. Such information can be found elsewhere in this proxy statement and in the other public filings EnergySouth makes with the SEC, which are available without charge at www.sec.gov.

 

The merger agreement contains representations and warranties that we, Sempra Energy and Merger Sub have made to each other as of the date of the merger agreement or other specific dates. The assertions embodied in those representations and warranties were made solely for the purposes of the contract between us, Sempra Energy and Merger Sub. Additionally, information concerning the subject matter of the representations and warranties may

have changed since the date of the merger agreement, which subsequent information may or may not be fully reflected in EnergySouth’s public disclosures. Moreover, certain representations and warranties may not be complete or accurate because they are subject to a contractual standard of materiality different from that generally applicable to stockholders and were used for the purpose of allocating risk between us and Sempra Energy and Merger Sub rather than establishing matters as facts. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.

 

The merger agreement provides that, upon and subject to the terms and conditions of the merger agreement, and in accordance with the applicable provisions of the Delaware General Corporation Law, or the DGCL, Merger Sub will be merged with and into EnergySouth. At that time, Merger Sub’s separate existence will cease and we will continue as the surviving corporation. Following the merger, we will be a privately-held corporation and a wholly-owned indirect subsidiary of Sempra Energy. The merger will become effective at the time the certificate of merger is filed with the Secretary of State of the State of Delaware or at such later time as Sempra Energy and we shall agree and specify in the certificate of merger. The certificate of merger will be filed on the closing date, which is expected to occur within three business days after all conditions specified in the merger agreement have been satisfied or waived.

 

Upon the effective time of the merger, you will cease to have any ownership interests in EnergySouth or rights as one of our stockholders. Accordingly, you will not participate in any future earnings or growth of EnergySouth and will not benefit from any appreciation in the value of our business. Instead, your shares of our common stock will be converted into and exchanged for the right to receive $61.50 per share in cash, without interest, less any applicable withholding taxes, as more fully described below.

 

Our common stock is currently listed on the Nasdaq Global Select Market under the symbol “ENSI.” After the merger, our common stock will cease to be listed on Nasdaq and there will be no public market for our common stock. Our common stock is also registered with the SEC under the Exchange Act. Following the merger, we expect to deregister our shares of common stock and cease to be a public reporting company. Accordingly, we will no longer be required to file periodic and current reports, such as annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K, with the SEC.

 

At the effective time of the merger, our certificate of incorporation and bylaws will be replaced with the certificate of incorporation and bylaws of Merger Sub. Also, at the effective time of the merger, the directors of Merger Sub in office immediately prior to the effective time of the merger will become the directors of EnergySouth. The officers of EnergySouth immediately prior to the effective time of the merger shall continue to serve as officers of EnergySouth in accordance with the new bylaws.

 

Upon consummation of the merger, each share of our common stock issued and outstanding at the effective time of the merger (other than shares held by stockholders who perfect their statutory appraisal rights and shares held by us or Sempra Energy or our respective subsidiaries) will cease to be outstanding and will be converted into and exchanged for the right to receive $61.50 in cash, without interest, less any applicable withholding taxes. Each share of our common stock owned by us, Sempra Energy or Merger Sub will be cancelled and cease to exist with no consideration issued in exchange for these shares. Each share of our common stock owned by a wholly-owned subsidiary of us or Sempra Energy (other than Merger Sub) will remain outstanding and will be appropriately adjusted so that each subsidiary will continue to own the same percentage of us after the merger as it owned beforehand. Each issued and outstanding share of capital stock of Merger Sub will be converted into and become one share of common stock of the surviving corporation.

 

Prior to the effective time of the merger, Sempra Energy will deposit with an exchange agent, for the benefit of the holders of our common stock, cash in an amount sufficient to pay the aggregate merger consideration, which we refer to as the exchange fund. Promptly, and in any event within five business days, after the effective time of the

merger, the exchange agent will send transmittal materials and instructions to each stockholder of record of EnergySouth whose shares of our common stock were converted into and exchanged for the right to receive the merger consideration discussed above. The transmittal materials will contain instructions for obtaining cash in exchange for shares of our common stock. Upon surrender of a stock certificate that formerly represented shares of our common stock, or the transfer of uncertificated shares of our common stock, together with a duly executed letter of transmittal and such other documents as the exchange agent may reasonably require in connection with its duties, the stockholder will be entitled to receive from the exchange agent, on behalf of EnergySouth, $61.50 in cash for each share represented by a stock certificate and each uncertificated share, without interest and less any applicable withholding taxes.

