70% Stock Sale Triggers Flurry of Activity by Energy Factors

Energy Factors last week announced that it will acquire a minority interest in an Illinois gas pipeline, begin construction on a $25-million electric power production plant in Lincoln, Mich., and make a cash tender offer for $80 million in outstanding debentures.

That flurry of activity was spurred by Energy Factors’ June agreement to sell as much as 70% of its stock to Sithe Energies Group. Sithe is a New York-based subsidiary of Compagnie Generale des Eaux, France’s largest privately held water-utility company.

Sithe has purchased 4.7 million shares of Energy Factors’ stock for $47.5 million, and has agreed to pay an additional $52.5 million for 5.2 million shares of authorized but not issued stock.

“I’d say all of (last week’s activity) is related to Sithe,” said Charles Freedman, a Los Angeles-based industry analyst with Crowell, Weedon & Co. “They’ve now got a lot of money (at Energy Factors).”

Projects Required Money

Prior to the agreement with Sithe, Energy Factors had “several projects in line that required additional capital,” Freedman said.

Energy Factors will use $1.5 million of that capital to acquire a 49% interest in Houston-based Midwest Pipeline L.P., which owns an oil pipeline that is being upgraded to carry natural gas to industrial and commercial customers in Illinois.

Though the pipeline falls outside of San Diego-based Energy Factors’ traditional power production business, the move doesn’t signal a diversification, according to Energy Factors Senior Vice President Rick Kay.

“This was just a deal that presented itself, a deal that we couldn’t pass,” Kay said Monday. “We could begin making money on gas sales shortly after it (begins operating) in six months.”

Builds Power Plants

Energy Factors, which builds and operates co-generation and electric power production plants, hopes eventually to sell co-generation plants to customers who buy natural gas that is delivered through the pipeline.

However, Energy Factors has no plans to acquire similar pipeline interests elsewhere in the country, Kay added.

The convertible debenture offer, which will pay 75 cents on the dollar for the company’s outstanding 8.25% convertible debentures, was a direct result of Energy Factors’ stronger capital position in the wake of the Sithe agreement, according to Freedman.

“At this point in time, the short-term costs of borrowing to cover the debenture offering are going to be less expensive than the fixed costs of keeping the bonds,” Freedman said.

Method of Financing

Energy Factors will use a combination of cash and short-term borrowing to finance the offering, Kay said.

Energy Factors also announced last week that it would begin construction on a previously announced, 16-megawatt wood-fired electrical generation plant that is co-owned by Houston-based CRS Sirrine Inc. and Energy Factors. The two companies previously began construction on two other wood-fired electrical generation plants.

Kay said the $25-million plant is “one of several projects” that will move forward because of the cash infusion by Sithe.