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Eastern's LDC Buying Continues With Colonial Gas

Eastern's LDC Buying Continues With Colonial Gas

Massachusetts' Eastern Enterprises clearly has embraced the concept of consolidation and is doing deals to prove it. Fresh from its acquisition of Essex County Gas, the Boston Gas parent last week said it will buy nearby Colonial Gas Co. for nearly half a billion in stock, cash, and assumed debt. The deal grants a 27% premium to Colonial's closing price preceding the deal's announcement.

The companies agreed to merge Colonial into Eastern for $37.50 per share in Eastern stock and cash. Based on Colonial shares outstanding Sept. 30, the deal values Colonial equity at $332 million, and including outstanding debt has an enterprise value of $495 million. The price represents a 27% premium to Colonial's Oct. 16 closing price and is 2.66 times Colonial's Sept. 30 book value. The transaction is not expected to be dilutive to Eastern's earnings, according to management.

The deal's announcement came almost three weeks after Eastern acquired Essex for $113 million. That deal was challenged, unsuccessfully, by the Massachusetts' attorney general, who said it would not yield adequate savings to customers.

"The merger with Colonial Gas is a significant step in the industry consolidation strategy we have been pursuing for several years in order to achieve the economies of scale that will enable us to improve customer service, lower costs and build value for our shareholders," said J. Atwood Ives, Eastern CEO. "The Essex County Gas acquisition was the first step and the Colonial Gas merger marks the second step of this strategy to realize the benefits of consolidation in this highly-fragmented market.

"Colonial Gas is a well-managed, fast-growing company that will profit from the synergies of the merger, as well as Eastern's financial strength. When this transaction is completed, Eastern's combined gas distribution companies will serve over 725,000 customers in Massachusetts."

The deal will lead to about a 5% job reduction from the 2,000-member combined work force of Boston Gas, Essex, and Colonial, said Colonial spokesman Brian Norris.

"I like it. I think it's very doable," Edward Jones analyst Zach Wagner said of the deal. "Colonial's shareholders are getting a very fair price, and I think Eastern will be able to recover the premium through cost-cutting." Wagner pointed to Colonial's contiguous service territory as one plus for cost cutting. System maintenance, back office operations such as meter reading and billing, as well as management functions all lend themselves to consolidation, he said. "I think there's a significant opportunity to save a lot of costs. It could be a 10-year timeframe before they get all of them out." Some of the cost savings will go to ratepayers, of course, and Wagner said he expects Eastern to seek some sort of a rate freeze as the company did with Essex. Essex customers were promised a 5% drop in gas prices and a 10-year freeze of base rates.

Wagner said he expects Eastern and others to do more consolidation deals. "We saw a flurry of them last December, and I think we're going to see a lot more of them in the next couple of months. I'm sure [Eastern will] continue to acquire, certainly within New England. There are a lot of fine gas utilities in the area. The train's not going to stop, not yet. Anyone that's publicly traded is certainly a target. I think they all make sense to Eastern."

Chet Messer, Eastern senior vice president and president of Boston Gas, told NGI there will be a thinning of the herd of New England LDCs. "Bottom line, I think economics and the need to provide cost-effective service is going to get us down to three or four." He said this will happen over the next five to seven years. "From our standpoint, we hope it's sooner than that. Since 1993, we've made it clear that we think there ought to be consolidations."

In December, Eastern opted out of the unregulated marketing business, announcing the sale of its 50% interest in AllEnergy Marketing Co. to New England Electric System (NEES), which had been Eastern's joint venture partner. It cited the uncertainties of unbundling and the need to finance other strategic alternatives. "Our expertise is in the distribution of natural gas, and we'll stay focused on that," Ives said at the time.

Joe Fisher, Houston

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