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Dominion Fishes Deals Upstream and Down

Dominion Fishes Deals Upstream and Down

Fanning the flames of the convergence-consolidation bonfire, Dominion Resources (DRI) last week announced two planned acquisitions that would add both wellheads and burner tips, not to mention assets in between.

Last Monday Dominion said it would acquire Consolidated Natural Gas (CNG) in a $6.3 billion stock deal to form the country's fourth largest electric and gas utility, serving nearly 4 million retail customers in five states. Two days later Dominion Resources subsidiary Dominion Energy announced a $34 million (C$50 million) cash offer for Remington Energy Ltd., a publicly traded gas E&ampP company headquartered in Calgary, AB.

The combination of Dominion and CNG would have all the markings of gas-power convergence. "CNG has got gas in the ground. They've got the way to move it, and they've got gas customers. We've got electric generating assets. We've got the way to move it, and we've got electric customers," touted Thomas E. Capps, DRI CEO. "I don't believe any of these other convergence [deals] put together gas and electric customers."

With deregulation, the companies are hoping to make existing gas customers into electric customers and vice versa. Dominion and CNG already have overlap of about 180,000 customers in Virginia's Tidewater area. "It's going to give us a chance to cross-sell. It's also going to give us a chance in the morning to wake up and say, 'What are we going to do with that gas? What's the most profitable thing to do? Is it to sell it? Is it to put it in storage, or is it to generate electricity with it?'"

Capps, who will be CEO of the combined company, told reporters during a conference call the company will not be a "trading" company. "We will build merchant plants and we would like to tie at least a part of these plants up under contract. We are not going to build a lot of generation to sell into the market and just speculate with it, although we will do some of that." Initially, merchant plant efforts will be focused on the ECAR and PJM NERC regions, Capps said.

Dominion's future has brightened with the CNG deal, noted Merrill Lynch &amp Co. analyst Donato Eassey. "You can't replicate these assets at any cost. To talk about a price-to-book [value] is almost irrelevant." The deal's only down-side in Eassey's view is the potential for regulatory delay. Mega-mergers among non-regulated companies seemingly are done at the drop of a hat compared to deals where parties must answer to regulators. Eassey didn't rule out another party coming in to court CNG. "I think the market will determine that." And he expects more big deals like this down the pike. "This has been a cost-plus regulatory compact for years, and all of a sudden when you open it up to competition the waste and inefficiencies are exposed, and that's what's happening.

"I think if you're an electric guy you look around at the options that you have, and you say this makes a pretty smart fit." Eassey said he thinks the prices paid in gas-power convergence deals will continue to climb.

Richmond, VA-based Dominion Resources is made up of Virginia Power/North Carolina Power, Dominion Energy, and Dominion Capital. Its Virginia-North Carolina utility is ranked among the electric industry's 10 largest utilities, serving more than 2 million customers from the northern Virginia suburbs of Washington, D.C. to northeastern North Carolina's Barrier Islands. Dominion Energy has ownership and operating interests in 24 generating facilities and has about 715 Bcfe of proven reserves in key gas-producing regions of the U.S. and Canada with annual production exceeding 95 Bcf.

Wellhead to Burnertip, Plus Storage

Pittsburgh, PA-based CNG has distribution, retail energy marketing, exploration and production, transmission and storage, and international operations. CNG's four local distribution companies serve nearly 2 million customers. They are East Ohio Gas, The Peoples Natural Gas, Virginia Natural Gas, and Hope Gas.

CNG Producing set records for production and reserve additions in 1998. The company produced 157.5 Bcf of gas and 7.9 million barrels of oil while adding 413 Bcfe of reserves, bringing total reserves to 1.7 Tcfe. CNG also has a 7,600-mile interstate gas pipeline network serving markets in the Northeast, Mid-Atlantic, and Midwest. And CNG operates the largest gas storage system in North America with working capacity of 435 Bcf. The CNG/Sabine Center is a market center hub operated jointly by CNG and Texaco.

When completed, the deal will create a fully integrated electric and gas company in the United States with about $8.8 billion in revenues, $23.9 billion in assets, annual cash flow exceeding $2 billion, and 17,000 employees. The combined company will have an energy portfolio of more than 20,000 MW of power generation, 2.4 Tcfe in gas and oil reserves producing nearly 300 Bcfe annually.

Market capitalization of Dominion-CNG will exceed $25 billion. Terms say DRI will acquire all CNG shares for 1.52 DRI shares each. Based upon DRI's closing Feb. 19, this represents a premium of 25.3% over the average CNG closing price during the 20 trading days ended Feb. 19. CNG stockholders will own about $6.3 billion of DRI stock, about 43% of the combined company. The combination is expected to be accretive to earnings per share by the end of its second year.

The combined company will be named Dominion Resources and be headquartered in Richmond. The gas distribution, pipeline and storage operations will continue to be headquartered in Pittsburgh. The companies anticipate regulatory procedures can be completed in about 12 months.

In a research note issued last Monday, PaineWebber said, "Given our continued belief that the natural gas and electricity industries will continue to converge (and likely at a faster pace given today's announcements), we continue to recommend accumulating positions in various names which have solid fundamentals, are trading at historically low valuations and have highly attractive asset portfolios ripe for acquisition." The names include El Paso Energy, Columbia Energy, The Coastal Corp., and Washington Gas Light.

Last week also saw Dominion subsidiary Dominion Energy's announcement it will buy Remington Energy Ltd. of Calgary, AB. Including assumed debt, the deal has a total value of about $261 million (C$390 million). Dominion Energy, the power and natural gas subsidiary of DRI, will have North American reserves exceeding 1 Tcfe including Remington. Production will exceed 350 MMcfe/d.

Low Oil Prices Foster Deal

In December Remington, laden with debt and foundering on weak oil prices, said it retained FirstEnergy Capital Corp. to assist in the possible sale of the company. Remington had a loss for the nine months ended Sept. 30, 1998 of $2.2 million compared to earnings of $4.9 million for the prior-year period.

The addition of Remington to Dominion Energy's portfolio will represent the company's second expansion into the Western Canadian Sedimentary Basin. Last year, Dominion Energy acquired 100% of Archer Resources Ltd., which now operates under the name Dominion Energy Canada Ltd.

"When we combine this planned acquisition with our acquisition last month of San Juan Partners, Dominion Energy increases its proved reserves to more than 1 Tcfe and boosts daily production by 50%," said Dominion Energy CEO Thomas N. Chewning. "Viewed as part of Dominion Resources' planned combination with Consolidated Natural Gas, our onshore reserve base will serve to balance the offshore reserves developed by CNG under its highly successful program. Our combined companies will own reserves with geographic and geological diversity."

G.E. Lake Jr., senior vice president-oil and gas operations of Dominion Energy, said with Remington "we are acquiring significant future development potential and adding a second core area of operations to our existing growth platform in Canada."

The Remington deal gives Dominion a holding in the Alliance Pipeline and moves the company into northeast British Columbia, a major gas supply region. The deal fits into CNG's strategy, articulated last week by CNG CEO Davidson. "We are going ahead with our E&ampP expansion and the budget increases there and are very aggressively pursuing reserves at this time, not only through the drillbit, but also purchasing reserves. We feel this is a perfect opportunity with prices down, with many independent producers having to back off their drilling programs, with many independent producers having to sell assets, energy in the ground, just to meet bank payments."

Joe Fisher, Houston

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