Once it acquires Eastern Enterprises, KeySpan Corp. will havelanded a big fish with a full belly as the Weston, MA-based holdingcompany is just now about to digest its third LDC acquisition inless than two years. The friendly deal, announced yesterday, hasEastern going for $64/share or about $2.5 billion.

The combined company will have assets of $8.8 billion, $4.3billion in revenues, and EBITDA of $950 million. “Our combinedcompanies will serve 2.4 million customers and will be strongcompetitors in the emerging energy markets. This merger isconsistent with our vision for growth, and with the addition ofEastern’s unregulated businesses, accelerates our plans to become afull-service energy company,” said KeySpan CEO Robert B. Catell.”This combination provides an excellent opportunity to increasegrowth while introducing geographic and regulatory diversity.”

Don’t look for KeySpan to pack up its tackle box and go homenow. With 2.4 million customers, the combined company is still muchsmaller than what at least one industry analyst views as theoptimal size for a utility holding company. Merrill Lynch financialanalyst Donato Eassey said he thinks 10 million to 35 millioncustomers should be the target size of anyone who hopes to be aserious player. KeySpan management would seem to agree.

“This combination positions KeySpan as the leading gas companyin the Northeast region and provides a platform for furtheracquisition in the Northeast,” Catell said. “This gives KeySpan avery strong regional platform in New England.”

Its future acquisition activities could become more difficult,however, since like-minded Energy East, parent of New York StateElectric & Gas, is boxing it in by acquiring Central MainePower, the largest electric utility in the state, CTG Resources,parent of Connecticut Natural Gas and Connecticut Energy, parent ofSouthern Connecticut Gas. When its current acquisitions arecompleted Energy East expects to have 1.3 million electriccustomers and about 542,000 gas customers. Consolidated Edison ofNew York also lumbered to life recently, announcing the acquisitionof Orange & Rockland Utilities. That merger adds up to fivemillion electric customers and 1.4 million gas customers.

Eastern owns and operates Boston Gas Co., Colonial Gas Co.,Essex Gas Co., Midland Enterprises Inc. Transgas Inc. andServicEdge Partners Inc. Upon completion of the pending merger withEnergyNorth Inc., Eastern will serve more than 800,000 gascustomers in Massachusetts and New Hampshire. Midland,headquartered in Cincinnati, OH, is a leading inland waterwaycarrier of coal and other dry bulk cargoes. Transgas is thenation’s largest over-the-road transporter of liquefied naturalgas. ServicEdge is the largest unregulated provider of residentialHVAC equipment installation and service to customers inMassachusetts.

Eastern’s announcement that it would acquire Colonial Gas inOctober 1998 for about $495 million came only about three weeksafter the closing of the Essex County Gas acquisition, a $113million deal (see NGI Oct. 26, 1998; Jan. 5, 1998).

Brooklyn, NY-based KeySpan is the parent of Brooklyn Union,which distributes gas to 1.6 million customers in New York City andon Long Island, making it the fourth largest gas-distributioncompany in the United States. Other KeySpan companies market aportfolio of energy services in the Northeast, operateelectric-generation plants in New York City and on Long Island, andprovide operating and customer services to 1.1 million electriccustomers of the Long Island Power Authority. KeySpan Energy’sunregulated energy activities focus on three principal lines ofbusiness: gas exploration and development, primarily through TheHouston Exploration Co.; domestic pipelines and storage; andinternational activities, including gas-processing in Canada, andgas pipelines and local-distribution in Northern Ireland.

“Eastern Enterprises is by far the largest natural gasdistribution utility in New England; however, there is stillsignificant upside potential due to the relatively low penetrationof customers using gas for heat in the region,” Catell said. “Thisopportunity is similar to what KeySpan Energy is experiencing onLong Island. The development of new pipeline capacity and newsupply options to New England over the past two years willcertainly help us to grow our customer base. In addition, thecombined company will have a broad platform for future growth forthe full array of services KeySpan Energy and Eastern Enterpriseshave been developing in their non-regulated subsidiaries.”

The price KeySpan is paying for Eastern represents a premium of24% over the Eastern Enterprises Nov. 3 closing price of $51.56 anda 45% premium over the average of the last 90-day trading period.The deal is worth $1.7 billion in equity and $0.8 billion inassumed debt and preferred stock and will be accounted for as apurchase.

The deal will increase KeySpan’s debt-to-equity ratio to about58% from 37%. Without the Eastern deal, the ratio was expected toincrease to 47% based on the company’s previous plans.

KeySpan expects pre-tax annual cost savings will be $30 million,primarily from elimination of duplicate functions and greaterefficiencies in operations and business processes and purchasing.KeySpan plans to cut its workforce through hiring freezes,attrition and separation programs.

Catell will remain chairman and CEO of the combined company.Eastern CEO J. Atwood Ives will retire and join the KeySpan board.KeySpan’s headquarters will remain in New York. Boston will be theNew England headquarters for the combined company.

The merger is conditioned upon, among other things, the approvalof Eastern Enterprises shareholders, the Securities and ExchangeCommission and the New Hampshire Public Utility Commission. Thecompany expects completion in nine to 12 months.

In connection with the merger, Eastern Enterprises has amendedits July 15 merger agreement with EnergyNorth Inc. to an all-cashacquisition at $61.13/share, an increase of 30% from a previouscombination of cash and stock worth $47/share. The revised purchaseprice values EnergyNorth’s equity at more than $200 million with atotal enterprise value of close to $250 million, including itsoutstanding long-term debt. The restructured EnergyNorth merger isexpected to close contemporaneously with the KeySpan Energy/EasternEnterprises transaction.

EnergyNorth, Inc. is an energy services holding companyheadquartered in Manchester, NH. Its subsidiaries distribute gasand propane to more than 95,000 customers throughout New Hampshireand Vermont, as well as provide mechanical contracting services forcommercial, industrial and institutional customers in northern NewEngland.

Eastern’s stock price jumped more than 13% in August to morethan $44 on news that it was evaluating strategic alternativesincluding the possible sale of the company (see NGI Aug. 23).KeySpan shares closed down $1.56 at $28 Thursday, and Easternshares closed up $4.69 at $56.25.

Joe Fisher, Houston

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