 

In the event of a transfer of ownership of shares of our common stock that is not registered in our stock transfer books, the merger consideration for those shares may be paid to a person other than the person in whose name those shares are registered if the certificate representing those shares is delivered to the exchange agent, accompanied by all documents required to evidence such transfer and by evidence satisfactory to the exchange agent that any applicable stock transfer taxes have been paid. No interest will be paid or accrue on any cash payable upon the surrender of stock certificates representing shares of our common stock or the transfer of uncertificated shares of our common stock. A stockholder whose stock certificate has been lost, stolen or destroyed may obtain the merger consideration payable with respect to the shares of common stock represented by the certificate by submitting an affidavit of loss, posting such bond as Sempra Energy or the exchange agent may reasonably require, submitting any other documents necessary to evidence and effect the bona fide exchange thereof, and complying with any other reasonable and customary rules and procedures that the exchange agent may require in connection with its duties.

 

At any time following one year after the effective time of the merger, Sempra Energy will be entitled to require the exchange agent to deliver to Sempra Energy any funds remaining in the exchange fund which have not been disbursed to stockholders as of such time, and thereafter, such stockholders are only entitled to look to Sempra Energy as general creditors thereof with respect to the payment of the merger consideration. Such stockholders will have no greater rights against Sempra Energy than may be accorded to general creditors of Sempra Energy under applicable laws. None of Sempra Energy, Merger Sub, EnergySouth or the exchange agent will be liable to any person in respect of any funds from the exchange fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar laws.

 

Upon consummation of the merger, all outstanding stock options, performance share awards and performance-based restricted stock unit awards will be cancelled and exchanged for a cash payment. The cash payment for each share of stock subject to a stock option will be equal to the amount, if any, by which the merger consideration of $61.50 exceeds the per share exercise price of such option. The cash payment for each performance share award or performance-based restricted stock unit award will be equal to the target number of shares or units underlying such award multiplied by the merger consideration of $61.50. In each case, the aggregate amount of such payment to the holder will be rounded to the nearest cent, paid without interest, and reduced by any applicable withholding taxes.

 

Upon consummation of the merger, each phantom stock unit credited to the accounts of our non-employee directors under certain of our deferred fee plans will be converted into a dollar amount equal to the merger consideration of $61.50, rounded to the nearest cent. The dollar amount will be credited to the participant’s cash account under the applicable deferred fee plan, and the phantom stock units will be debited from such participant’s account. Our deferred fee plans have been amended to provide that as of the effective time no further phantom stock units will be credited to participants’ accounts and account balances may be distributed only in cash.

 

Should the effective time of the merger occur prior to November 15, 2008, then immediately prior to the effective time we will pay to each employee then actively employed by us or one of our subsidiaries any amounts due under outstanding awards granted under our executive incentive compensation plan or employee incentive compensation plan, as applicable, with respect to the full fiscal year ending on September 30, 2008. The amount of

each such payment shall be reasonably consistent with the intent of the applicable compensation plan, as determined by the compensation committee of our board of directors with regard to executives and by our president and chief executive officer with regard to our other employees; provided that the aggregate amount of such payments under both such plans shall not exceed $4,800,000.

 

Should the effective time of the merger occur on or after November 15, 2008, then immediately prior to the effective time we will pay to each employee then actively employed by us or one or our subsidiaries any amounts due under the terms and conditions of such award and the applicable compensation plan for the full fiscal year ending September 30, 2008; provided that the aggregate amount of such payments under both such plans shall not exceed $4,800,000.

 

The merger agreement contains representations and warranties that we made to Sempra Energy and Merger Sub. Generally, these representations and warranties are typical for transactions such as the merger and include representations and warranties relating to, among other things:

 

 

 

The merger agreement also contains representations and warranties that Sempra Energy and Merger Sub made to us. These relate to, among other things:

 

 

Many of the representations and warranties made by each party in the merger agreement are qualified by a “material adverse effect” standard. This standard requires the representations and warranties to which it applies to be true except in the cases where their failure to be true would not have a “material adverse effect.” The merger agreement defines the term “material adverse effect,” with respect to us, to mean any change, effect, event, occurrence, state of facts or development that, individually or in the aggregate, is or would reasonably be expected (1) to prevent, materially delay or materially impede our ability to consummate the merger or other transactions contemplated by the merger agreement, or (2) to be materially adverse to the business, condition (financial or

otherwise), assets, liabilities or results of operations of us or our subsidiaries, taken as a whole. However, this definition of “material adverse effect” excludes:

 

 

The merger agreement defines the term “material adverse effect” with respect to Sempra Energy differently. With respect to Sempra Energy, “material adverse effect” is defined to mean any change, effect, event, occurrence, state of facts or development which, individually or in the aggregate, would reasonably be expected to prevent, materially delay or materially impede Sempra Energy or Merger Sub’s ability to consummate the merger or other transactions contemplated by the merger agreement.

