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