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Deal to acquire RGS Energy Group in SEC’s hands

Deal to acquire RGS Energy Group in SEC’s hands

The acquisition of RGS Energy Group Inc. by Energy East Corp. could close within 30 days-ending more than a half century of local ownership.
RGS-the parent of Rochester Gas and Electric Corp.-is this area’s 10th largest private-sector employer, and accounts for more than 1,900 local jobs. As a supplier of energy to a majority of homes and businesses, it is also a vital cog in the region’s economy.
Energy East filed an amended merger proposal with the Securities and Exchange Commission on May 9. If the SEC moves quickly on the filing, the deal could close in mid-June, some 12 months after shareholders of both companies voted their approval.
The Federal Energy Regulatory Commission, the Nuclear Regulatory Commission and the state Public Service Commission signed off on the sale last year. That leaves SEC approval as the merger’s last regulatory hurdle.
Spokesmen for RGS and Energy East this week declined to comment on the merger or a closing date.
With its headquarters in Albany, Energy East has roughly $3 billion in revenues and is the parent of New York State Electric and Gas Corp. It is also parent to several New England utilities.
Energy East announced plans to acquire the roughly $1 billion RGS last year, proposing to pay $1.4 billion and assume $1 billion in RGS debt. Energy East is headed by Chairman Wesley Von Schack, who before the formation of Energy East was NYSEG’s CEO.
Despite RGS being the smaller of the companies and the acquired party in the deal, the Rochester area is likely to see little immediate effect, said Kent Gardner, chief economist for the Center for Governmental Research Inc. RGS at least initially would control its own and NYSEG’s operations, putting the Rochester utility in charge of a majority of Energy East’s business.
Stanley Spector, former RG&E director of subsidiary operations who now runs a merger-and-acquisitions firm here, concurs.
Gardner added that energy markets and power-transmission networks nationally and in New York are in flux. The ultimate shape they will take is hard to predict.
Whether the merger would bode well, ill or neutral for this region depends on how the combined companies fit into the emerging energy landscape, he said. The merger’s ultimate effects are unknown and difficult to predict.

Merged operations

The Energy East filing calls for NYSEG and RG&E to merge operations and for RGS chairman and CEO Thomas Richards to become CEO of the merged operations. Energy East also would acquire RGS’ unregulated Energetix Inc. subsidiary, which runs an energy-marketing business and is the largest liquid-fuels distributor in New York. Energy East has agreed to assume $1 billion in RGS debt.
The merger proposal also calls for Richards and two current RGS outside directors to take seats on Energy East’s board, increasing the body from 12 to 15 members. Richards, who would oversee a roughly $5 billion statewide operation, also is to become a senior vice president of Energy East.
The post-merger RGS board, meanwhile, would consist of Richards, Energy East chairman Von Schack and Energy East chief financial officer Kenneth Jasinski. The rest of RGS’ current board would become an advisory body to the three-member governing body.
While Energy East would be the ultimate parent of NYSEG and RGS, the combined NYSEG and RGS operations would operate under the RGS name. NYSEG’s corporate offices would move from Binghamton to Rochester, a move that would bring a total of 40 workers here, the filing states. NYSEG also maintains corporate offices in Ithaca. It is unclear whether any employees would move here from Ithaca.
Spector, who takes a largely positive view of the merger, sees one possible downside for Rochester-the dilution of the advantage RG&E has from owning its own power plants.
NYSEG, like all state public utilities except RG&E, was required by state regulators to shed virtually all of its power plants as part of an energy-industry deregulation plan begun in 1997.
RG&E, which serves essentially the Rochester area, was exempted from divestiture rules because its 2,700-square-mile service territory is relatively tiny. NYSEG’s service area is 20,000 square miles. Prior to the Energy East bid, RGS portrayed its retention of generating capacity as a major plus for this area.
RG&E could count on its three power plants to supply some 90 percent of the area’s electricity, RGS officials said. This meant Rochester would be less subject to alleged pricing manipulations by independent power generators and energy marketers such as Enron Corp. that plunged California into crisis last year. The proposed merger plan calls for RG&E to retain ownership of its power plants.
The thick Energy East filing does not specifically address post-Enron energy-pricing questions. Those questions, it notes, have been reviewed by the PSC and the Federal Energy Regulatory Commission. Both agencies have vetted and approved the merger plan.
RGS officials have maintained the power-supply advantage through RG&E’s continuing plant ownership would not be diluted as RGS takes charge of a vastly expanded service territory in merging its operations with NYSEG.
Spector said, however, the post-merger RGS would be legally bound to spread RG&E’s power over the larger territory. He finds it hard to imagine a scenario in which Rochester’s local advantage will not be diluted.
Still, Spector believes, the merger will generate savings sufficient to offset such a downside.
Energy East’s SEC filing devotes considerable space to assurances that through operational consolidations and economies of scale the merged companies would generate substantial savings throughout the NYSEG-RGS service territories.
Spector largely concurs, but notes RG&E’s rate-cut agreements with the PSC are about to expire. NYSEG and the PSC just inked a new rate-reduction pact as part of the PSC’s merger review in which PSC staff largely concentrated on NYSEG rate questions. In the near term, Spector said, NYSEG customers could benefit more from merger savings.

