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Hungry Energy East Adds CTG to its Plate

Hungry Energy East Adds CTG to its Plate

After swallowing two energy distributors in two months most observers expected Energy East to enter a digestion phase, but the company came back for a third helping yesterday. The parent company of New York State Electric and Gas said it is adding CTG Resources, Inc., parent of Connecticut Natural Gas (CNG), to its plate, which already is loaded with CMP Energy and Connecticut Energy.

The agreement calls for Energy East to pay $355 million and assume $220 million in CTG's long-term debt. Energy East said it intends to finance the cash portion of the deal through a combination of debt and cash. Forty-five percent of CTG Resources common stock is to be converted into Energy East common stock, with a value of $41 in cash per share of CTG. The remaining percentage of CTG common stock will be converted into $41 in cash per share. CTG shareholders can choose how much they want in stock and in cash, but transaction will be tax-free if they receive Energy East stock.

CTG stock prices jumped 2% yesterday after the announcement to $38.38/share, while Energy East shares fell $0.13 to $26.

"This transaction is another important step in our strategy to use our strong balance sheet and the proceeds from the sale of our generation assets to selectively grow our distribution business in the Northeast," said Energy East CEO Wes Von Schack.

Energy East's transformation began in 1998 with an electric restructuring plan, which led to the sale of its coal-fired generation assets and the recently announced sale of NYSEG's 18% ownership in the Nine Mile Point 2 nuclear plant. The power plant sale resulted in after-tax proceeds of $1.3 billion and eliminated NYSEG's stranded costs.

Just two weeks ago, the company announced it was buying CMP Energy, parent of Maine's largest electric utility Central Maine Power, for $1.2 billion in cash and debt, and in April, Energy East bought Connecticut Energy, parent of Southern Connecticut Gas (see Daily GPI June 16 and April 26) for $617 million.

Von Schack said the company's efforts to build a "super-regional" energy distribution company are nearing completion, at least for the time being, and it plans to "focus on integration. We're focusing on growing the companies in the Northeast, but who knows what the future may hold."

"I realize we have had three transactions in the last couple months, but even when you take these together, they are far simpler than many you have seen in the industry," he said, promising there would be no regulatory hold up. "It will take no more than 12 months for all three to be approved."

He noted both CTG and NYSEG have very low gas rates and high customer satisfaction ratings, and on the electric side NYSEG and CMP are "very clean" with no stranded costs, nuclear concerns or market power issues in power generation.

Following the completion of all three acquisitions, Energy East will have 1.3 million electric customers and about 542,000 gas customers, excluding any added through CMP Natural Gas, the Maine gas distribution partnership of Energy East and CMP.

With CTG and Connecticut Energy, Energy East becomes the largest gas distributor in the state with about 300,000 customers. "We now have the critical mass that is necessary to effectively compete in the state of Connecticut," said Von Schack. Although the two companies have no electric customers in the state they plan to play an active role in the competitive power market when retail competition begins in 2001, he said.

CTG CEO Arthur C. Marquardt said Energy East was the "strongest partner possible" for his company, which took only a few weeks to examine its strategic alternatives after coming under competitive pressure from Northeast Utilities (NU). NU muscled back into gas distribution last month with the purchase of Yankee Energy, parent of Connecticut LDC Yankee Gas.

Marquardt focused on the strength of their combined energy services businesses. However "pipes and wires" will continue to be the core business of Energy East. Von Schack noted there's still significant room for distribution growth in Connecticut. There's only a 38% saturation rate for gas service in CTG's service area, he said.

Energy East said it expects the CTG transaction to be accretive in the first year through reduced costs, greater efficiency and revenue enhancements, but without a work force reduction. "We plan to create more jobs rather than lay off employees," he said, noting energy services will be a growth area for the combined company.

Under the purchase agreement with CTG, Marquardt will continue as president and CEO and will become president and COO of XENERGY Enterprises. One outside CTG Resources director will be added to the Energy East board of directors.

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