Upstate New York Utilities to Merge
Albany-based Energy East Corp., parent of New York State
Electric and Gas, is spending $1.4 billion to acquire RGS Energy
Group, creating a Empire State powerhouse that would serve almost
three million customers, including half of those in upstate New
York. The boards of both companies approved the deal last week.
Energy East also will assume about $1 billion of RGS Energy debt.
Accounted for as a purchase, the deal would give Rochester,
NY-based RGS shareholders the equivalent of $39.50 per stock,
payable in cash or in Energy East common stock, which would be a
premium of 19.3% on RGS' closing price of $33.10 on Feb. 16. The
price would be contingent on Energy East's stock price remaining
between $16.57 and $22.41. On Feb. 16, Energy East closed at
The combined company would serve an overlapping territory of
about 200 miles, with 1.8 million electric customers, 1 million
natural gas customers and 200,000 other retail energy customers now
served by RGS' Rochester Gas & Electric (RG&E) or Energy
East's NYSEG. Annual revenues would be $5 billion, and the company
would have $10 billion in assets. As an added bonus, officials said
the combination would cut costs for both, with a savings of around
$50 million in 2004.
Energy East CEO Wes von Schack, who would remain CEO following
the merger, said he thinks that earnings increases for calendar
year 2003 will exceed the typical 3% to 5%. "We think we can do
better than that," he said, calling RGS the "right partner, at the
Expecting to receive approval from the New York State Public
Service Commission and other regulatory agencies within 12 months,
von Schack said the companies have already met with state
regulators and anticipate no problems. He added that he foresees no
federal complications at all.
Nearly two-thirds of NYSEG's customers are covered under
long-term contracts and owned generation with the remaining
customers' needs hedged through March 2003. RG&E also supplies
its customers through its generation portfolio, which includes the
Ginna nuclear plant.
Answering questions about high natural gas prices, RGS Chairman
Tom Richards said the new company would be "fully covered and not
significantly dependent on gas." He said that the merger would give
the company a "flat load across the year" with no peaking problems.
Richards will become executive vice president of Energy East and
also hold his current RGS positions.
In response to the merger announcement, Moody's Investor
Services placed the long-term credit ratings of Energy East under
review for a possible downgrade along with the long-term ratings of
its subsidiaries. In its review, Moody's will focus on the
additional debt burden resulting from the merger and the resulting
call it may generate on the cash flows of the operating
"Although the combination is in line with Energy East's regional
wires and pipes strategy, the company has announced four mergers
since 1999 and may still be in the process of integrating those
companies," said Moody's. "Also, our review will evaluate Energy
East's ability to manage its plans for a share repurchase program
while at the same time paying down the debt associated with the
transaction and growing its current common stock dividend."
RGS Energy and NYSEG would both be subsidiaries of Energy East
when the merger is completed. RG&E would remain a subsidiary of
RGS Energy. Last December, RG&E agreed to refund $5.7 million
to its gas customers because of overcharges, which it said were
based on incorrect gas usage and cost forecasts between Aug. 31,
1999 and Aug. 31, 2000.
Carolyn Davis, Houston