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Merger Week Rolls on With Nos. 3 & 4

Merger Week Rolls on With Nos. 3 & 4

Merger week in the energy industry continued yesterday with two more convergence combinations in New England. The larger of the two involved Energy East, the parent company of Upstate New York's combination utility New York State Electric & Gas, buying CMP Group, parent of Maine's largest electric utility, Central Maine Power, for $1.2 billion in cash and debt. The other transaction was a $679 million purchase, including assumption of $201 million in debt, of Yankee Energy by its former parent company Northeast Utilities.

"It just keeps rolling along," said Ed Tirello, an analyst with Deutsche Banc Alex. Brown. "As I said two years ago. in five years there will be no more gas companies. They will all be owned by the electric companies, and the price does not matter." Tirello referred to the recently announced pairings of Columbia and NiSource, a hostile deal, (See Daily GPI June 8, 1999); Indiana Energy and Sigeco (See Daily GPI June 15, 1999); and Dynegy and Illinova (See Daily GPI June 15, 1999).

"You watch next week. I'm sure there will be a couple more [deals] announced," Tirello said. "They're just moving hot and heavy."

The Yankee deal gives NU another 183,000 energy customers in Connecticut, where Yankee is the largest gas distribution company. NU already is New England's largest electric utility, serving more than 2.3 million customers in Connecticut, Massachusetts and New Hampshire. Yankee will retain its corporate name and once again become a subsidiary of NU.

CEO Michael G. Morris said NU's goals, "which are different from many other New England utilities," are to remain in the unregulated generation business in the Northeast, to "broaden its energy delivery platform" and to get back into the natural gas business. This transaction fits those requirements perfectly, he said, and now can succeed because the Securities and Exchange Commission (SEC) is taking a lighter handed approach in applying the provisions of the Public Utility Holding Company Act. The SEC ordered the divestiture of Yankee Gas in 1989 because of PUHCA.

"Because things have changed in a state sense in the regulation of utilities and in the federal sense of restructuring and deregulating the utility industry, we believe the SEC will allow us in fact to say 'I do,'" said Morris, citing a recent decision that was made on the gas properties of Cinergy.

Despite the regulatory risks, Yankee investors loved the deal, which was a whopping 38% premium to Yankee's stock price at the close of trading on Monday. Yankee's stock soared 23%, or $7.44/share, to $39.94 on Tuesday. The transaction calls for NU to pay Yankee shareholders $45/share, 45% payable in NU shares and 55% payable in cash.

Merrill Lynch energy analyst Rebecca Followill said it was a "hefty premium" to pay for a small gas distributor, but she noted there are not too many of them left. "It's a scarcity factor..[driven by] the declining number of gas utilities. With new higher premiums, folks we've seen as buyers may turn into sellers at these high prices.

"It's higher than any of the multiples we've seen to date," she added. "It ups the ante on [merger and acquistion] activity out there. It was 25 times forward year earnings. This was 10.9 times cash flow from operations. The other ones have been 8.1. This was 2.7 times book, and the others were 2.5 and this was a 39% premium to last trade and the others have averaged 28% [more than the last trade]," she said. "It's almost gotten to a frenzied pace out there on M&A activity." She noted CTG, the only other Connecticut utility that has not been bought out, has hired PaineWebber to review its alternatives and its stock price soared $3.75/share yesterday.

Morris said this isn't the last purchase for NU. It plans to continue looking for other potential combinations and additions to build its "strategic platform" of regulated energy delivery businesses.

Energy East, CMP

Energy East Corp., parent of New York State Electric & Gas (NYSEG), plans to buy all common shares of CMP Group Inc., parent of Central Maine Power Co., for $29.50/share in a cash deal worth about $957 million, not including about $271 million of preferred stock and long-term debt to be assumed by Energy East.

CMP Group will become a wholly owned subsidiary of Energy East. The purchase transaction is expected to be accretive to Energy East's earnings per share in the first full year after closing.

Central Maine Power serves more than 530,000 electric customers in an 11,000 square-mile territory in central and southern Maine with more than three-quarters of the state's population, in addition to major commercial, manufacturing and recreational areas, including the cities of Portland, Maine's largest city, and state capital Augusta. NYSEG serves nearly 820,000 electric customers and 240,000 gas customers in upstate New York.

