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 week.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 on Feb. 16. Theprice would be contingent on Energy East’s stock price remainingbetween $16.57 and $22.41. On Feb. 16, 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 nowserved by RGS’ Rochester Gas & Electric (RG&E) or EnergyEast’s NYSEG. Annual revenues would be $5 billion, and the companywould have $10 billion in assets. As an added bonus, officials saidthe combination would cut costs for both, with a savings of around$50 million in 2004.

Energy East CEO Wes von Schack, who would remain CEO followingthe merger, said he thinks that earnings increases for calendaryear 2003 will exceed the typical 3% to 5%. “We think we can dobetter than that,” he said, calling RGS the “right partner, at theright 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.

In response to the merger announcement, Moody’s InvestorServices placed the long-term credit ratings of Energy East underreview for a possible downgrade along with the long-term ratings ofits subsidiaries. In its review, Moody’s will focus on theadditional debt burden resulting from the merger and the resultingcall it may generate on the cash flows of the operatingsubsidiaries.

“Although the combination is in line with Energy East’s regionalwires and pipes strategy, the company has announced four mergerssince 1999 and may still be in the process of integrating thosecompanies,” said Moody’s. “Also, our review will evaluate EnergyEast’s ability to manage its plans for a share repurchase programwhile at the same time paying down the debt associated with thetransaction and growing its current common stock dividend.”

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.

Carolyn Davis, Houston

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