Cap Rock Holding Corp. agreed to acquire SEMCO Energy Inc. — parent of utilities SEMCO Energy gas Co. in Michigan and ENSTAR Natural Gas Co. in Alaska in an $867 million cash and debt deal.

SEMCO, which distributes gas to more than 400,000 customers in the two states, also has businesses involved in propane distribution, intrastate pipelines and natural gas storage. Cap Rock, through Midland, TX-based Cap Rock Energy Corp., has electric utility transmission and distribution assets serving 28 counties in Texas.

SEMCO is entitled to a 35-day “go-shop” period during which it may seek a better deal. Should another deal be struck, a breakup fee and other expenses would be payable to Cap Rock. Should the deal go forward, Cap Rock will acquire all of the outstanding common stock and 5% Series B preferred stock of SEMCO. SEMCO shareholders will receive $8.15 in cash for each common share, a premium of approximately 37% over recent closing prices. Holders of preferred shares will receive $213.07/share plus a “make-whole” premium calculated at closing. The deal is valued at $867 million, including $515 million of debt.

SEMCO’S board has recommended approval of the deal. The transaction is subject to approval by holders of SEMCO common stock, as well as other customary closing conditions, including the receipt of applicable regulatory approvals. Cap Rock has obtained financing commitments in the full amount of the consideration to be paid to common and preferred shareholders.

“The price to be paid by Cap Rock in the proposed transaction provides shareholders with a significant premium for their shares over the current market price,” said SEMCO Chairman Donald W. Thomason. “This transaction also will give SEMCO a financially strong owner with experience in the regulated utility industry. This combination of access to additional capital and familiarity with what utility regulators and customers expect should help ensure that customers will continue to enjoy dependable natural gas distribution service in our Michigan and Alaska service territories.”

Cap Rock said it will honor all existing collective bargaining agreements and maintain current compensation and benefits levels for employees for at least two years after the transaction closes, said SEMCO CEO George Schreiber Jr. SEMCO headquarters will remain in Port Huron, MI, with the current management to remain in place, he said.

Credit Suisse Securities LLC is serving as financial advisor to SEMCO. BB&T Capital Markets was retained to provide additional financial advisory services. Troutman Sanders LLP is acting as legal advisor for SEMCO, and Dykema Gossett PLLC is acting as legal advisor for the board’s finance committee. Berenson & Company LLC is serving as financial advisor to Cap Rock. Cravath, Swaine & Moore LLP is acting as legal advisor for Cap Rock.

SEMCO said it expects to hold its earnings conference call March 14 and will be available then to comment on the deal.

Cap Rock Energy Corp. began as Cap Rock Electric Cooperative Inc. in 1939 providing electric service to rural customers throughout West Texas. Through its predecessor, the company operated as an electric utility for more than 60 years. Cap Rock was listed on the American Stock Exchange on March 14, 2002. It began operating as a public utility regulated by the Public Utility Commission of Texas on Sept. 1, 2003. In May 2006 private investment firm Lindsay Goldberg & Bessemer acquired all outstanding Cap Rock shares and Cap Rock Holding Corp. became the sole shareholder of now privately held Cap Rock.

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