Against the backdrop of NiSource Inc.’s hostile takeover bid forColumbia Energy Group, a number of U.S. and foreign electriccompanies were emerging last week as potential third-party suitorsfor the diversified energy concern.
The most prominent foreign suitor was said to be Paris-basedVivendi, whose U.S. assets include Sithe Energies Inc., a majorindependent power producer. In the U.S., the electric companiesthat were reported to be eyeing Columbia’s assets were UnicomCorp., parent of ComEd of Chicago; Ohio-based Cinergy Corp., whichhas the 12th largest investor-owned utility system in the nation;and FirstEnergy Corp., whose utilities serve Ohio, Indiana andKentucky. Even KeySpan Energy, parent of Brooklyn Union Gas in NewYork, was said to be “very interested” in the company. It’s notclear whether the potential suitors being rumored would be hostileor friendly.
Meanwhile, NiSource, which bid $68/share ($5.7 million) forColumbia, said it was “encouraged with the response” of Columbiashareholders to its tender offer so far. NiSource – a $3.6 billionenergy holding company with key electric/gas utilities in theMidwest and New England – expects to receive about 25-30% of theshares tendered by this week, but it has been promised “well inexcess” of that amount (above 50%), said NiSource spokeswoman MariaHibbs.
“They’re still in the hunt obviously,” remarked Donato Eassey,first vice president at Merrill Lynch. He believes, however,NiSource will have to “up the ante” – to at least $73/share – tocapture enough outstanding shares to win Columbia, which ownsextensive gas distribution and pipeline assets. NiSource’s tenderoffer expires Aug. 6, but may be extended.
Sanders Morris and Mundy energy analyst John Olson said with itscurrent price offer of $68/share, or only about $4/share more thanColumbia’s current share price, NiSource faces an uphill battle.Absent Columbia’s consent, it will be extremely difficult forNiSource to win over shareholders and get a combination though theregulatory process, given Columbia’s holding company status andsome sticky issues involving the Public Utility Holding CompanyAct.
Some industry analysts dismissed Vivendi as a viable contender,but Eassey didn’t think the French company should be ruled out.”There is no doubt that the foreign operators would love to own theassets of a company like Columbia…There’s an opportunity, Ithink, for these foreign companies to continue their dominance interms of size by gaining access in the U.S. We’ve seen some on theWest Coast, and we’re likely to see more,” he said. And, “there’sprobably some argument that [Columbia Chairman Oliver “Rick”Richard III] would love to be owned by a foreign company versus onethat’s stationed here in the U.S.”
But Edward Tirello, a utility analyst for Deutsche Banc Alex.Brown, rejected the possibility of a Vivendi-Columbia match. “Ifind that hard to believe. Vivendi’s an infrastructure company, butmainly in water. It has nothing to do with gas. I would beshocked.” Vivendi would have to bid $75-$80/share to “steal thiscompany because they have no experience in this area.”
“I expect one of the three big electric companies [Unicom,Cinergy or FirstEnergy] to do something,” Tirello said. He didn’tview KeySpan Energy as a serious suitor. “…I’m sure they’relooking. You can’t count anyone out. But having said all that, Ireally think [Columbia’s] out of their league.”
Eassey said he could “speculate until the cows come home” aboutwhich electric utilities were interested in Columbia. “Suffice itto say, there isn’t anyone on the electric side that wouldn’t loveto own Richard’s assets.” But they will have to make a move quicklyto beat out NiSource, he noted. “I would think that if anybody’sgoing to do something they’d want to do it soon knowing thatNiSource already has [close to] 30% of the shares tendered.”
Columbia to Repurchase Shares; Earnings Rise
Meanwhile, Columbia counter-punched last week by adding $400million to its stock repurchase program, which now totals $420million. Analyst John Olson said he expects the stock buy-back to”encourage some of the discontented stockholders to cash in.”
The repurchase program was beefed up, Columbia’s Richard said,because the company believes its “true value is not fully reflectedin its current stock price, which was impacted in 1999 by muchwarmer than usual weather and by significant investments and costsin the marketing segment, and does not reflect Columbia’s long-termbusiness prospects.
“This repurchase program, announced on the same day as wereported our fourth consecutive quarter of increased net income,demonstrates our clear commitment to enhance shareholder value inboth the near and long term.”
Columbia won praise from analysts for beating second quarterearnings expectations with a 15% jump ($3.3 million or five centsper share) in net income during the second quarter to $26.1million, or 32 cents per share.
The highlights of the second quarter included a positive impactfrom lower property taxes on its distribution assets, anAppalachian reserve discovery and a large E&P propertyacquisition, three propane purchases, strong performance in gasdistribution and the start of construction on a new fiber networkfor telecommunications between New York and Washington, D.C.
However, retail marketing operations continued to struggle, andColumbia had to dish out $4.1 million for its failed bid forConsolidated Natural Gas — which will cost the company anadditional $8 million in the third quarter. It also reported loweroperating income from its transmission and E&P segments and anoperating loss in its propane, power generation and LNG segment.
The distribution segment recorded a $3.2 million gain inoperating income to $16.6 million. But operating income fromtransmission and storage fell $2.9 million to $55.9 million. Andthe E&P segment showed a $1.6 million decrease in operatingincome to $6.9 million because of lower gas prices and flatproduction.
Higher operating expenses led to an operating loss for thepropane, power generation and LNG segment of $500,000 versus anoperating loss of $200,000 last year.
Columbia’s marketing segment is inundated with additionalcustomer acquisition costs and higher expenses for increasedstaffing levels on the retail side. The wholesale marketingdivision posted a $1.2 million gain in operating income. But theentire marketing segment showed an operating loss of $10.5 million.That compared with an operating loss of $7.6 million in 2Q98.
Gas sales customers totaled over 320,000, compared to 53,300 in1998’s second quarter. Total gas sales were 391.4 Bcf for thesecond quarter, an increase of 44 Bcf over last year, and powersales more than tripled to 9,910 GWh.
Nevertheless, under new management, the marketing segment isexpected to undergo some changes in the quarters ahead. Columbiabrought in Brian Watt, an MIT graduate and industry consultant, tohelp turn things around at Columbia Energy Services. “Due to[Watt’s] early participation in this project, he has an excellentknowledge of these businesses and I am confident he will providethe necessary direction, immediately,” said Richard. “Althoughshowing improvement, we continue to be dissatisfied with ColumbiaEnergy Services’ operations and results.”
Columbia’s second quarter revenues totaled $1.7 billion, up$373.4 million over the 1998 period, while operating income was$64.3 million, a decrease of $6.6 million from last year’s secondquarter. However, Richard said he expects total operating incomefor the full year to be about $625 million, or 15% higher than1998, with much of the increase coming from our nonregulatedsegments. Columbia’s net income for the 1999 first half was $176.5million, or $2.13 per share, an increase of $6.2 million, or 9cents per share, over the 1998 first half.
Susan Parker; Rocco Canonica
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