While it continues to tangle with Oneok in an effort to acquireSouthwest Gas, Southern Union Co. agreed to merge with PennsylvaniaEnterprises Inc. (PEI). PEI’s Pennsylvania-based operations willbecome the fourth major autonomous division of Southern Union,complementing its Texas, Missouri and Florida operations.

The deal diversifies Southern Union’s risk in areas such asweather exposure and provides the company its first entry intopower marketing.

Headquartered in Wilkes-Barre, PA, PEI’s primary business is gasdistribution. Principal subsidiary PG Energy and PEI’s HonesdaleGas Co. serve more than 153,000 gas customers in northwestern andcentral Pennsylvania. The company also markets electricity to morethan 20,000 customers through PG Energy PowerPlus, which markets tocommercial, industrial, and residential customers.

Pennsylvania Enterprises will become an autonomous division ofSouthern Union with the division headquarters remaining inWilkes-Barre [PA], and there will be no material changes to theoperations of PEI.

The combined company will have a market capitalization of about$1 billion and serve 1.2 million gas and electric customers inPennsylvania, Texas, Missouri, Florida and Piedras Negras, Mexico.

Southern Union agreed to acquire PEI for about $500 million,including debt assumption. The transaction will call for each shareof PEI’s approximately 11 million outstanding common shares to beexchanged for $32 in Southern Union common stock (subject toadjustment for market fluctuations) and $3 cash. Based on the June4 Southern Union closing price, PEI shareowners will receive 1.4798shares of Southern Union for each share of PEI. The common stockportion of the transaction is expected to be tax-free to PEI’sshareowners.

“The acquisition of Pennsylvania Enterprises gives SouthernUnion weather and economic diversification, as well as valuableexpertise in the electric marketing business,” said Southern UnionCEO George Lindemann. “This transaction enables Southern Union tocontinue our active strategy for growth and provides geographicdiversity with entry into the East Coast. Especially important isthe electric marketing expertise that PEI’s marketing divisionbrings to Southern Union. PG Energy PowerPlus is an electricmarketer that ranks 8th among the largest suppliers of electricityin Pennsylvania in terms of peak load and has an electric customerbase which has doubled in the past year.”

“We are extremely pleased about this strategic relationship withSouthern Union. It strengthens PEI’s ability to attain the criticalmass needed to effectively compete in today’s energy markets,” saidPEI CEO Thomas F. Karam. “This merger will retain PEI’sPennsylvania presence, with no material change to our operations,since we will operate as an autonomous division of Southern Union.Our shareowners will have an interest in an international energycompany with a demonstrated track record for growth and shareownervalue.”

The deal requires shareholder approval, and approval ofPennsylvania, Missouri, and Florida regulators.

Southern Union spokesman George Yankowski said prices for LDCassets are rising, “but we still believe they’re going to gohigher. There’s real value in access to the customer. Another thingthis acquisition does for us is it brings our equity to roughly 50%of our total capital.” He said the company will be in a betterposition to move forward with even larger acquisitions.

Southern Union is headquartered in Austin, TX, and mainlyengages in the distribution of natural gas and is the 15th largestdistributor in the nation. The company serves more than 1 millioncustomers through its three natural gas divisions in Texas,Missouri, Florida, its propane distribution subsidiaries, and itsequity ownership in a natural gas distribution company servingPiedras Negras, Mexico. Through its subsidiaries, Southern Unionalso markets natural gas to end users, operates propanedistribution and natural gas pipeline systems and markets propanegas.

PEI is a holding company with regulated and non-regulatedsubsidiaries. The regulated group consists of PG Energy and itssubsidiary, Honesdale Gas Co., which together provide natural gasto more than 153,000 customers in 13 counties in northeastern andcentral Pennsylvania. The non-regulated group consists of PEI PowerCorp., Theta Land Corp. and PG Energy Services and its subsidiary,Keystone Pipeline Services Inc. PG Energy Services markets energyand energy products in a large area of Pennsylvania under the namePG Energy PowerPlus.

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