Albany-based Energy East Corp., parent of New York StateElectric and Gas, is spending $1.4 billion to acquire RGS EnergyGroup, creating a Empire State powerhouse that would serve almostthree million customers, including half of those in upstate NewYork. The boards of both companies approved the deal last weekend.Energy East also will assume about $1 billion of RGS Energy debt.

Accounted for as a purchase, the deal would give Rochester,NY-based RGS shareholders the equivalent of $39.50 per stock,payable in cash or in Energy East common stock, which would be apremium of 19.3% on RGS’ closing price of $33.10 last Friday. Theprice would be contingent on Energy East’s stock price remainingbetween $16.57 and $22.41. Last Friday, Energy East closed at$19.14.

The combined company would serve an overlapping territory ofabout 200 miles, with 1.8 million electric customers, 1 millionnatural gas customers and 200,000 other retail energy customers whoare now served by RGS’ Rochester Gas & Electric (RG&E) orEnergy East’s NYSEG. Annual revenues would be $5 billion, and thecompany would have $10 billion in assets. As an added bonus,officials said the combination would cut costs for both, with asavings of around $50 million in 2004.

In a conference call Tuesday, Energy East CEO Wes von Schack,who would become CEO of the new corporation, said he thinks thatearnings increases for calendar year 2003 will exceed the typical3% to 5%. “We think we can do better than that,” he said, callingRGS the “right partner, at the right time.”

Expecting to receive approval from the New York State PublicService Commission and other regulatory agencies within 12 months,von Schack said the companies have already met with stateregulators and anticipate no problems. He added that he foresees nofederal complications at all.

Nearly two-thirds of NYSEG’s customers are covered underlong-term contracts and owned generation with the remainingcustomers’ needs hedged through March 2003. RG&E also suppliesits customers through its generation portfolio, which includes theGinna nuclear plant.

Answering questions about high natural gas prices, RGS ChairmanTom Richards said the new company would be “fully covered and notsignificantly dependent on gas.” He said that the merger would givethe company a “flat load across the year” with no peaking problems.Richards will become executive vice president of Energy East andalso hold his current RGS positions.

RGS Energy and NYSEG would both be subsidiaries of Energy Eastwhen the merger is completed. RG&E would remain a subsidiary ofRGS Energy. Last December, RG&E agreed to refund $5.7 millionto its gas customers because of overcharges, which it said werebased on incorrect gas usage and cost forecasts between Aug. 31,1999 and Aug. 31, 2000.

Just months ago, Great Britain’s National Grid Group bought anotherupstate New York generator, Niagara Mohawk Holdings, for $3 billion(see Daily GPI, Sept. 6, 2000). Also,Entergy Corp. is close to completing its merger with FPL Group (seeDaily GPI, Dec. 18, 2000), which willserve the Southeast as the largest electricity provider in thecountry. And last August, FirstEnergy and GPU Inc. announced a mergerof their Pennsylvania, Ohio and New Jersey customer base (see DailyGPI, Aug. 9, 2000).

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