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Indiana Firms Seek to Form State's Largest Utility

June 21, 1999
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Indiana Firms Seek to Form State's Largest Utility

In an effort to build a larger customer base, cut costs and offer a wider variety of commodities and services, Indiana Energy, parent of Indiana Gas, announced plans to merge with Sigcorp, the holding company for Southern Indiana Gas and Electric (Sigeco). The merger of equals will create a new $1.9 billion holding company called Vectren Corp.

The transaction was approved by the boards of directors of both companies but still requires regulatory and shareholder approvals. Vectren would be the largest combined utility in the state, serving 650,000 gas and electric customers and slightly surpassing neighboring LDC Northern Indiana Public Service, which is actively pursuing a merger of its own with Columbia Energy Group (see NGI June 14).

"The energy industry is converging and successful participants will be able to offer a broad array of products and services to customers," said Niel Ellerbrook, Indiana Energy CEO. "With this combination, our asset mix will be split evenly between gas and electric, balancing our earnings while positioning the combined company to deliver energy in whatever form our customers need."

The merger of the two Indiana utilities was "just an example of a trend we've seen in which the smaller utilities get together to create critical mass," said Barry Abramson, an energy analyst with PaineWebber. "If they want to control their destiny they have to get bigger than they are. That's a good fit of two local companies that are in good shape and will be able to benefit from post-merger cost cutting."

Indiana Energy's and Sigcorp's utility companies will remain separate subsidiaries of Vectren and will continue to operate under their respective names. Under the merger agreement, the corporate headquarters of Vectren and of Sigeco will be in Evansville, IN. Indiana Gas will continue to be headquartered in Indianapolis.

By merging, the two companies expect to realize net savings of $200 million over 10 years from the elimination of duplicate corporate and administrative programs and greater efficiencies in operations, business processes and purchasing. The merger is expected to cause 120 people to lose their jobs, a 7% reduction in work force. Both companies said they will seek alternatives to minimize the impact on current personnel. All union contracts will be honored.

"This merger does two things," said Zach Wagner, an analyst at St. Louis-based Edward Jones. "It creates a strong utility company and a strong non-regulated firm as well. On the utility side, both these companies are strong and low-cost. When customer choice reaches this service area, customers have a tendency to flock to companies like this newly-created Vectren. On the non regulated side, Indiana Energy's gas and electric marketing operations will combine nicely with Sigcorp's telecommunications division to create a powerful new entity."

The two companies are no strangers to each other. They have been partners for two years in the energy-related service provider Energy Systems Group LLC. The partnership provides energy management to clients throughout the Midwest.

"Simply put, this combination makes sense. It's a marriage of strengths. Sigcorp has the lowest average retail electric rate in the state and each company has among the lowest gas rates," said Andrew Goebel, Sigcorp's COO. "Furthermore, over the last several years, our customer growth rates have exceeded the national average."

Ryan Soultz, a spokesman for the Indiana Utility Regulatory Commission (IURC), said it's too early to tell if the combination will run into regulatory trouble. "Obviously, we'll take a long look at all the aspects of the merger once it has been filed with us. Right now, we don't know a lot." The companies anticipate that the regulatory processes can be completed in six to nine months.

Under the agreement, Sigcorp shareholders will receive one and one-third shares of the new company's common stock for each share of Sigcorp they currently hold. Indiana Energy shareholders will receive one share of the new company's common stock for each share of Indiana Energy they currently hold. The tax-free stock-for-stock transaction would create a combined company with $1.4 billion in equity and $500 million in debt and subsidiary preferred stock based upon Indiana Energy's closing stock price of $22.563 and Sigcorp's closing stock price of $29.50 per share on Friday, June 11. Shareholders of each company will control 50% of Vectren's stock.

Following the merger, Ellerbrook will be chairman and CEO of the new company and Goebel will be president and COO. Indiana Energy Chairman L.A. Ferger, and Sigcorp Chairman Ronald Reherman, will retire but will serve on the board of directors of the new company. Both Indiana Energy and Sigcorp each will designate six directors to the new company's board.

Ellerbrook said he wants to grow non-regulated operations to a point where they would be contributing more than 25% of the consolidated total earnings by 2003. Vectren's non-utility subsidiaries will offer energy-related products and services, fiber-optic based telecommunication services, materials management, locating and trenching services and energy marketing to customers throughout its service area.

John Norris

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