Columbia Energy has accepted defeat in the three-month battlewith Dominion Resources for a merger with Consolidated Natural Gas.Columbia officially withdrew its $6.7 billion offer late Tuesdayfollowing a sweetened merger bid by Virginia Power parent Dominionset at $6.4 billion and the CNG board’s unanimous approval of arevised agreement with Dominion.

“We want to put to rest any further speculation about Columbia’sintentions toward CNG,” said Columbia CEO Oliver G. Richard III.”We had a superior offer and are disappointed in the CNG board’sdecision, but observe that our proposal resulted in CNG’sshareholders gaining a better offer from Dominion than that agreedto by CNG and Dominion in February.”

Dominion set its revised offer at $66.60/share, an improvementcompared to its previous bid which fluctuated with its share price.Its original agreement was to convert each common share of CNG to1.52 shares of Dominion stock, which fell in value following theannounced transaction in February.

At face value, the revised Dominion offer still falls short ofColumbia’s by about $300 million, excluding Dominion’s $2.58 pershare dividend and its tax-free offer. Some analysts, includingPaineWebber’s Ronald J. Barone, still see the Columbia proposal assuperior from “both an economic and a strategic standpoint. Thecombination of CNG and Columbia would truly represent and idealfit,” Barone said.

CNG’s board, however, clearly disagreed. “We believe that acombination of CNG and Dominion best serves our shareholdersbecause it makes strategic sense and has a straightforward road mapto completion,” said Chairman George A. Davidson, Jr. “Together, wewill have the scale, scope and skills to be successful in thecompetitive energy marketplace.”

CNG’s board concluded the revised Dominion transaction wasbetter for CNG shareholders due to its certainty and timing, thestrategic benefits of a gas and electric combination, and theupside potential to shareholders of an investment in the combinedCNG/Dominion. The board said it based its decision in part on areview of the regulatory situation and on input from severalregulatory experts, including former public utility commissioners.CNG and Dominion largely had completed all of their regulatoryfilings for the merger even before Columbia’s April bid. AHart-Scott-Rodino filing with the SEC was made on May 10, a FERCfiling is expected shortly and the transaction is expected toclose, at the latest, in early 2000. In contrast, a Columbia mergerwas expected to take much longer, possibly until year end 2000.

“It was a foregone conclusion early on that Dominion would winthis one,” according to Paul Messerschmidt with Energy SecurityAnalysis (ESAI). “The Columbia offer came too late in the game andit was really not as attractive because of the timing and theregulatory hurdles. I find it intriguing that when Dominion wasurged to raise its bid, it held firm for the most part. It wasconfident it had the better offer.”

In the end, Columbia’s consolidation merger plan, which wouldhave created one of the largest gas utilities and independentproducers in the nation, was deemed inferior to Dominion’selectric-gas convergence transaction. CNG and Dominion will have anenergy portfolio of more than 20,000 MW of power generation, andnearly 3 Tcfe of gas and oil reserves with production exceeding 300Bcf annually. They will operate a major interstate gas pipeline,the largest gas storage system in North America and will rank asone of the largest independent producers. They will form one of thenation’s largest integrated energy companies, serving nearly 4million retail customers in five states. Market capitalization ofthe combined entity will be $25 billion-consisting of approximately$14.4 billion in equity, $9.5 billion in debt and minorityinterests, and $1.1 billion in preferred stock.

Despite the failed bid, Columbia vowed to continue growing itsregulated business and its unregulated energy services andmarketing arm, and plans to renew its search for a transaction thatwill keep it among the leading energy companies.

“As our interest in CNG has demonstrated, obviously we are opento attractive opportunities brought about by consolidation andconvergence in the energy industry,” Richard said. “We have alsodemonstrated that we are disciplined in our approach, and will onlyconsider those transactions that provide real value for ourshareholders, customers and employees. We will continue to look atadvantageous situations that fit our growth strategies andfinancial criteria.”

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