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ConEd Buys NU, Creates a Utility Powerhouse

ConEd Buys NU, Creates a Utility Powerhouse

Consolidated Edison Inc. (ConEd) announced the purchase of Northeast Utilities (NU) last week, creating a huge utility with over five million electric and 1.4 million gas customers in New York and New England. ConEd expects the $7.5 billion transaction to be completed in 12 to 18 months.

The combined company will have annual revenues of $11 billion and a total enterprise value of $19 billion. NU will become a wholly-owned subsidiary of ConEd. Eugene McGrath will remain ConEd's CEO and NU CEO Michael Morris will become the New York company's president.

"This is a good growth maneuver for ConEd, and NU shareholders should get great value out of this as well," said Ed Tirello, an analyst for Deutsche Banc Alex. Brown. "I think they're half way there to being the major player in the Northeast. Once this is done, look for them to move again, maybe set their sights on Niagara Mohawk or BEC Energy. It could happen very soon. ConEd knows that companies need to be picked up before others swoop in and grab what is available. Look at Energy East. They've got three mergers in the works now."

While the merger may create the largest combined utility in terms of customer base, the recent PECO merger with Unicom was larger financially. That union created a company with $12.4 billion in revenues and an enterprise value of $31.8 billion. Rob Mullin, a Jefferies & Co. analyst, said the two mergers form companies with different agendas.

"The Unicom deal with PECO was more of a generation play, whereas the ConEd purchase of NU was more transmission and distribution oriented. ConEd will not necessarily be competing with Unicom, because the crux of this deal is the regulatory operations in New York and New England. The challenge for the new ConEd will be to handle the deregulation process in the Northeast in such a way that favors its bottom line."

Both companies are already heavily involved in the Northeast region's deregulating efforts. ConEd is in the second phase of a retail choice program for its electric customers, with almost 20% of its electric load already participating. NU's three electric utilities, Connecticut Light and Power (CL&P), Public Service of New Hampshire (PSNH) and Western Massachusetts Electric Co. (WMECO), plan to or already have implemented rate reductions as a result of state deregulation. Officials for both companies said these reductions will not be affected by the merger.

Officials expect the merger to result in savings of nearly $1 billion over the next 10 years. They did not elaborate on how those savings would be accumulated. Morris did say in a teleconference no layoffs are planned and that the merged company will create synergies through normal attrition and re-training.

Under the terms of the agreement, which has been approved by the boards of both companies, ConEd will offer NU shareholders $25/share in a combination of cash and ConEd common stock. The offer is subject to proration if the elections exceed 50% stock or 50% cash. ConEd is also required to pay an additional $1/share if NU sells units 2 and 3 of the Millstone nuclear plant before the merger's projected closing date. In the teleconference, NU officials said the sales do not pose a problem. In addition, the amount of stock Northeast shareholders receive may increase if the deal does not close by Aug. 5, 2000.

"I think it's a fair price," Mullin said. "We thought fair value for NU stock was in the $22 to $23 range. The 15% premium paid on top of that gives good value to NU shareholders, but doesn't burden ConEd too much."

ConEd will assume all of NU's debt, capitalized leases and preferred securities. The transaction is being accounted for as a purchase and is expected to be accretive to ConEd's earnings in the first full year after closing. The company will be based in New York, but all the utility subsidiaries will keep their headquarters in place.

"This transaction is consistent with our strategy of growing our core wires and pipes business and enables us to leverage what both companies do best," McGrath said when ConEd announced the merger. "The merged company will have a strong, regional foundation......Our neighboring service territories will allow us to generate significant synergies and operating efficiencies."

One of the main additions ConEd is gaining is Select Energy, NU's unregulated arm. It provides energy services to 11,000 customers in eight states in the Northeast, and has plans to enter three more, said Select Energy spokesman Joel Weinberg. In addition to its electric service contracts, Select also has a large gas presence. Last May, Select purchased all the New England retail contracts and their associated natural gas supplies from Dallas-based Aurora Natural Gas. The acquisition, with contracted annual volumes in excess of 8 Bcf, represented hundreds of large commercial and industrial customers in Connecticut, Rhode Island, Massachusetts and New Hampshire.

Mullin does not expect any regulatory hang ups. "I think 12 months is stretching it, but 18 months is definitely doable."

John Norris

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