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FirstEnergy, GPU Form Mid-Atlantic Team

FirstEnergy, GPU Form Mid-Atlantic Team

FirstEnergy of Akron, OH, will acquire New Jersey's GPU Inc. in a $12 billion deal that will create the sixth largest investor-owned electric system in the country with the largest customer base in the Pennsylvania-New Jersey-Maryland (PJM) power pool.

The boards of directors of both companies have approved the deal in which FirstEnergy would acquire all of GPU's outstanding shares of common stock for about $4.5 billion plus the absorption of $7.4 billion of GPU's preferred stock and debt.

FirstEnergy, a diversified energy services holding company, and GPU, a public utility holding company, combined will serve about 4.3 million customers throughout 37,200 square miles of Ohio, Pennsylvania and New Jersey. The combined revenues of the two companies for the 12 months ended June 30, 2000 totaled $12 billion, and the assets will equal $38.6 billion. The transaction, which both companies expect to complete within a year's time, is to be financed by a combination of long-term debt and bank credit lines. The transaction will be accounted for as a purchase, and is expected to be accretive to FirstEnergy's earnings per share and cash flow immediately upon the completion of the merger.

"One of the company's big plans regarding this [merger] is to be able to sell power, to take some of their generation richness from the Midwest and ship it. GPU is short power, and FirstEnergy is long power. The company wants to go that direction," said Dan Poole, an analyst with National City Capital Investments. FirstEnergy would also be able to get more out of its plants by tweaking them and running them as baseload instead of cycling them, Poole added. GPU's Advanced Resources subsidiary, in turn, offers a window into eastern markets through its competitive retail energy sales and services in the Mid-Atlantic region.

Earlier in the week during the rumor phase of the merger, Thomas Hamlin, utility analyst with First Union in Richmond, VA, said, "What I'm saying is if they were to do this deal, it makes a lot of sense." A merged FirstEnergy-GPU would have 4.2 million customers, making it the "top five or so" utility in the electric industry, and would have a combined market capitalization of $10.3 billion, he told NGI.

For Hamlin, a merger between FirstEnergy and GPU would be a good fit. "FirstEnergy has made a big move into Pennsylvania and New Jersey, which is where GPU serves, and [is] selling in the deregulated marketplace. This [would help] them along that way. FirstEnergy [also] has a lot of baseload capacity, which GPU has none. So it [the merger] helps in that area. And it also helps in their [non-regulated] businesses. GPU recently acquired a mechanical services contracting company, called the Myr Group. FirstEnergy is also very big in that business. So there's some natural synergies there as well," he said. FirstEnergy has grown its unregulated activities, acquiring 12 mechanical construction, contracting and energy management companies, with sales exceeding $445 million annually.

Each GPU share of common stock would receive $36.50, payable in cash or its equivalent in FirstEnergy common stock, as long as FirstEnergy's common stock price is between $24.24 and $29.63. Shareholders will be able to choose either form of consideration, subject to proration so that the aggregate consideration consists of 50% cash, and 50% FirstEnergy common stock.

"The positives are the increase in earnings per share, the fact that it's immediately accretive and the fact that the companies should be able to operate their plants a little more efficiently. The negatives are the incremental debt increase, because debt will be going up as a percent of the total cap," Poole explained.

Peter Burg, CEO of FirstEnergy, said, "By doubling the retail customer base and leveraging both companies' customer relationships, we will be able to maximize the utilization of our existing energy and related resources. Those resources include electricity from our more than 12,000 MW of generating capacity; natural gas from our exploration and production operations; fiber optics and long-distance phone service from our telecommunications operations; and a wide range of energy-related services from our network of mechanical contracting and construction companies."

First Energy's electric utility operating companies ---Cleveland Electric Illuminating, Toledo Edison, Ohio Edison and its subsidiary Pennsylvania Power --- will likely retain their names and current facilities as will GPU's electric operating companies, including Jersey Central Power & Light, Metropolitan Edison and Pennsylvania Electric.

In addition to its electric power operations, FirstEnergy provides natural gas service to approximately 50,000 customers. It has interests in more than 7,700 oil and gas wells, oil and natural gas drilling rights to about 980,000 acres in the Appalachian Basin and proved reserves of 450 Bcf equivalent of natural gas and oil reserves, about 90% of which is natural gas, and 5,000 miles of pipeline.

Fred D. Hafer, CEO of GPU, said, "This is an extraordinary transaction for our shareholders and all of our other constituents. Our access to FirstEnergy's generation and its expertise in providing cost-effective supply options in competitive markets will be a tremendous advantage in GPU's efforts to accommodate customers who rely on us for their supply of electricity. Our merger will provide other important benefits, including increased ownership in two exciting ventures already under way --- America's Fiber Network, which is positioned to reach about 35% of the national wholesale communications market, and Pantellos Corp., which will operate an Internet-based e-marketplace for the purchase of goods and services between the energy industry and its suppliers."

Hafer, who is 59, would become chairman of FirstEnergy until his retirement at age 62; Burg who is 54, would become vice chairman and CEO of FirstEnergy. The board of directors is to be comprised of 10 existing board members of FirstEnergy and six from GPU's board. The union is conditioned on a number of things, including approvals from both companies' shareholders as well as various regulatory agencies including the states of Ohio, Pennsylvania and New Jersey.

FirstEnergy's combined utility companies make up the nation's 10th largest investor-owned electric system, serving 2.2 million customers in northern and central Ohio and western Pennsylvania. FirstEnergy has $6 billion in annual revenues and more than $18 billion in assets. It has 16 power plants that produce about 12,000 MW, and it owns about 60,000 miles of transmission and distribution lines, and 35 interconnects and six regional electric systems. The company markets about 62 billion kilowatt-hours of electricity each year.

In the United States, GPU, through its three electric utility subsidiaries, serves two million customers in Pennsylvania and New Jersey. GPU Advanced Resources Inc. sells retail energy and services in the Mid-Atlantic region. It also owns transmission and distribution facilities overseas, where it caters to an additional 2.3 million customers.

Alex Steis

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