Is bigger better?

But bigger is not necessarily better, Gardner said. Whether the combined RGS-NYSEG operations generate promised savings remains to be seen. Historically, he said, New York’s most efficient utilities have been its smallest.
State electric-utility costs published by the PSC show NYSEG customers to have paid an average of 11.31 cents a kilowatt hour for 12.2 billion kilowatts of power in 2000. RG&E customers paid 9.55 cents for 5.8 billion kilowatts.
By comparison, smaller Central Hudson Gas & Electric Corp. supplied 4.7 billion kilowatts for 8.95 cents a kilowatt hour. And giant Consolidated Edison Corp., which at 31.9 billion kilowatt hours supplied the most electricity of any New York utility, charged an average of 16.56 cents.
Like Spector, Gardner sees dilution of Rochester’s current power-supply advantage as possible. However, he also believes that depending on how energy markets and transmission networks shape up, that advantage could turn into a liability.
Gardner said bigger could turn out to be better. If FERC succeeds in a push to create regional power networks spanning state and even national lines with the inclusion of Canadian generators, the cost of power could come down, putting bigger players in a position to make the best deals in a deregulated energy marketplace.
In that scenario, RG&E’s biggest plant-the aging Ginna nuclear plant-could turn into a liability, Gardner said.
Ginna, which is supposed to be decommissioned in 2009, is a low-cost facility. And RGS has said that it strongly would consider asking the NRC to extend Ginna’s license.
If the plant is decommissioned, Gardner said, the cost of taking it out of service would be steep. If Ginna stays in service and cross-state transmission networks bring power prices down, maintenance costs could push its electricity higher than prevailing rates, he added.
But in another scenario, New York’s energy costs could rise steeply as demand for power outstrips supplies. That is a possibility over which the state’s Independent System Operator-the non-profit, overseen by FERC, manages New York’s energy market-as well as business groups are raising continuing alarms.
An April ISO alert noted that of six new plants approved statewide, only one is under construction. Demand in the state is rising, warned ISO president and CEO William Museler.
Among difficulties Museler sees is that in the wake of California’s energy crisis and the subsequent financial collapse of Enron, generators are pulling back from plant construction. Last year, for example, Scythe Energy Corp. put an approved power plant in Oswego on indefinite hold.
If post-Enron jitters work to keep supplies sufficiently low, Gardner said, continued plant ownership would be a decided, albeit diluted, advantage.
Gardner sees those scenarios or some hybrid development equally likely. Whether the merger ultimately is good or bad for this region most likely will depend on how nimbly the merged company responds to conditions that at the moment are murky.

Acquisition inevitable

At the same time, Gardner-echoing an opinion previously voiced by RGS’ Richards-said the eventual acquisition of RGS by some larger entity was a virtual certainty. Since New York started energy deregulation some four years ago, the trend in energy has been bigger fish are swallowing smaller ones.
The National Grid Group, a more than $6 billion energy-transmission firm based in England, last year acquired Niagara Mohawk Corp. National Grid previously bought five utilities in New England formerly known as the New England Electric System. It boasts on its Web site that its U.S. transmission network now equals its network in the British Isles.
Gardner said Con Ed is rumored to be courting Central Hudson Gas and Electric Corp. in eastern New York. Previously Con Ed acquired Orange and Rockland Utilities, which serves seven counties in southeastern New York, northern New Jersey and eastern Pennsylvania.
When or whether the RGS-Energy East merger closes depends on how quickly the SEC moves to approve, kill or seek modifications to the Energy East filing. Federal rules call for a 25-day public-comment period before the commission can vote. The SEC, as of Wednesday, had not noticed officially the May 9 filing.
But it is not clear how much of a microscope the SEC will put the merger proposal under in light of growing concerns over alleged energy-market price manipulations in California and other Western states. Allegations of malfeasance against Arthur Andersen LLP and questions over investment bankers’ role in Enron’s financial collapse are still rippling out in corporate America, and could also move the SEC to take its time on the Energy East proposal.
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05/31/02 (C) Rochester Business Journal