 

Under the merger agreement, we have agreed that, unless Sempra Energy gives us its prior written consent or as otherwise contemplated by the merger agreement, until the effective time of the merger, we and our subsidiaries will:

 

 

 

We have also agreed that during the same time period, subject to certain exceptions, and again, unless Sempra Energy gives us its prior written consent, and except as otherwise contemplated by the merger agreement, we and our subsidiaries will not, among other things:

 

 

 

 

 

 

 

 

We have agreed that, until the earlier of the effective time of the merger or the termination of the merger agreement pursuant to the terms described below, neither we, nor any of our subsidiaries, our officers and directors, nor those of our subsidiaries, will directly or indirectly:

 

 

We have also agreed that we will not authorize or permit our or our subsidiaries’ investment bankers, financial advisors, attorneys, accountants, consultants, directors, officers, employees, advisors or other representatives or agents to take any of the actions listed above. Additionally, we agreed to cease any and all discussions or negotiations with respect to any takeover proposal that were existing as of the date of the merger agreement.

 

In the event that we receive a written takeover proposal, we must, within 24 hours, provide Sempra Energy with oral and written notice of the material terms of such takeover proposal and the identity of the third party making the takeover proposal, and we must keep Sempra Energy informed in all material respects of the status and details of any such takeover proposal. In addition, we must publicly reaffirm the recommendation of our board of directors to our stockholders in favor of the merger agreement and the merger within 10 business days of receipt of a written request from Sempra Energy to do so, except that our board of directors may adversely change its recommendation pursuant to the procedures described below.

 

We may engage in negotiations with, and furnish nonpublic information to, any third party that makes a bona fide takeover proposal so long as:

 

 

 

Prior to the time that our stockholders vote to adopt the merger agreement and approve the merger, our board of directors may withdraw, modify or qualify in a manner adverse to Sempra Energy, its recommendation to our stockholders in favor of the merger agreement and the merger and may take any other action or make any public statement in connection with such recommendation that is inconsistent with such recommendation, and may adopt or recommend, or propose publicly to adopt or recommend, any takeover proposal, provided that:

 

 

We have agreed to, and have agreed to cause our legal and financial advisors to, during the four-business day notice period, negotiate with Sempra Energy and Merger Sub in good faith to make adjustments to the terms and conditions of the merger agreement so that the takeover proposal that our board of directors has determined to be a superior proposal will no longer be a superior proposal. In addition, if any material revisions, as determined by our board of directors in good faith, are made to the superior proposal during this notice period, we have agreed to deliver a new written notice to Sempra Energy and Merger Sub, except that the notice period will be reduced to two business days.

 

Once our board of directors has changed its recommendation in response to a superior proposal, our board of directors may adopt, recommend, or publicly propose to adopt or recommend, or approve our entering into any agreement constituting or relating to, or that is intended to or could reasonably be expected to lead to, a takeover proposal, and we may terminate the merger agreement and enter into any such agreement, provided that our board of directors concludes in good faith (after consultation with our outside legal counsel), that in light of the superior proposal, its failure to terminate the merger agreement would be inconsistent with its fiduciary duties to our stockholders.

 

In addition to the foregoing, in response to a material development or change in material circumstances occurring or arising after the date of the merger agreement and not relating to any takeover proposal, if the existence and material consequences of such change were not known by our board of directors prior to the date of the merger agreement, our board of directors may withdraw, modify or qualify in a manner adverse to Sempra Energy, its recommendation to our stockholders in favor of the merger agreement and the merger, but only if our board of directors concludes in good faith (after consultation with our outside legal counsel) that its failure to do so would be inconsistent with its fiduciary duties to our stockholders.

 

Unless the merger agreement is validly terminated in accordance with the terms set forth in the merger agreement, you will be entitled to vote to approve the merger and merger agreement, even if the board of directors has changed its recommendation to you with respect to the merger and merger agreement.

 

For a period of 12 months after the effective time of the merger, Sempra Energy will cause our employees and the employees of our subsidiaries as of the effective time to receive a base salary or hourly wage that is substantially similar to either those provided by Sempra Energy and its subsidiaries to their similarly situated employees or those provided by us and our subsidiaries immediately prior to the effective time, provided that, subject to applicable law and the honoring of existing agreements, nothing shall limit the right of Sempra Energy or its subsidiaries to terminate our employees or the employees of our subsidiaries after the closing date of the merger. Additionally, for a period of 12 months after the effective time, such employees will be entitled to receive employee welfare and retirement benefits which are substantially similar in the aggregate to either those provided by Sempra Energy and its subsidiaries to their similarly situated employees or those provided by us and our subsidiaries immediately prior to the effective time, provided that nothing will require Sempra Energy or its subsidiaries to continue any specific benefit plan, nor will Sempra Energy or its subsidiaries be obligated to continue or adopt any plans or arrangements providing for the issuance of any shares of capital stock or the right to receive any such shares.