Neither Energy East nor CMP Group continue to hold generation assets, and executives said neither has stranded costs to contend with.

Central Maine Power and NYSEG already have a joint venture, called CMP Natural Gas, which aims to provide new local gas distribution service to a number of Maine communities. The new distribution grid would become one of the largest infrastructure projects in the state in more than four decades (see Daily GPI Feb. 20, 1998; May 27, 1999).

Tirello said he likes the Energy East-CMP deal. Gas slated to arrive in Maine from Canada makes for what Tirello called a good beach head in the northern New England market. He predicted Energy East will be on the hunt for more New England distribution holdings, and the company won't be trying to go the cheap route either. "They pay up, but you've got to pay up. I think they've learned, you don't underbid. If you screw up and underbid, you always lose. You don't want a bidding war. You don't want to get into what Southwest Gas ran into with Oneok.. You've got too many other things to do."

Clearly, Energy East sees its plate as being full of opportunities.

"We will use our combined balance sheets and proceeds from the sales of generation assets to selectively grow our distribution businesses in the Northeast," said Energy East CEO Wes von Schack. "Energy East and CMP Group have a common vision for the future of our industry. We have chosen to focus on our core competencies-the distribution of electricity and natural gas-and we will leverage our combined skills and resources to grow our distribution businesses and improve efficiencies.

"With this transaction and our previously announced combination with Connecticut Energy, Energy East is strategically positioned to be a leading energy distribution company in the Northeast."

The Connecticut Energy deal was only announced in April (see Daily GPI April 26, 1999). Energy East's offer was for $617 million in a deal to add 160,000 new gas customers. "Our focus is on. moving away from generation and turning our attention to distribution of electricity and gas," von Schack said at the time."

Energy East began a transformation in 1998 with an electric restructuring plan that lowered prices for NYSEG customers, promoted competition by allowing all of its customers to choose suppliers by Aug. 1, 1999, and created the holding company, Energy East. The sale of coal-fired generation assets, which resulted in after-tax proceeds of $1.3 billion, eliminated all generation stranded costs, including nuclear stranded costs and provided cash to grow its electric and gas distribution businesses.

Energy East intends to finance the CMP Group transaction through a combination of debt and cash. The transaction will have no effect on the company's previously announced share repurchase program. Energy East has repurchased nearly 10 million shares of common stock this year, bringing its total share repurchase since 1996 to about 27 million shares. Energy East has about 116 million shares outstanding.

Flanagan will be chairman, president and CEO of CMP Group and will become president of Energy East. Arthur W. Adelberg, executive vice president of CMP Group, will become senior vice president and chief financial officer of Energy East. Sara J. Burns will continue as president of Central Maine Power Co. Flanagan and two other CMP Group directors to be mutually agreed upon will be named to the Energy East board. As operating utilities-CMP, as well as NYSEG and The Southern Connecticut Gas Co.-will continue to be headquartered in their respective locations and operate under their respective names. Energy East will also establish a corporate office in Portland, ME.

The companies plan to minimize job cuts through reduced hiring and attrition. All union contracts will be honored.

The merger is conditioned, among other things, upon the approvals of CMP Group shareholders and various regulatory agencies, including the Maine Public Utilities Commission, the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission. Energy East intends to register as a holding company with the SEC under the Public Utility Holding Company Act (PUHCA) of 1935. The companies anticipate that regulatory approvals can be obtained within a year.

CMP Group is a Maine holding company formed Sept. 1, 1998, with general offices in Augusta, ME. Its principal holding, Central Maine Power Co. (CMP), is a century-old electric utility that serves more than 530,000 retail customers in an 11,000 square-mile service territory in central and southern Maine. CMP Group subsidiaries include Union Water-Power, property management, real estate, utility services, and energy-efficiency contracting; MaineCom, fiber-optic infrastructure; CNEX, consulting; and TeleSmart, accounts-receivable services.

Energy East is an energy delivery, products and services company doing business in New York, Massachusetts, Maine and New Hampshire. New York State Electric & Gas Corporation (NYSEG), a subsidiary, supplies, markets and delivers electricity and gas to over one million customers across more than 40% of upstate New York.

CMP Group shares closed up a whopping 5 11/16 at 25 _. Energy East shares closed up 1/16 Tuesday at 26 5/16.

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