Energy East CEO: RGS acquisition to boost earnings, cut costs
East Energy Corp., Albany, NY, Tuesday said it will acquire Rochester, N.Y.-based RGS Energy Group Inc. in a deal valued at $2.4 billion, including the assumption of $1 billion of debt. Energy East CEO Wes von Schack, who will hold the same position after the deal is completed, said during a conference call the acquisition is expected to add to earnings in calendar year 2003. Compared to typical earnings of 3-5% for most pipes and wires companies, 'We think we can do better than that,' he said.
By Kate Thomas
HOUSTON, Feb. 20�East Energy Corp., Albany, NY, Tuesday said it will acquire Rochester, N.Y.-based RGS Energy Group Inc. in a deal valued at $2.4 billion, including the assumption of $1 billion of debt.
Based on Friday's close, the deal calls for Energy East to pay RGS shareholders $39.50/share for each RGS share in cash or in Energy East stock. The terms set a 19% premium for the RGS shares.
The combined company will serve nearly 3 million customers in the US Northeast, including 1.8 million electric customers, almost 1 million natural gas customers, and 200,000 other retail energy customers. Together, Energy East and RGS Energy, through their operating subsidiaries, will serve half of upstate New York.
The combined company will have annual revenues of $5 billion and nearly $10 billion in assets. The companies said the transaction will be accounted for as a purchase.
Energy East CEO Wes von Schack, who will hold the same position after the deal is completed, said during a conference call the acquisition is expected to add to earnings in calendar year 2003. Compared to typical earnings of 3-5% for most pipes and wires companies, "We think we can do better than that," he said.
He called the service territory of Rochester Gas & Electric's (RG&E), the regulated unit of RGS is an "excellent" fit with Energy East's New York State Electric & Gas (NYSEG). With more than 200 miles of contiguous territory and other benefits, he said, the combination provides an opportunity for an estimated $50 million in savings in 2004.
Importantly, von Schack said, under agreement with state regulators NYSEG can retain 100% of savings from mergers for 5 years after a deal is closed. "That's a very important provision and makes this transaction especially attractive," von Schack said.
The companies anticipate approval from the New York State Public Service Commission and all regulatory approvals can be obtained in 12 months.
"We are pretty confident we can get approval on an expedited basis," von Shack said. The companies have already held preliminary discussions with state regulators, and "on the federal side there are no market power issues," he said.
The two companies are well positioned to address the two main issues�reliability and price�that concern customers today, said Tom Richards, RGS chairman, who will become executive vice-president of Energy East and retain his RGS positions.
Two-thirds of NYSEG's customer needs are covered by long-term contracts and owned generation, and the balance is hedged through March 2003, Richards said. RG&E supplies its customers' requirements substantially through its own generation portfolio, including the Ginna nuclear plant.
"We are fully covered and not significantly dependent on gas," Richards said. Together the merged companies will have a flat load across the year, when "most people are driven nearly nuts with peaking problems," he said.
Under the agreement, RGS Energy will become a wholly-owned subsidiary of Energy East. RG&E will remain a subsidiary of RGS Energy, and it is expected that NYSEG will be a wholly-owned subsidiary of RGS Energy. No change is expected in Energy East's dividend policy.