 

Sempra Energy has agreed to recognize the service of our employees and the employees of our subsidiaries to us and to our subsidiaries, as if such service had been performed with Sempra Energy or its subsidiaries, for purposes of determining eligibility for and vesting (but not benefit accrual) under certain employee benefit plans, except if such treatment would result in duplicative benefits.

 

Subject to the terms and conditions of the merger agreement, each party has agreed to use its, and cause its subsidiaries to use their, commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate the merger. Among other things, each party has agreed to prepare and file as soon as reasonably practicable all documentation necessary to consummate the merger, including the appropriate filings pursuant to the Hart-Scott Rodino Antitrust Improvements Act, known as the HSR Act. Each party has also agreed to use its commercially reasonable efforts to cooperate with the other party in connection with any filing or any investigation or other inquiry, to keep the other party reasonably informed on the status of matters related to the transactions contemplated by the merger agreement, including furnishing the other with any written communications received from any governmental authority or received in connection with an action brought by a private party, and to permit the other party to review and consult with them in advance of any communication to or meeting with any governmental authority.

 

Each party has committed to cooperate with each other and use commercially reasonable efforts to contest and resist any action challenging the merger and to have removed any judgment, injunction or restraining order that prohibits, prevents or restricts consummation of the transactions contemplated by the merger agreement. Additionally, each party has agreed to use its best efforts to resolve any objections asserted with respect to the merger under any antitrust law; however, neither party is required to take any actions which requires that party to sell, hold separate or otherwise dispose of any business or assets or conduct its or its subsidiaries’ business in any specified manner, or any action which is reasonably likely to have a material adverse effect on the condition, business, assets, liabilities or results of operations of either party, taken individually or in the aggregate, or that is not conditioned on the consummation of the merger.

 

Additionally, Sempra Energy has agreed to vote (or cause to be voted) any shares of common stock owned by it or any of its affiliates in favor of the adoption of the merger agreement and the approval of the merger.

 

The consummation of the merger is subject to certain conditions contained in the merger agreement. If those conditions are not satisfied or waived, neither we nor Sempra Energy and Merger Sub would be obligated to effect the merger. If we waive any of the conditions to the merger, we will not re-solicit proxies.

 

Conditions to the obligations of all parties to complete the merger include:

 

 

 

Conditions to Sempra Energy’s and Merger Sub’s obligations to complete the merger include:

 

 

Conditions to our obligation to complete the merger include:

 

 

The merger agreement may be terminated and the merger abandoned at any time prior to the effective time of the merger in any of the following ways:

 

 

 

 

 

The merger agreement provides that, in general, all direct costs and expenses incurred by the parties in connection with the merger agreement and the merger will be borne by the party incurring such cost or expense. The merger agreement requires, however, that we pay Sempra Energy a termination fee of $25 million if:

 

 

 

The HSR Act and the rules and regulations promulgated thereunder required us and Sempra Energy to file notification and report forms with respect to the merger and related transactions with the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission. We and Sempra Energy filed our notification and report forms on August • , 2008. We thereafter were required to wait for the expiration or early termination of the statutory waiting period before completing the merger.

We and Sempra Energy are in the process of obtaining the necessary regulatory approvals, consents and authorizations from the Federal Communications Commission. We have been advised by the Alabama Public Service Commission that its approval is not required to consummate the merger.

 

Sempra Energy, Merger Sub and we may amend the merger agreement at any time. However, after our stockholders approve the merger agreement, no amendment may be made that requires further approval by our stockholders without such further approval having been obtained.

 

Each party to the merger agreement may extend the time for performance of any of the obligations or other acts of the other parties under the merger agreement, to the extent permitted by applicable law, waive any inaccuracies in the representations and warranties contained in the merger agreement, and, to the extent permitted by applicable law, waive compliance with any of the agreements or conditions in the merger agreement other than the restrictions on amendments to the merger agreement requiring stockholder approval described above.

 

The consummation of the merger is not contingent upon Sempra Energy obtaining financing. Sempra Energy has represented to us that it or Merger Sub has sufficient cash available, either through cash on hand or through committed availability under existing credit facilities, directly or through one or more of its affiliates, to pay the aggregate merger consideration described above.

