After swallowing two energy distributors in two months mostobservers expected Energy East to enter a digestion phase, but thecompany came back for a third helping yesterday. The parent companyof New York State Electric and Gas said it is adding CTG Resources,Inc., parent of Connecticut Natural Gas (CNG), to its plate, whichalready is loaded with CMP Energy and Connecticut Energy.
The agreement calls for Energy East to pay $355 million andassume$220 million in CTG’s long-term debt. Energy East said itintends to finance the cash portion of the deal through acombination of debt and cash. Forty-five percent of CTG Resourcescommon stock is to be converted into Energy East common stock, witha value of $41 in cash per share of CTG. The remaining percentageof CTG common stock will be converted into $41 in cash per share.CTG shareholders can choose how much they want in stock and incash, but transaction will be tax-free if they receive Energy Eaststock.
CTG stock prices jumped 2% yesterday after the announcement to$38.38/share, while Energy East shares fell $0.13 to $26.
“This transaction is another important step in our strategy touse our strong balance sheet and the proceeds from the sale of ourgeneration assets to selectively grow our distribution business inthe Northeast,” said Energy East CEO Wes Von Schack.
Energy East’s transformation began in 1998 with an electricrestructuring plan, which led to the sale of its coal-firedgeneration assets and the recently announced sale of NYSEG’s 18%ownership in the Nine Mile Point 2 nuclear plant. The power plantsale resulted in after-tax proceeds of $1.3 billion and eliminatedNYSEG’s stranded costs.
Just two weeks ago, the company announced it was buying CMP Energy,parent of Maine’s largest electric utility Central Maine Power, for$1.2 billion in cash and debt, and in April, Energy East boughtConnecticut Energy, parent of Southern Connecticut Gas (see Daily GPIJune 16 andApril 26) for $617 million.
Von Schack said the company’s efforts to build a”super-regional” energy distribution company are nearingcompletion, at least for the time being, and it plans to “focus onintegration. We’re focusing on growing the companies in theNortheast, but who knows what the future may hold.”
“I realize we have had three transactions in the last couplemonths, but even when you take these together, they are far simplerthan many you have seen in the industry,” he said, promising therewould be no regulatory hold up. “It will take no more than 12months for all three to be approved.”
He noted both CTG and NYSEG have very low gas rates and highcustomer satisfaction ratings, and on the electric side NYSEG andCMP are “very clean” with no stranded costs, nuclear concerns ormarket power issues in power generation.
Following the completion of all three acquisitions, Energy Eastwill have 1.3 million electric customers and about 542,000 gascustomers, excluding any added through CMP Natural Gas, the Mainegas distribution partnership of Energy East and CMP.
With CTG and Connecticut Energy, Energy East becomes the largestgas distributor in the state with about 300,000 customers. “We nowhave the critical mass that is necessary to effectively compete inthe state of Connecticut,” said Von Schack. Although the twocompanies have no electric customers in the state they plan to playan active role in the competitive power market when retailcompetition begins in 2001, he said.
CTG CEO Arthur C. Marquardt said Energy East was the “strongestpartner possible” for his company, which took only a few weeks toexamine its strategic alternatives after coming under competitivepressure from Northeast Utilities (NU). NU muscled back into gasdistribution last month with the purchase of Yankee Energy, parentof Connecticut LDC Yankee Gas.
Marquardt focused on the strength of their combined energyservices businesses. However “pipes and wires” will continue to bethe core business of Energy East. Von Schack noted there’s stillsignificant room for distribution growth in Connecticut. There’sonly a 38% saturation rate for gas service in CTG’s service area,he said.
Energy East said it expects the CTG transaction to be accretivein the first year through reduced costs, greater efficiency andrevenue enhancements, but without a work force reduction. “We planto create more jobs rather than lay off employees,” he said, notingenergy services will be a growth area for the combined company.
Under the purchase agreement with CTG, Marquardt will continueas president and CEO and will become president and COO of XENERGYEnterprises. One outside CTG Resources director will be added tothe Energy East board of directors.
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