Fanning the flames of the convergence-consolidation bonfire,Dominion Resources (DRI) last week announced two plannedacquisitions that would add both wellheads and burner tips, not tomention assets in between.
Last Monday Dominion said it would acquire Consolidated NaturalGas (CNG) in a $6.3 billion stock deal to form the country’s fourthlargest electric and gas utility, serving nearly 4 million retailcustomers in five states. Two days later Dominion Resourcessubsidiary Dominion Energy announced a $34 million (C$50 million)cash offer for Remington Energy Ltd., a publicly traded gas E&Pcompany headquartered in Calgary, AB.
The combination of Dominion and CNG would have all the markingsof gas-power convergence. “CNG has got gas in the ground. They’vegot the way to move it, and they’ve got gas customers. We’ve gotelectric generating assets. We’ve got the way to move it, and we’vegot electric customers,” touted Thomas E. Capps, DRI CEO. “I don’tbelieve any of these other convergence [deals] put together gas andelectric customers.”
With deregulation, the companies are hoping to make existing gascustomers into electric customers and vice versa. Dominion and CNGalready have overlap of about 180,000 customers in Virginia’sTidewater area. “It’s going to give us a chance to cross-sell. It’salso 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 profitablething to do? Is it to sell it? Is it to put it in storage, or is itto generate electricity with it?'”
Capps, who will be CEO of the combined company, told reportersduring a conference call the company will not be a “trading”company. “We will build merchant plants and we would like to tie atleast a part of these plants up under contract. We are not going tobuild a lot of generation to sell into the market and justspeculate with it, although we will do some of that.” Initially,merchant plant efforts will be focused on the ECAR and PJM NERCregions, Capps said.
Dominion’s future has brightened with the CNG deal, notedMerrill Lynch & Co. analyst Donato Eassey. “You can’t replicatethese assets at any cost. To talk about a price-to-book [value] isalmost irrelevant.” The deal’s only down-side in Eassey’s view isthe potential for regulatory delay. Mega-mergers amongnon-regulated companies seemingly are done at the drop of a hatcompared to deals where parties must answer to regulators. Easseydidn’t rule out another party coming in to court CNG. “I think themarket will determine that.” And he expects more big deals likethis down the pike. “This has been a cost-plus regulatory compactfor years, and all of a sudden when you open it up to competitionthe waste and inefficiencies are exposed, and that’s what’shappening.
“I think if you’re an electric guy you look around at theoptions that you have, and you say this makes a pretty smart fit.”Eassey said he thinks the prices paid in gas-power convergencedeals will continue to climb.
Richmond, VA-based Dominion Resources is made up of VirginiaPower/North Carolina Power, Dominion Energy, and Dominion Capital.Its Virginia-North Carolina utility is ranked among the electricindustry’s 10 largest utilities, serving more than 2 millioncustomers from the northern Virginia suburbs of Washington, D.C. tonortheastern North Carolina’s Barrier Islands. Dominion Energy hasownership and operating interests in 24 generating facilities andhas about 715 Bcfe of proven reserves in key gas-producing regionsof the U.S. and Canada with annual production exceeding 95 Bcf.
Wellhead to Burnertip, Plus Storage
Pittsburgh, PA-based CNG has distribution, retail energymarketing, exploration and production, transmission and storage,and international operations. CNG’s four local distributioncompanies 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 additionsin 1998. The company produced 157.5 Bcf of gas and 7.9 millionbarrels of oil while adding 413 Bcfe of reserves, bringing totalreserves to 1.7 Tcfe. CNG also has a 7,600-mile interstate gaspipeline network serving markets in the Northeast, Mid-Atlantic,and Midwest. And CNG operates the largest gas storage system inNorth America with working capacity of 435 Bcf. The CNG/SabineCenter is a market center hub operated jointly by CNG and Texaco.
When completed, the deal will create a fully integrated electricand gas company in the United States with about $8.8 billion inrevenues, $23.9 billion in assets, annual cash flow exceeding $2billion, and 17,000 employees. The combined company will have anenergy portfolio of more than 20,000 MW of power generation, 2.4Tcfe 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 of25.3% over the average CNG closing price during the 20 trading daysended Feb. 19. CNG stockholders will own about $6.3 billion of DRIstock, about 43% of the combined company. The combination isexpected to be accretive to earnings per share by the end of itssecond year.
The combined company will be named Dominion Resources and beheadquartered in Richmond. The gas distribution, pipeline andstorage operations will continue to be headquartered in Pittsburgh.The companies anticipate regulatory procedures can be completed inabout 12 months.
In a research note issued last Monday, PaineWebber said, “Givenour continued belief that the natural gas and electricityindustries will continue to converge (and likely at a faster pacegiven today’s announcements), we continue to recommend accumulatingpositions in various names which have solid fundamentals, aretrading at historically low valuations and have highly attractiveasset portfolios ripe for acquisition.” The names include El PasoEnergy, Columbia Energy, The Coastal Corp., and Washington GasLight.
Last week also saw Dominion subsidiary Dominion Energy’sannouncement it will buy Remington Energy Ltd. of Calgary, AB.Including assumed debt, the deal has a total value of about $261million (C$390 million). Dominion Energy, the power and natural gassubsidiary of DRI, will have North American reserves exceeding 1Tcfe including Remington. Production will exceed 350 MMcfe/d.
Low Oil Prices Foster Deal
In December Remington, laden with debt and foundering on weakoil prices, said it retained FirstEnergy Capital Corp. to assist inthe possible sale of the company. Remington had a loss for thenine months ended Sept. 30, 1998 of $2.2 million compared toearnings of $4.9 million for the prior-year period.
The addition of Remington to Dominion Energy’s portfolio willrepresent the company’s second expansion into the Western CanadianSedimentary Basin. Last year, Dominion Energy acquired 100% ofArcher Resources Ltd., which now operates under the name DominionEnergy Canada Ltd.
“When we combine this planned acquisition with our acquisitionlast month of San Juan Partners, Dominion Energy increases itsproved reserves to more than 1 Tcfe and boosts daily production by50%,” said Dominion Energy CEO Thomas N. Chewning. “Viewed as partof Dominion Resources’ planned combination with ConsolidatedNatural Gas, our onshore reserve base will serve to balance theoffshore reserves developed by CNG under its highly successfulprogram. Our combined companies will own reserves with geographicand geological diversity.”
G.E. Lake Jr., senior vice president-oil and gas operations ofDominion Energy, said with Remington “we are acquiring significantfuture development potential and adding a second core area ofoperations to our existing growth platform in Canada.”
The Remington deal gives Dominion a holding in the AlliancePipeline and moves the company into northeast British Columbia, amajor gas supply region. The deal fits into CNG’s strategy,articulated last week by CNG CEO Davidson. “We are going ahead withour E&P expansion and the budget increases there and are veryaggressively pursuing reserves at this time, not only through thedrillbit, but also purchasing reserves. We feel this is a perfectopportunity with prices down, with many independent producershaving to back off their drilling programs, with many independentproducers having to sell assets, energy in the ground, just to meetbank payments.”
Joe Fisher, Houston
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