 

EnergySouth’s common stock is traded on the Nasdaq Global Select Market under the symbol “ENSI.” On August 8, 2008, there were 8,115,733 shares of common stock outstanding, held by approximately 1,100 stockholders of record. Because many of the Company’s shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

The following table shows, for the periods indicated, the reported high and low sale prices per share of the common stock on the Nasdaq Global Select Market and the amount of dividends paid per outstanding share:

 

 

The closing sale price of EnergySouth common stock on the Nasdaq Global Select Market on July 25, 2008, the last full trading day before the public announcement of the execution of the merger agreement and the approval of the merger agreement by the board of directors, was $50.16 per share. On [ • ] , 2008, the last full trading day

prior to the date of the first mailing of this proxy statement, the closing market price of the common stock on the Nasdaq Global Select Market was $ [ • ] per share. Stockholders should obtain a current market quotation for the common stock before making any decision with respect to the merger.

 

We are limited in our ability to declare and pay dividends on our common stock by the merger agreement, which provides that we will not pay any dividend except for regular quarterly cash dividends in the ordinary course of business consistent with past practice (and subject to the other limitations specified in the merger agreement) not to exceed $0.26 per share. Our long-term debt instruments and credit agreements also contain certain debt to equity ratio requirements and restrictions on the payment of cash dividends and the purchase of shares of our capital stock, which are not expected to have a significant impact on our ability to pay dividends in the future. See “The Merger Agreement — Conduct of Our Business Pending the Merger.”

 

Holders of EnergySouth common stock who dissent and do not vote in favor of the merger are entitled to certain appraisal rights under Delaware law in connection with the merger, as described below and in Annex C hereto. Holders who perfect their appraisal rights and strictly follow certain procedures in the manner prescribed by Section 262 of the DGCL will be entitled to receive payment of the fair value of their shares, as determined by appraisal proceedings, in cash from EnergySouth, as the surviving corporation in the merger.

 

ANY ENERGYSOUTH STOCKHOLDER WHO WISHES TO EXERCISE APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE HIS OR HER RIGHT TO DO SO SHOULD REVIEW ANNEX C CAREFULLY AND SHOULD CONSULT HIS OR HER LEGAL ADVISOR, SINCE FAILURE TO COMPLY STRICTLY AND TIMELY WITH THE PROCEDURES SET FORTH THEREIN WILL RESULT IN THE LOSS OF SUCH RIGHTS.

 

Record holders of the shares of EnergySouth common stock that elect to exercise their appraisal rights with respect to the merger are referred to herein as “dissenting stockholders,” and the shares of EnergySouth common stock with respect to which they exercise appraisal rights are referred to herein as “dissenting shares.” If an EnergySouth stockholder has a beneficial interest in shares of EnergySouth common stock that are held of record in the name of another person, such as a broker or nominee, and such EnergySouth stockholder desires to perfect whatever appraisal rights such beneficial EnergySouth stockholder may have, such beneficial EnergySouth stockholder must act promptly to cause the holder of record timely and properly to follow the steps summarized below.

 

A VOTE IN FAVOR OF THE MERGER BY AN ENERGYSOUTH STOCKHOLDER WILL RESULT IN A WAIVER OF SUCH HOLDER’S RIGHT TO APPRAISAL RIGHTS.

 

When the merger becomes effective, EnergySouth stockholders who strictly comply with the procedures prescribed in Section 262 of the DGCL will be entitled to a judicial appraisal of the fair value of their shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, and to receive payment of the fair value of their shares in cash from EnergySouth, as the surviving corporation in the merger. The following is a brief summary of the statutory procedures that must be followed by a common stockholder of EnergySouth in order to perfect appraisal rights under the DGCL. This summary is not intended to be complete and is qualified in its entirety by reference to Section 262 of the DGCL, the text of which is included as Annex C to this proxy statement. We advise any EnergySouth stockholder considering exercising appraisal rights to consult legal counsel.

 

In order to exercise appraisal rights under Delaware law, a stockholder must be the stockholder of record of the shares of EnergySouth common stock as to which appraisal rights are to be exercised on the date that the written demand for appraisal described below is made, and the stockholder must continuously hold such shares through the effective date of the merger.

 

While EnergySouth stockholders electing to exercise their appraisal rights under Section 262 of the DGCL are not required to vote against the approval of the merger, a vote in favor of approval of the merger will result in a waiver of the holder’s right to appraisal rights. EnergySouth stockholders electing to demand the appraisal of such

stockholder’s shares shall deliver to EnergySouth, before the taking of the vote on the merger, a written demand for appraisal of such stockholder’s shares. Such demand will be sufficient if it reasonably informs EnergySouth of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder’s shares. A proxy or vote against the merger shall not constitute such a demand. Please see the discussion below under the heading “Written Demand” for additional information regarding written demand requirements.

