In yet another instance where bigger is believed to be better inthe deregulated energy marketplace, Boston Edison parent BEC Energyand Cambridge, MA-based gas and power holding company CommonwealthEnergy System plan to merge in a cash and stock deal. Thetransaction also represents the acquisition of gas assets byelectric BEC.
The new company will be an exempt public utility holding companyand the parent of Boston Edison Co. and Commonwealth Electric Co.,Cambridge Electric Light Co., Canal Electric Co., Commonwealth GasCo., and the unregulated affiliates of BEC Energy and COM/Energy.The corporate headquarters will be in Boston.
“One of the reasons that Boston Edison was interested in mergingwith us was because of our gas business,” said Commonwealth Energyspokesman Peter Dimond. “Having the ability to meet customer needsfor both gas and electricity is something that we’ve foundimportant and believe that Boston Edison has found important aswell. There are quite a few areas that Boston Edison serves withelectricity that are also served by Com/Gas.
“A year and a half ago, we merged our gas and electricoperations under one management team. More recently in November weunbundled our bills to carry gas as a commodity in anticipation ofthe state of Massachusetts opening the gas market for residentialconsumers.”
The combined company will have market capitalization of about$4.4 billion ($2.6 billion in equity; $1.7 billion in net debt;$0.1 billion in preferred stock). The $2.6 billion equity value isthe largest of any New England utility. The combined company willserve about 1.3 million customers, including about 1.04 millionelectric customers in 81 communities and 240,000 gas customers in51 communities. The combination is anticipated to be accretive toearnings per share in the first full year following closing.
Boston Edison serves 670,000 customers in Boston and 39 othercities and towns in eastern Massachusetts. Commonwealth’s utilitiesserve 367,000 electric customers in 41 communities, and 237,000 gascustomers in 51 communities, including 12 that are served by sisterelectric utility operations.
“Our goal is to grow to two million customers, enabling us tofurther enhance customer service. The new company allows us tobroaden our customer base, and to capture the savings opportunitiesthat the combined operations can produce,” said BEC Energy CEOThomas J. May. “We will continue to make customer service the toppriority. Our expanded platform will allow the combined company toinvest more effectively in technology and infrastructure which willlead to higher levels of customer service.”
“From our perspective, one of the reasons why the merger fitsagain is the commonality of focus as we move forward,” said BECEnergy spokesman Michael Monahan. “Both companies have divested oftheir generation. Now we’re looking at focusing on becoming apremier wires and pipes company.” He noted an unregulatedsubsidiary of BEC is involved in a joint venture with RCN ofPrinceton, NJ, that provides telephone, cable television, andInternet service.
Massachusetts electric restructuring legislation specified a 10%rate reduction that took effect in March. By September, thediscount is supposed to grow to at least 15%. “Obviously, the wayyou provide these rate reductions is to cut your costs and makeyour operations more efficient, basically through economies ofscale,” Monahan said.
BEC, which had $144.6 million of net income in 1997, recentlynegotiated a transition plan with the Massachusetts Department ofTelecommunications and Energy that allows for 100% stranded costrecovery. The company received a 50% premium to book value for itsgenerating assets. In August, BEC sold its 50% share in retailenergy marketer Energy Vision to Williams. Commonwealth Energy had1997 net income of $49.9 million.
Savings related to the merger are expected to be about $500million over a 10-year period from the elimination of duplicationin corporate and administrative programs, greater efficiencies inoperations and business processes, increased purchasingefficiencies and the combination of work forces. Employeereductions are expected to be about 300 positions out of a workforce of 3,900. The new company expects to achieve reductionsthrough a variety of programs which would include hiring freezes,attrition and voluntary separation. All union contracts will remainin effect.
May will become chairman and chief executive officer of the newcompany. Russell D. Wright, president and CEO of COM/Energy, willbecome president and chief operating officer of the new company andwill serve on the board of directors. Under the terms of theagreement, a new holding company will be created and both BECEnergy and COM/Energy will exchange their shares for a combinationof stock in the holding company and cash. The cash portion of thetransaction is expected to be financed primarily through currentcash balances and internally generated funds. BEC Energystockholders may elect to receive one share of the holdingcompany’s common stock or $44.10 in cash for each BEC Energy sharethey own. The cash price represents a 5% premium to BEC Energy’sclosing stock price on Dec. 4. COM/Energy stockholders may elect toreceive 1.05 shares of the holding company’s common stock or $44.10in cash for each COM/Energy share they own, representing a 17%premium to COM/Energy’s closing price on Dec. 4.
The merger requires shareholder, and state and federalregulatory approval. Since all operations are in Massachusetts, thecompanies anticipate approvals can be obtained by mid-1999.
Commonwealth Energy System is a $1 billion holding company. Itsregulated subsidiaries include Commonwealth Electric, CambridgeElectric Light, Canal Electric, and Commonwealth Gas, togetherserving 600,000 customers in eastern Massachusetts. BEC Energy,through its wholly owned subsidiary Boston Edison Co., provideselectricity to about 670,000 customers
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