Houston Industries to buy NorAm Energy Corp. Combined companies will control electricity, gas sales in Houston area

Utilities

August 13, 1996|By BLOOMBERG BUSINESS NEWS

NEW YORK -- Houston Industries Inc. yesterday said it will buy Houston-based NorAm Energy Corp., the third-largest U.S. natural gas utility, for $3.8 billion, giving the combined companies control of retail electricity and natural gas sales in the Houston area.

The two utilities have 600,000 common customers.

Analysts said they expect more acquisitions in the industry, especially ones that combine gas and electric companies.

"The [utility] company of the future will supply both electricity and gas," said Edward Tirello, a NatWest Securities Corp. analyst.

State and federal legislators are moving to end utility monopolies before the end of this century, allowing customers to choose their gas and electric suppliers just as they do their long-distance phone carriers.

Because it is cheaper and less polluting than other fuels used to produce electricity, natural gas will be consumed in greater volumes as deregulation forces companies to use the lowest-cost means of generation.

Natural gas is now used to generate 9 percent to 10 percent of total U.S. electricity, a share expected to grow to 17 percent or 18 percent over the next 10 years, said Daniele Seitz, a UBS Securities analyst.

Utilities will want to own natural gas units to ensure they have low cost supplies for generation and the ability to provide their residential customers with any service that can be delivered via cables or pipelines.

"The [utility industry] structure that exists today will not exist five to 10 years from now," Seitz said.

Energy suppliers will have to provide nationwide service and have 2 million to 10 million customers to compete, Tirello said. Companies also will have to offer security systems, appliance repair and cable services to compete in what would otherwise be a commodity business vulnerable to price wars.

Dallas-based Texas Utilities Co., one of the largest U.S. electric utilities, said in April that it would buy Enserch Corp., owner of Texas' largest gas utility, for $1.7 billion in stock and debt. Houston-based Enron Corp., the huge natural gas marketing and pipeline company, last month said it would buy Portland General Corp., an Oregon electric utility, for $3.23 billion in stock and assumed debt.

Also yesterday, Cinergy Corp. of Cincinnati, Ohio, an electric and gas utility, said it was in preliminary merger talks with unidentified third parties.

Houston Industries Inc.'s $3.8 billion offer sent shares of Houston-based NorAm up $2.875, or 25 percent, to close at $14.50 in trading of more than 8.5 million, more than 17 times its three-month daily average. Houston Industries shares fell 75 cents to $22.875.

The addition of NorAm's 2.7 million customers will more than double Houston Industries' customer base to 4.2 million, and will expand its geographic territory beyond Texas to include Louisiana, Mississippi, Arkansas, Oklahoma and Minnesota.

"This gives them [Houston Industries] a big leg up," Tirello said. "Five additional states and 2 million customers plus."

Houston Industries, owner of the ninth-largest U.S. electricity utility based on the amount of electricity sold, will pay $2.4 billion, half in cash and half in stock, for NorAm. It also will assume $1.4 billion in NorAm debt and preferred stock.

The combined company would have annual revenue of $6.7 billion and a total market capitalization of $14.3 billion.

"The electricity and natural gas markets are converging, and customers are demanding additional products and services," said Don Jordan, Houston Industries chairman. "This acquisition will substantially strengthen Houston Industries' strategic position."

Houston Industries' primary subsidiary is Houston Lighting and Power Co., the major electricity supplier for the Houston area. The utility has 1.5 million customers in a 5,000-square-mile area of the Texas Gulf Coast. NorAm's Entex is the major supplier of natural gas to residential customers in the Houston area.

Pub Date: 8/13/96

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