 

Within ten days after the effective time of the merger, EnergySouth, as the surviving corporation, must provide notice of the date of effectiveness of the merger to all EnergySouth stockholders who have not voted for approval of the merger agreement and who have otherwise complied with the requirements of Section 262 of the DGCL.

 

An EnergySouth stockholder who elects to exercise appraisal rights must mail or deliver the written demand for appraisal to:

 

EnergySouth, Inc.

P.O. Box 2248

Mobile, Alabama 36652

Attn: G. Edgar Downing, Jr., Secretary

 

Within 120 days after the effective date of the merger, any dissenting stockholder, and any beneficial owner of shares of EnergySouth stock held either in a voting trust or by a nominee on behalf of such beneficial owner, that has strictly complied, or has caused the applicable dissenting stockholder to strictly comply, with the procedures prescribed in Section 262 of the DGCL will be entitled, upon written request, to receive from EnergySouth, as the surviving corporation, a statement of the aggregate number of shares not voted in favor of the merger and with respect to which demands for appraisal have been received by EnergySouth, and the aggregate number of holders of those shares. This statement must be mailed to the requesting stockholder within ten days after the stockholder’s written request has been received by EnergySouth, as the surviving corporation, or within ten days after the date of the effective date of the merger, whichever is later.

 

Within 120 days after the effective date of the merger, (1) EnergySouth, as the surviving corporation, (2) any dissenting stockholder that has strictly complied with the procedures prescribed in Section 262 of the DGCL or (3) any beneficial owner of shares of EnergySouth stock held either in a voting trust or by a nominee on behalf of such beneficial owner that has caused the applicable dissenting stockholder to strictly comply with the procedures prescribed in Section 262 of the DGCL may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of each share of EnergySouth stock of all dissenting stockholders. If a petition for an appraisal is timely filed, then after a hearing on the petition, the Delaware Court of Chancery will determine which EnergySouth stockholders are entitled to appraisal rights and then will appraise the shares of EnergySouth common stock owned by those stockholders by determining the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger, together with the interest to be paid, if any, on the amount determined to be the fair value. If no petition for appraisal is filed with the Delaware Court of Chancery by EnergySouth, as the surviving corporation, any dissenting stockholder or any beneficial holder described above within 120 days after the effective time of the merger, then the dissenting stockholders’ rights to appraisal will cease, and they will be entitled only to receive merger consideration paid in the merger on the same basis as other EnergySouth unaffiliated stockholders. Inasmuch as EnergySouth, as the surviving corporation, has no obligation to file a petition, any EnergySouth stockholder who desires a petition to be filed is advised to file it on a timely basis. Unless the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective time of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at the rate that is 5% over the Federal Reserve discount rate (including any surcharges) as established from time to time during the period between the effective time of the merger and the date of payment of the judgment.

 

The cost of the appraisal proceeding may be determined by the Delaware Court of Chancery and taxed upon the parties as the court deems equitable in the circumstances. Upon application of a dissenting stockholder that has strictly complied with the procedures prescribed in Section 262 of the DGCL, the court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees, and the fees and expenses of experts, be charged pro rata against the value of all shares entitled to appraisal. In the absence of this determination or assessment, each party

bears its own expenses. A dissenting stockholder who has timely demanded appraisal in compliance with Section 262 of the DGCL will not, after the effective time of the merger, be entitled to vote EnergySouth common stock subject to such demand for any purpose or to receive payment of dividends or other distributions on EnergySouth common stock, except for dividends or other distributions payable to stockholders of record at a date prior to the effective time of the merger.

 

At any time within 60 days after the effective time of the merger, any dissenting stockholder will have the right to withdraw the stockholder’s demand for appraisal and to accept the right to receive merger consideration in the merger on the same basis on which EnergySouth common stock is converted in the merger. After this 60 day period, a dissenting stockholder that has strictly complied with the procedures prescribed in Section 262 of the DGCL may withdraw his or her demand for appraisal only with the written consent of EnergySouth or Sempra Energy. If a petition has been timely filed in the Delaware Court of Chancery demanding appraisal, such petition will not be dismissed as to any EnergySouth stockholder, without the approval of the Delaware Court of Chancery, which may be conditioned on any terms the Delaware Court of Chancery deems just. However, such approval is not required for any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party to withdraw such stockholder’s demand for appraisal and to accept the merger consideration within 60 days after the effective date of the merger.

 

Written Demand

 

When submitting a written demand for appraisal under Delaware law, the written demand for appraisal must reasonably inform EnergySouth of the identity of the stockholder of record making the demand and indicate that the stockholder intends to demand appraisal of the stockholder’s shares. A demand for appraisal must be executed by or for an EnergySouth common stockholder of record, fully and correctly, as that stockholder’s name appears on the stockholder’s stock certificate. If EnergySouth common stock is owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, the demand must be executed by the fiduciary. If EnergySouth common stock is owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, must execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, he, she or it is acting as agent for the record owner.

