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Boston Edison Parent Buying Commonwealth Energy

Boston Edison Parent Buying Commonwealth Energy

Consolidation continued last week among Massachusetts utilities, this time with an electric planning to buy a combination utility in a move that follows the maxim that bigger is better in a deregulated market. Boston Edison parent BEC Energy and Cambridge, MA-based gas and power holding company Commonwealth Energy System plan to merge in a cash and stock deal.

The new company will be an exempt public utility holding company and the parent of Boston Edison Co. and Commonwealth Electric Co., Cambridge Electric Light Co., Canal Electric Co., Commonwealth Gas Co., and the unregulated affiliates of BEC Energy and COM/Energy. The corporate headquarters will be in Boston.

"One of the reasons that Boston Edison was interested in merging with us was because of our gas business," said Commonwealth Energy spokesman Peter Dimond. "Having the ability to meet customer needs for both gas and electricity is something that we've found important and believe that Boston Edison has found important as well. There are quite a few areas that Boston Edison serves with electricity that are also served by Com/Gas.

"A year and a half ago, we merged our gas and electric operations under one management team. More recently in November we unbundled our bills to carry gas as a commodity in anticipation of the state of Massachusetts opening the gas market for residential consumers."

The combined company will have market capitalization of about $4.4 billion ($2.6 billion in equity; $1.7 billion in net debt; $0.1 billion in preferred stock). The $2.6 billion equity value is the largest of any New England utility. The combined company will serve about 1.3 million customers, including about 1.04 million electric customers in 81 communities and 240,000 gas customers in 51 communities. The combination is anticipated to be accretive to earnings per share in the first full year following closing.

"Our goal is to grow to two million customers, enabling us to further enhance customer service. The new company allows us to broaden our customer base, and to capture the savings opportunities that the combined operations can produce," said BEC Energy CEO Thomas J. May. "We will continue to make customer service the top priority. Our expanded platform will allow the combined company to invest more effectively in technology and infrastructure which will lead to higher levels of customer service."

"From our perspective, one of the reasons why the merger fits again is the commonality of focus as we move forward," said BEC Energy spokesman Michael Monahan. "Both companies have divested of their generation. Now we're looking at focusing on becoming a premier wires and pipes company." He noted an unregulated subsidiary of BEC is involved in a joint venture with RCN of Princeton, NJ, that provides telephone, cable television, and Internet service.

Massachusetts electric restructuring legislation specified a 10% rate reduction that took effect in March. By September, the discount is supposed to grow to at least 15%. "Obviously, the way you provide these rate reductions is to cut your costs and make your operations more efficient, basically through economies of scale," Monahan said.

BEC, which had $144.6 million of net income in 1997, recently negotiated a transition plan with the Massachusetts Department of Telecommunications and Energy that allows for 100% stranded cost recovery. The company received a 50% premium to book value for its generating assets. In August, BEC sold its 50% share in retail energy marketer Energy Vision to Williams. Commonwealth Energy had 1997 net income of $49.9 million.

Savings related to the merger are expected to be about $500 million over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies and the combination of work forces. Employee reductions are expected to be about 300 positions out of a work force of 3,900. The new company expects to achieve reductions through a variety of programs which would include hiring freezes, attrition and voluntary separation. All union contracts will remain in effect.

May will become chairman and chief executive officer of the new company. Russell D. Wright, president and CEO of COM/Energy, will become president and COO. Under the terms of the agreement, a new holding company will be created and both BEC Energy and COM/Energy will exchange their shares for a combination of stock in the holding company and cash. The cash portion of the transaction is expected to be financed primarily through current cash balances and internally generated funds. BEC Energy stockholders may elect to receive one share of the holding company's common stock or $44.10 in cash for each BEC Energy share they own. The cash price represents a 5% premium to BEC Energy's closing stock price on Dec. 4. COM/Energy stockholders may elect to receive 1.05 shares of the holding company's common stock or $44.10 in cash for each COM/Energy share they own, representing a 17% premium to COM/Energy's closing price on Dec. 4.

The merger requires shareholder, and state and federal regulatory approval. Since all operations are in Massachusetts, the companies anticipate approvals can be obtained by mid-1999.

John Kodak is an independent broker with Everen Securities in Hyannis, MA, who closely follows Commonwealth Energy and owns stock in the company. He said he's liked Commonwealth for quite some time as it manages an 18 to 20% return to investors over 10- and 20-year periods. Having a low capitalization, Commonwealth hasn't gotten much attention from Wall Street analysts, Kodak said. He credits management for Commonwealth's strong performance and said he hopes BEC retains Commonwealth's brightest lights and becomes a utility powerhouse in the region. "These [Commonwealth] people are extremely good at efficiency. Even people who've done financial arrangements with them find they really get the extra mile out of everything.

Kodak noted Commonwealth's gas territory is in Wooster County, one of the colder parts of Massachusetts, "a good place to have a gas business." Commonwealth's Cambridge Electric territory is contiguous to Boston Edison's, forming a horseshoe around the Boston utility.

Like others, Kodak predicts further consolidation of Massachusetts utilities, noting what he considers a relatively enlightened view among state regulators toward deregulation and consolidation. "I wonder if in the next 90 days we're not going to see even a foreigner enter the market, like Scottish Power is pushing on the West Coast."

In October, Massachusetts' Eastern Enterprises, parent of Boston Gas, said it would buy nearby Colonial Gas Co. for nearly half a billion in stock, cash, and assumed debt, a roughly 27% premium (See NGI Oct. 26, 1998). In January, Eastern said it would acquire contiguous LDC Essex County Gas through a tax-free, stock-for-stock transaction worth $80.5 million, or $47.50 per share (See NGI Jan. 5, 1998). The move to annex the neighboring LDC was made one week after Northern Indiana Public Service reached across the country and grabbed Bay State Gas, with 300,000 customers the so-called "plum" among a flock of small Massachusetts distributors.

Joe Fisher, Houston

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