Energy East Corp., parent of New York State Electric & Gas,offered to buy Connecticut Energy Corp. (CNE) for $617 millionFriday, paving the way for the combined utility to add 160,000 newgas customers and at the same time continuing to shrink the numberof pure gas utilities. The board of directors for each company hasagreed to the deal.

“Our focus is on maximizing shareholder value and we are doingthat by moving away from generation and turning our attention todistribution of electricity and gas. Our two companies have asimilar goal of bringing energy deregulation to New England andthis merger would enhance competition in the area. It also givesEnergy East the opportunity to operate in an area of high growthpotential and new market penetration” according to Wes von Schack,Energy East CEO.

The offer still needs approval from each company’s shareholdersas well as the Securities and Exchange Commission and theConnecticut Department of Public Utility.

If approved, CNE shareholders would receive $42 share. Anindustry analyst said the price is 2.4 times the book value whilethe industry average price for offers is 2.3 times book value. Halfthe shareholders would be paid in stock and the other half wouldreceive cash. For those that would receive stock, there is a floorvalue of $23.10 and a collar of $29.40. The transaction is expectedto be tax-free to CNE shareholders to the extent they receive stockof Energy East. The deal will be accretive in the first full yearfollowing closing.

If the merger is approved, one director of the CNE board will beelected to the Energy East board. J.R. Crespo, CEO of CNE and itsmajor subsidiary, Southern Connecticut Gas, will remain in hisposition as well as gain new responsibility as head of EnergyEast’s Xenergy Enterprises. While Energy East is based in Ithaca,NY, CNE’s headquarters will remain in Bridgeport, CT.

Southern Connecticut’s gas optimization deal with Sempra (SeeDaily GPI, Jan. 29) will be unaffected, Crespo said in a conferencecall Friday. The deal, which became effective April 1 and allowsSempra to manage supply and delivery of gas to SouthernConnecticut’s customers, runs for one year. After the contractexpires, Crespo said Southern Connecticut will re-evaluate itsoptions.

Although both companies expect to close the transaction in oneyear, Dave Fidell, an analyst with AG Edwards, said it may takelonger. “Whenever I hear the closing of a merger is expected in 12months, I automatically assume 15. Especially because the SEC is sobacked up with all the other mergers, this one could take sometime.” He added that the offer is fair and there isn’t muchlikelihood for a hostile or competing bid.

Fidell said this merger is another case of a gas utility beingswallowed up by a larger, more diverse energy company. “We’ve gotjust another piece of the convergence puzzle in place. Its beenhappening for a while now. These gas utilities get eaten up bythese bigger, combined utilities all over the place.”

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