NGI The Weekly Gas Market Report
Columbia, SC-based SCANA Corp. nearly doubled its regulated gascustomer base in the fast-growing Carolinas last week with thepurchase of Public Service Company of North Carolina (PSNC) for$900 million, including the assumption of about $250 million inPSNC debt. The combination will serve 517,000 electric, 760,000 gascustomers in the Carolinas and Georgia and 350,000telecommunications customers throughout the Southeast. Total annualrevenues for the combined company will be about $2 billion andmarket capitalization will be about $6 billion.
“This acquisition is about growth, opportunity and maximizingshareholder value in the face of the dramatic changes taking placein today’s utility industry,” said SCANA CEO William B. Timmerman.The combination “offers us the opportunity to extend our naturalgas service area into some of the fastest growing markets in NorthCarolina while nearly doubling our natural gas customer base.” Thedeal gives SCANA a major presence in North Carolina gas markets,which are growing at about 5%/year, a rate that is double thenational average and double SCANA’s own markets. It also reflects acontinuation of SCANA’s strategy to focus on retail markets in theSoutheast rather than wholesale marketing or exploration andproduction, two businesses it exited over the past 14 months.
For PSNC, a combination with a larger partner provides morefinancial strength to compete with neighboring Raleigh, NC-basedCarolina Power & Light, which announced a plan last November toacquire North Carolina Natural Gas and make it a wholly ownedsubsidiary. CP&L anticipates receiving regulatory approval forthe acquisition by mid-1999. PSNC, based in Gastonia, sells gas to340,000 customers in cities such as Raleigh, Durham, Chapel Hill,Concord, Gastonia and locations west of Charlotte.
PSNC announced a strategic restructuring plan announced latelast year to better prepare for competition. “The advancedoperational goals we set for ourselves last year under our plan arewell served by partnering our highly competitive natural gasdistribution franchise in North Carolina with SCANA’s diversifiedelectric, natural gas, and telecommunications businesses throughoutthe Southeast,” said PSNC Chairman Charles E. Zeigler Jr. “Throughthis combination, we obtain the critical mass that facilitatessignificant growth opportunities for the benefit of all our vitalconstituencies. Today, we have taken our boldest step yet toposition ourselves in the highly competitive energy industry of thenext century.”
Under the terms of the agreement, shareholders of PSNC willreceive consideration valued at $33/share, a 45% premium to PSNC’sclosing price on Feb. 16. PSNC shares rose $6.69/share in tradingyesterday to close at $29.44. SCANA shares dropped 75 cents toclose at $26.06. SCANA shareholders have the right to exchangetheir current SCANA common shares for new shares of SCANA commonstock, or $30 per share in cash. This represents a premium of about10% over SCANA’s five-day average trading price through Tuesday,when it closed at $26.75.
However, SCANA’s Timmerman indicated it might take a coupleyears for the transaction to have a positive impact on earnings.”We’ve got some models that suggest there might be a 1-2% dilutionin earnings” in 2000, he said. “After that, it becomes increasinglyaccretive” because of savings generated by combining work forcesand by PSNC’s continuing restructuring, which is expected to reduceits work force to 850 people by 2001 from 1,100 last year. PSNC andSCANA utility South Carolina Electric & Gas are expected tocontinue operating as separate utility subsidiaries of the SCANAholding company.
Moody’s Investors Service placed the debt ratings of SCANA onreview for possible downgrade, but confirmed the long-term andcommercial paper ratings South Carolina Electric & Gas(SCE&G), leaving its stable outlook unchanged. Moody’s notedthat the deal shifts SCANA’s capital structure from 49% debt tocapital to 58%. But SCANA also intends to withhold an additional$40 million per year by cutting its quarterly dividend by 11 centsper share. Moody’s confirmed the ratings of PSNC and changed itsoutlook to positive.
Timmerman said the decision to change the common stock dividend”was not an easy one, but it was a decision our board consideredappropriate to give us the flexibility to deal with the demands ofa more competitive utility industry while implementing our growthstrategies.” He said increasing competition requires that thecompany retain more of its earnings to make additional investmentsin core and non-core business opportunities. “We believe thisstrength-through-growth strategy will increase future earnings,providing a sound basis for future growth in our dividends andstock price.”
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