Generation is out and distribution is in. At least that’s the thinking behind last week’s announcement that Energy East, the parent company of Upstate New York’s combination utility New York State Electric & Gas will buy CMP Group, parent of Maine’s largest electric utility, Central Maine Power, for $1.2 billion in cash and debt.

Ed Tirello, an analyst with Deutsche Banc Alex. Brown, said he likes the Energy East-CMP deal. Gas slated to arrive in Maine from Canada makes for what Tirello called a good beach head in the northern New England market. He predicted Energy East will be on the hunt for more New England distribution holdings, and the company won’t be trying to go the cheap route either. “They pay up, but you’ve got to pay up. I think they’ve learned, you don’t underbid. If you screw up and underbid, you always lose. You don’t want a bidding war. You don’t want to get into what Southwest Gas ran into with Oneok.. You’ve got too many other things to do.”

Central Maine Power serves more than 530,000 electric customers in an 11,000 square-mile territory in central and southern Maine with more than three-quarters of the state’s population, in addition to major commercial, manufacturing and recreational areas, including Maine’s largest city, Portland, and state capital Augusta. NYSEG serves nearly 820,000 electric customers and 240,000 gas customers in New York.

Neither Energy East nor CMP Group continue to hold generation assets, and executives said neither has stranded costs to contend with.

Central Maine Power and NYSEG already have a joint venture, called CMP Natural Gas, which aims to provide new local gas distribution service to a number of Maine communities. The new distribution grid would become one of the largest infrastructure projects in the state in more than four decades (see NGI Feb. 23, 1998; May 31, 1999).

The goal of the deal for Energy East is to grow its footprint. Right now, the company is still completely in New York State, said PaineWebber analyst Barry Abramson. “It’s definitely trying to become the super regional company. They are trying to increase their customer base and their geographic reach significantly.”

Clearly, Energy East sees its plate as being full of opportunities. “We will use our combined balance sheets and proceeds from the sales of generation assets to selectively grow our distribution businesses in the Northeast,” said Energy East CEO Wes von Schack. “Energy East and CMP Group have a common vision for the future of our industry. We have chosen to focus on our core competencies-the distribution of electricity and natural gas-and we will leverage our combined skills and resources to grow our distribution businesses and improve efficiencies.

“With this transaction and our previously announced combination with Connecticut Energy, Energy East is strategically positioned to be a leading energy distribution company in the Northeast.”

The Connecticut Energy deal was only announced in April (see NGI April 26, 1999). Energy East’s offer was for $617 million in a deal to add 160,000 new gas customers. “Our focus is on moving away from generation and turning our attention to distribution of electricity and gas,” von Schack said at the time.”

Energy East began a transformation in 1998 with an electric restructuring plan that lowered prices for NYSEG customers, promoted competition by allowing all of its customers to choose suppliers by Aug. 1, 1999, and created the holding company, Energy East. The sale of coal-fired generation assets, which resulted in after-tax proceeds of $1.3 billion, eliminated all generation stranded costs, including nuclear stranded costs and provided cash to grow its electric and gas distribution businesses.

Energy East intends to finance the CMP Group transaction through a combination of debt and cash. The transaction will have no effect on the company’s previously announced share repurchase program. Energy East has repurchased nearly 10 million shares of common stock this year, bringing its total share repurchase since 1996 to about 27 million shares. Energy East has about 116 million shares outstanding.

Energy East plans to buy all common shares of CMP Group for $29.50/share in a cash deal worth about $957 million, not including about $271 million of preferred stock and long-term debt to be assumed by Energy East. CMP Group will become a wholly owned subsidiary of Energy East. The purchase transaction is expected to be accretive to Energy East’s earnings per share in the first full year after closing.

Flanagan will be chairman, president and CEO of CMP Group and will become president of Energy East. Arthur W. Adelberg, executive vice president of CMP Group, will become senior vice president and chief financial officer of Energy East. Sara J. Burns will continue as president of Central Maine Power Co. As operating utilities – CMP, as well as NYSEG and The Southern Connecticut Gas Co. – will continue to be headquartered in their respective locations and operate under their respective names. Energy East will also establish a corporate office in Portland, ME.

The companies plan to minimize job cuts through reduced hiring and attrition. All union contracts will be honored.

The merger is conditioned, among other things, upon the approvals of CMP Group shareholders and various regulatory agencies, expected to be obtained within a year.

Joe Fisher, Houston

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