Thursday, May 02, 2002

Cinergy on high; merger talks fly

Forecast to come at annual meeting today

By Mike Boyer,
The Cincinnati Enquirer

        Cinergy Corp.'s shares are trading near their 52-week high, and the merger-and-acquisition speculation is flying.

        For employees and shareholders of the utility holding company, which will have its annual meeting in Indianapolis this morning, the rumors are nothing new.

        The company created by the 1994 merger of Cincinnati Gas & Electric & PSI Energy in Indiana has been the focus of recurring speculation that it was merging with or being acquired by any number of utility companies in the past few years.

        It reflects, in part, chairman James E. Rogers' frankness about the need to get bigger to be a survivor in the U.S. energy business.

        “This is an industry where, at the end of the day, consolidation will be the reality,” he said. “The only issue is when.”

        Despite the collapse of Enron, turmoil in California's power market and the recession, Cinergy finished last year with record earnings of $442 million, or $2.75 a share, on revenues of $12.9 billion.

        Most of the companies in the Standard & Poor's Electric Supercomposite Index, composed of 59 utilities of all sizes, either missed or lowered their earnings targets last year.

        Cinergy's shares, which closed Wednesday at $35.22, down 31 cents, are trading near the stock's 52-week high of $37.17.

        Cinergy's total return — stock appreciation and dividend yield — was 7 percent last year, while total return for the S&P Electric Index declined more than 8 percent.

        “From a shareholder's standpoint, we had a good year last year relative to everybody else,” he said.

        Still, Cinergy has bolstered its balance sheet recently, issuing $316 million in convertible securities in December and raising another $200 million in a stock offering in February.

        As a result, last month, Moody's Investor Service confirmed its ratings on Cinergy's debt, citing the company's moves to reduce that debt.

        As part of cost-control efforts, Cinergy said Wednesday that about 213 of 280 eligible employees accepted a voluntary early retirement offer announced in March.

        Nonunion employees, representing about 3 percent of its 8,800 work force, who were at least 54 years old with five years of service were eligible. The company said it didn't know yet the cost of the buyout program, but said the response was above expectations. Most of the retirements are expected to take effect by June 1.

        And the utility faces an array of challenges:

        • Resolving a 16-month stalemate in a tentative settlement in a pollution lawsuit filed by the U.S. Justice Department over emissions from several of the company's coal-fired generating plants.

        The federal government said recently that it wants to complete the agreement, which would commit Cinergy to spend about $1.4 billion on environmental cleanup, in the next couple of months.

        • Settling a $25 million gas rate increase pending before the Public Utilities Commission of Ohio. In March, the company won a $2.8 million gas rate increase in Kentucky. Several of the interested groups in the Ohio case have agreed to a compromise, which would raise rates by $15 million, but some groups — notably the Utility Workers Union of America, which represents about 900 Cinergy employees — have refused to join the proposed settlement. The Utility Workers are in contract negotiations with Cinergy.

        Uncertainties over electricity restructuring — where some states such as Ohio have deregulated and others such as Kentucky and Indiana haven't — coupled with the volatility in energy markets are pushing the industry toward consolidation, Mr. Rogers said.

        “The way you create sustainable wealth (for shareholders) is by combining companies, reducing balance sheet debt and be better able to handle the swings in the market,” he said.

        The latest speculation has Cinergy and Dayton, Ohio-based DPL Inc. being rolled up by German conglomerate E.on AG, which is in the midst of acquiring the parent of Louisville's LG&E Energy Corp.

        E.on, which says it wants to acquire more U.S. power companies, is holding “preliminary acquisition” talks with Cinergy and DPL, according to an online newsletter published by Institutional Investor.

        Mr. Rogers won't comment on any talks Cinergy is having, but he says he hasn't wavered in his willingness to do a merger or acquisition.

        “I think you're in a stronger position when your stock is up, but we're not looking more today than we did yesterday or a year ago,” he said.

        “It's a continuing, ongoing process. It's just that your ability to complete a deal now, the probability to do it, is better.”


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