 

A record owner who holds EnergySouth common stock as a nominee for other beneficial owners of the shares may exercise appraisal rights with respect to EnergySouth common stock held for all or less than all beneficial owners of EnergySouth stock for which the holder is the record owner. In that case, the written demand must state the number of shares of EnergySouth common stock covered by the demand. Where the number of shares of EnergySouth common stock is not expressly stated, the demand will be presumed to cover all shares of EnergySouth common stock outstanding in the name of that record owner. Beneficial owners who are not record owners and who intend to exercise appraisal rights should instruct the record owner to comply strictly with the statutory requirements with respect to the delivery of written demand prior to the taking of the vote on the merger.

 

EnergySouth stockholders considering whether to seek appraisal should bear in mind that the fair value of their EnergySouth common stock determined under Section 262 of the DGCL could be more than, the same as or less than the value of the right to receive merger consideration in the merger. Also, EnergySouth and Sempra Energy reserve the right to assert in any appraisal proceeding that, for purposes thereof, the “fair value” of EnergySouth common stock is less than the value of the merger consideration to be issued in the merger.

 

Any stockholder who fails to strictly comply with the requirements of Section 262 of the DGCL, attached as Annex C to this proxy statement will forfeit his, her or its rights to dissent from the merger and to exercise appraisal rights and will receive merger consideration on the same basis as all other stockholders.

 

THE PROCESS OF DISSENTING REQUIRES STRICT COMPLIANCE WITH TECHNICAL PREREQUISITES. THOSE INDIVIDUALS OR ENTITIES WISHING TO DISSENT AND TO EXERCISE THEIR APPRAISAL RIGHTS SHOULD CONSULT WITH THEIR OWN LEGAL COUNSEL IN CONNECTION WITH COMPLIANCE UNDER SECTION 262 OF THE DGCL. TO THE EXTENT THERE ARE ANY INCONSISTENCIES BETWEEN THE FOREGOING SUMMARY AND SECTION 262 OF THE DGCL, SECTION 262 OF THE DGCL SHALL CONTROL.

ADJOURNMENT OF THE SPECIAL MEETING (PROPOSAL NO. 2)

 

Proposal for Adjournment

 

EnergySouth is asking its stockholders to vote on a proposal to adjourn the special meeting, if necessary or appropriate, in order to allow for the solicitation of additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement and approve the merger. We currently do not intend to propose adjournment at our special meeting if there are sufficient votes to adopt the merger agreement and approve the merger. The proposal to adjourn our special meeting for the purpose of soliciting additional proxies requires the affirmative vote of the holders of a majority of the shares of EnergySouth common stock present or represented by proxy and entitled to vote on the matter.

 

The board of directors recommends that you vote “FOR” the adjournment of the special meeting, if necessary, to solicit additional proxies.

SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

 

The table below sets forth, as of August 8, 2008, certain information with respect to the beneficial ownership of the Company’s common stock by (1) each person known by the Company to own beneficially more than five percent (5%) of the outstanding shares of common stock; (2) each of our named executive officers; (3) each director of the Company; and (4) all directors and executive officers as a group.

 

Beneficial ownership is determined in accordance with the rules of the SEC that deem shares to be beneficially owned by any person who has or shares voting power or investment power with respect to such shares. Shares of the Company’s common stock that are issuable to the identified person pursuant to stock options or other awards under the Company’s equity incentive compensation plans within 60 days after August 8, 2008 are deemed to be outstanding and to be beneficially owned by the person holding such awards for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. For this purpose, since all EnergySouth equity incentive compensation awards, both vested and not vested, will become fully vested in connection with the merger, we have assumed that all such awards are fully exercisable within 60 days of the date of this table. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date.

 

The business address of each officer and director is c/o EnergySouth, Inc., 2828 Dauphin Street, Mobile, Alabama 36606 .

 

 

 

 

STOCKHOLDER PROPOSALS

 

If the merger is completed, there will be no public participation in any future meetings of our stockholders. If the merger is not completed, our stockholders will continue to be entitled to attend and participate in our stockholder meetings. Pending consummation of the merger, we do not intend to conduct any further annual meetings of stockholders.

