Merger week in the energy industry continued yesterday with twomore convergence combinations in New England. The larger of the twoinvolved Energy East, the parent company of Upstate New York’scombination utility New York State Electric & Gas, buying CMPGroup, parent of Maine’s largest electric utility, Central MainePower, for $1.2 billion in cash and debt. The other transaction wasa $679 million purchase, including assumption of $201 million indebt, of Yankee Energy by its former parent company NortheastUtilities.

“It just keeps rolling along,” said Ed Tirello, an analyst withDeutsche Banc Alex. Brown. “As I said two years ago. in five yearsthere will be no more gas companies. They will all be owned by theelectric companies, and the price does not matter.” Tirello referredto the recently announced pairings of Columbia and NiSource, a hostiledeal, (See Daily GPI June 8, 1999);Indiana Energy and Sigeco (See Daily GPIJune 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 andheavy.”

The Yankee deal gives NU another 183,000 energy customers inConnecticut, where Yankee is the largest gas distribution company.NU already is New England’s largest electric utility, serving morethan 2.3 million customers in Connecticut, Massachusetts and NewHampshire. Yankee will retain its corporate name and once againbecome a subsidiary of NU.

CEO Michael G. Morris said NU’s goals, “which are different frommany other New England utilities,” are to remain in the unregulatedgeneration business in the Northeast, to “broaden its energydelivery platform” and to get back into the natural gas business.This transaction fits those requirements perfectly, he said, andnow can succeed because the Securities and Exchange Commission(SEC) is taking a lighter handed approach in applying theprovisions of the Public Utility Holding Company Act. The SECordered the divestiture of Yankee Gas in 1989 because of PUHCA.

“Because things have changed in a state sense in the regulationof utilities and in the federal sense of restructuring andderegulating the utility industry, we believe the SEC will allow usin fact to say ‘I do,'” said Morris, citing a recent decision thatwas 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 theclose of trading on Monday. Yankee’s stock soared 23%, or$7.44/share, to $39.94 on Tuesday. The transaction calls for NU topay 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 notedthere are not too many of them left. “It’s a scarcityfactor..[driven by] the declining number of gas utilities. With newhigher premiums, folks we’ve seen as buyers may turn into sellersat these high prices.

“It’s higher than any of the multiples we’ve seen to date,” sheadded. “It ups the ante on [merger and acquistion] activity outthere. It was 25 times forward year earnings. This was 10.9 timescash flow from operations. The other ones have been 8.1. This was2.7 times book, and the others were 2.5 and this was a 39% premiumto last trade and the others have averaged 28% [more than the lasttrade],” she said. “It’s almost gotten to a frenzied pace out thereon M&A activity.” She noted CTG, the only other Connecticututility that has not been bought out, has hired PaineWebber toreview its alternatives and its stock price soared $3.75/shareyesterday.

Morris said this isn’t the last purchase for NU. It plans tocontinue looking for other potential combinations and additions tobuild its “strategic platform” of regulated energy deliverybusinesses.

Energy East Corp., parent of New York State Electric & Gas(NYSEG), plans to buy all common shares of CMP Group Inc., parentof Central Maine Power Co., for $29.50/share in a cash deal worthabout $957 million, not including about $271 million of preferredstock 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 EnergyEast’s earnings per share in the first full year after closing.

Central Maine Power serves more than 530,000 electric customersin an 11,000 square-mile territory in central and southern Mainewith more than three-quarters of the state’s population, inaddition to major commercial, manufacturing and recreational areas,including the cities of Portland, Maine’s largest city, and statecapital Augusta. NYSEG serves nearly 820,000 electric customers and240,000 gas customers in upstate New York.

Neither Energy East nor CMP Group continue to hold generationassets, and executives said neither has stranded costs to contendwith.

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

Tirello said he likes the Energy East-CMP deal. Gas slated toarrive in Maine from Canada makes for what Tirello called a goodbeach head in the northern New England market. He predicted EnergyEast will be on the hunt for more New England distributionholdings, and the company won’t be trying to go the cheap routeeither. “They pay up, but you’ve got to pay up. I think they’velearned, you don’t underbid. If you screw up and underbid, youalways lose. You don’t want a bidding war. You don’t want to getinto what Southwest Gas ran into with Oneok.. You’ve got too manyother things to do.”

Clearly, Energy East sees its plate as being full ofopportunities.

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

“With this transaction and our previously announced combinationwith Connecticut Energy, Energy East is strategically positioned tobe 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’soffer was for $617 million in a deal to add 160,000 new gascustomers. “Our focus is on. moving away from generation and turningour attention to distribution of electricity and gas,” von Schack saidat the time.”

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

Energy East intends to finance the CMP Group transaction througha combination of debt and cash. The transaction will have no effecton the company’s previously announced share repurchase program.Energy East has repurchased nearly 10 million shares of commonstock this year, bringing its total share repurchase since 1996 toabout 27 million shares. Energy East has about 116 million sharesoutstanding.

Flanagan will be chairman, president and CEO of CMP Group andwill become president of Energy East. Arthur W. Adelberg, executivevice president of CMP Group, will become senior vice president andchief financial officer of Energy East. Sara J. Burns will continueas president of Central Maine Power Co. Flanagan and two other CMPGroup directors to be mutually agreed upon will be named to theEnergy East board. As operating utilities-CMP, as well as NYSEG andThe Southern Connecticut Gas Co.-will continue to be headquarteredin their respective locations and operate under their respectivenames. Energy East will also establish a corporate office inPortland, ME.

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

The merger is conditioned, among other things, upon theapprovals of CMP Group shareholders and various regulatoryagencies, including the Maine Public Utilities Commission, theSecurities and Exchange Commission (SEC), the Federal EnergyRegulatory Commission and the Nuclear Regulatory Commission. EnergyEast intends to register as a holding company with the SEC underthe Public Utility Holding Company Act (PUHCA) of 1935. Thecompanies anticipate that regulatory approvals can be obtainedwithin a year.

CMP Group is a Maine holding company formed Sept. 1, 1998, withgeneral offices in Augusta, ME. Its principal holding, CentralMaine Power Co. (CMP), is a century-old electric utility thatserves more than 530,000 retail customers in an 11,000 square-mileservice territory in central and southern Maine. CMP Groupsubsidiaries include Union Water-Power, property management, realestate, utility services, and energy-efficiency contracting;MaineCom, fiber-optic infrastructure; CNEX, consulting; andTeleSmart, accounts-receivable services.

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

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

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