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 $19.14.
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 right time."
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 subsidiaries.
"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
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