Once it acquires Eastern Enterprises, KeySpan Corp. will havelanded a big fish with a full belly as the Weston, MA-based companyis just now about to digest its third LDC acquisition in less thantwo years. The friendly deal, announced yesterday, has Easterngoing 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.”

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 Daily GPI, Oct. 20, 1998; Dec. 23, 1997)

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. It will be immediately accretive to KeySpan Energy’s cashearnings per share and will turn accretive to the company’searnings per share in the second year after closing.

KeySpan expects pre-tax annual cost savings will be $30 million,primarily from elimination of duplicate corporate andadministrative programs, greater efficiencies in operations andbusiness processes, and increased purchasing efficiencies. KeySpanplans to cut its workforce through hiring freezes, attrition andseparation programs.

“The choice of KeySpan Energy as our partner for the future willbring immediate and long-term benefits to our customers,shareholders, employees and the communities we serve,” said EasternCEO J. Atwood Ives. Catell will remain chairman and CEO of thecombined company. Ives will retire from active management and willjoin the KeySpan board of directors. KeySpan’s headquarters willremain in New York. Boston will serve as the New Englandheadquarters for the combined company.

The merger is conditioned upon, among other things, upon theapproval of Eastern Enterprises shareholders, the Securities andExchange Commission and the New Hampshire Public UtilityCommission. The company expects completion in nine to 12 months.Initial financing of $1.7 billion will be raised in short-termmarkets and will ultimately be replaced by long-term financing.KeySpan Energy anticipates continuing its current annual dividendof $1.78/share. Eastern Enterprises will continue to pay $1.72.

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. The revised, taxable transaction iscontingent on the completion of Eastern’s merger with KeySpan. TheEnergyNorth deal was restructured to all cash to allow a reversemerger, which is more advantageous for tax reasons, Eastern said.

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.

KeySpan shares closed down $1.56 at $28 Thursday, and Easternshares closed up $4.69 at $56.25.

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