Strategic benefits emerge in electric- gas alliance

Tami Cissna

Associate Editor

Dominion Resources and Consolidated Natural Gas Co. (CNG) are sticking with their merger plans. After CNG refused major natural gas company suitor Columbia Energy, the merging companies are quickly moving ahead to exploit synergies afforded by the gas-electric combination, beginning with planning new peaking units near CNG`s natural gas pipeline system.

Thus far, the companies have selected four sites in Ohio, Pennsylvania and West Virginia where they plan to build 300 to 600 MW units. They are seeking additional sites in those states and in New York and Virginia. A few months ago, Dominion signed an agreement with General Electric Co. for the option to purchase 10 gas-fired electric generation turbines.

“These are opportune locations-in a part of the country where power is really needed,” noted a CNG spokesman.

CNG, based in Pittsburgh, said it preferred a merger with Dominion because joining a gas company with an electric utility was more appealing than simply merging two gas companies. It also concluded that merging with Dominion, based in Richmond, Va., would be quicker and more certain.

The success rate among gas-electric mergers is high. Typically, such mergers go through more quickly than companies in the same industry because they have fewer regulatory hurdles to clear.

The best choice for a CNG partner was clear, said Ed Tirello, an analyst with BT Alex Brown. “You have to look at the whole story. With a merger with Columbia, the only savings are gained by firing 3,000 people. There are also a lot of potential problems with that scenario, such as monopoly of storage.”

Dominion and CNG are quickly leveraging to gain the substantial savings offered by an electric-gas merger. The companies have identified 65 sites, and will eventually locate 100 locations where an electric transmission line and CNG pipeline cross. “There is a myriad of things like that where savings can be realized,” Tirello said.

CNG`s chairman and CEO George A. Davidson Jr. said the combined company will offer energy, gas and electricity to retail and wholesale customers. “We expect to cross-market gas to electric customers and electricity to gas customers. In addition, the company will benefit from the arbitrage available among fuel sources,” said Davidson in a statement.

In a competitive marketplace, electric and gas companies need each other, Tirello said. “Electric companies going from monopolies to competitive companies can`t afford to have overlapping customer lists-they need to own all of them.”

Customers want one consolidated bill for energy use and the volume discounts they get from buying energy from a larger company. Convergence of the two businesses also makes sense in light of the trend toward distributed generation. “If the electric company doesn`t own the gas company, it will lose revenue,” he said.

Tirello predicted in 1997 all gas companies would be consolidated with electric power companies within the next five years. Today, electric-natural gas mergers are commonplace (see table).

The combined CNG/Dominion will form one of the nation`s largest integrated companies, serving nearly 4 million retail customers in five states. Market capitalization of the combined entity will be approximately $25 billion.

Dominion`s initial friendly stock offer in February valued Consolidated at about $62.32 a share in a $6 billion acquisition. The agreement met with challenge in April when Columbia Energy, one of the largest U.S. gas companies, made an unsolicited $6.7 billion cash and stock offer for CNG.

Dominion revised its offer and won the deal. In the new agreement, CNG shareholders will receive a combination Dominion common stock and cash with a firm value of $66.60 a share. The companies filed for FERC approval June 7.

Succeeding CNG`s rejection, Columbia Energy Group received a proposal for a buyout from NiSource Inc., based in Merrillville, Ind. In the unsolicited offer, NiSource would acquire all of Columbia`s outstanding common stock for $68 per share in cash. Columbia issued a statement stating it was “not interested in any merger transaction in which another company acquires control of Columbia.”

But shareholders, representing more than 30 percent of Columbia`s outstanding common stock, said they do want negotiations. At least three class-action shareholder lawsuits were filed regarding Columbia`s refusal to negotiate.

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