 

If the merger is not consummated, our stockholders are permitted to submit proposals that they believe should be voted on at the 2009 annual meeting and recommend persons who they believe should be nominated for election to the board of directors. Pursuant to Rule 14a-8 under the Exchange Act, some stockholder proposals may be eligible for inclusion in our 2009 proxy statement. Any such stockholder proposals intended for inclusion in our 2009 proxy statement must be submitted, along with proof of ownership of our stock in accordance with Rule 14a-8(b)(2), to our principal executive offices to the attention of our Secretary. Failure to deliver a proposal by this means may result in it not being deemed timely received. We must [have] receive [d] all such submissions no later than August 20, 2008. Submitting a stockholder proposal does not guarantee that we will include it in our proxy statement.

 

Notice of a stockholder proposal intended to be submitted for a vote at the 2009 annual meeting outside the process of Rule 14a-8 (i.e., not for inclusion in our 2009 proxy statement) will be considered untimely if not received by our Secretary no later than November 3, 2008. If notice of such a stockholder proposal is received by the Secretary after such date, then the proxy card for the 2009 annual meeting may confer discretionary authority for Company representatives to vote on such matter in their discretion, without a description of such matter being included in the proxy statement.

 

The Corporate Governance and Nominating Committee reviews all stockholder proposals and makes recommendations to the board of directors for action on such proposals.

OTHER MATTERS

 

At this time, we know of no other matters to be submitted to our stockholders at the special meeting or any adjournment or postponement of the special meeting. If any other matters properly come before the special meeting or any adjournment or postponement of the special meeting, it is the intention of the persons named in the enclosed proxy card to vote the shares they represent in accordance with their judgment.

 

Pursuant to the SEC’s “householding” rules, we may deliver a single proxy statement to an address shared by two or more of our stockholders. This delivery method can result in significant costs savings for us. To take advantage of this opportunity, we have delivered only one proxy statement to multiple stockholders who share an address, unless we received contrary instructions from the impacted stockholders prior to the mailing date. We undertake to deliver promptly upon written or oral request a separate copy of the proxy statement, as requested, to a stockholder at a shared address to which a single copy of that document was delivered. If you prefer to receive, either now or in the future, separate copies of any proxy statement or annual report or if you are now receiving multiple copies and prefer to receive a single copy, either now or in the future, you can submit your request by writing to us at the following address: EnergySouth, Inc., P.O. Box 2248, Mobile, Alabama 36652, Attention: Martha Loper, Investor Relations, or by telephoning (251) 450-4631.

 

We are subject to the informational filing requirements of the Exchange Act and, in accordance therewith, are required to file periodic reports, proxy statements and other information with the SEC relating to our business, financial condition and other matters. Such reports, proxy statements and other information are available for inspection at the public reference facilities maintained by the SEC at Room 1580, 100 F Street, NE, Washington, D.C. 20549. Copies of such materials may also be obtained by mail, upon payment of the SEC’s customary fees, by writing to the SEC’s principal office at 100 F Street, NE, Washington, D.C. 20549. You may obtain written information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. These materials filed by us with the SEC are also available on the SEC’s website at www.sec.gov .

 

The SEC allows us to “incorporate by reference” information into this proxy statement. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this proxy statement, and later information filed with the SEC will update and supersede the information in this proxy statement.

 

The following documents filed with the SEC are incorporated by reference in this proxy statement:

 

 

We incorporate by reference each document we file pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement and prior to final adjournment of the special meeting.

We will provide, without charge, to each person to whom a copy of this proxy statement has been delivered, upon request, by first class mail or other equally prompt means, within one business day of receipt of such request, a copy of any or all of the documents incorporated by reference into this proxy statement, other than the exhibits to these documents, unless the exhibits are specifically incorporated by reference into the information that this proxy statement incorporates. You may obtain copies of documents incorporated by reference by requesting them in writing or by telephone from:

 

Martha Loper, Investor Relations

EnergySouth, Inc.

P.O. Box 2248

Mobile, Alabama 36652

Telephone: (251) 450-4631

 

Any request for copies of documents should be made by [ • ], 2008 in order to ensure receipt of the documents before the special meeting.

 

Stockholders should not rely on information other than that contained or incorporated by reference in this proxy statement. EnergySouth has not authorized anyone to provide information that is different from that contained in this proxy statement. This proxy statement is dated [ • ], 2008. The delivery of this proxy statement should not create an implication that there has been no change in the affairs of EnergySouth since the date of this proxy statement or that the information herein is correct as of any later date. Notwithstanding the foregoing, in the event of any material change in any of the information previously disclosed, EnergySouth will, where relevant and if required by applicable law, update such information through a supplement to this proxy statement to the extent necessary.

 

Annex A

 

 

AGREEMENT AND PLAN OF MERGER
Dated as of July 25, 2008
by and among
SEMPRA ENERGY,
EMS HOLDING CORP.
and
ENERGYSOUTH, INC.

 

TABLE OF CONTENTS

 

INDEX OF DEFINED TERMS