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New Century, NSP Marriage Creates Top-5 Utility

New Century, NSP Marriage Creates Top-5 Utility

New Century Energies and Northern States Power, two mid-sized combination utilities, decided on marriage yesterday to create a much larger company, fend off competitors and prepare for coming deregulation. Through a $4.7 billion merger of equals ($9 billion based on combined market capitalization), the companies will create a Minneapolis-based electric and gas utility conglomerate with 3 million power customers and 1.5 million gas customers in 12 states from Mexico to Canada.

Internationally, the company will serve about 2 million electric customers and 400,000 gas customers in the United Kingdom, and will have operations in Central Europe, Australia and South America. The combined entity also will have total generating capacity of 21,720 MW, of which 15,133 MW is regulated in the U.S. Based on 1998 results, it would have revenues of $6.4 billion, earnings of $618.8 million and assets totaling $15.1 billion.

"This merger combines two well-managed, Midcontinent electric and gas companies in order to provide a strong platform for assuring low-cost, quality service to the region during a time of rapid change in the utility industry," NSP Chairman James J. Howard said in a statement.

The merger is expected to be a tax-free, stock-for-stock exchange and will be accounted for as a pooling of interests. NCE and NSP anticipate the merger will be accretive in the first full year and thereafter to both sets of shareholders, assuming realization of anticipated net cost savings of $1.1 billion in the first 10 years of operations. The savings are expected to come from consolidating operations, such as coal procurement and transportation. However, the companies said they do not expect corporate downsizing and major staff reductions.

Upon completion, holders of NCE stock will receive 1.55 shares of the merged company stock for each share of NCE stock. Each share of NSP stock will continue as one share of the combined company. Based on outstanding shares, New Century Energies shareholders will own 54% of the common equity of the combined company, and Northern States Power shareholders will own 46%.

"I like it. I think it was a very smart move," said Ed Tirello, of BT Alex. Brown. "I like the Mexico-to-Canada concept. I like both these companies' foreign operations. Together it will make them a nice force globally. I also like the fact that when you look at the numbers they are forming the fifth largest generator and the third largest [electric] transmission company and the third largest [electric] distribution company. This is the way the industry is going, and they are right on top of it. Also, it gives them about 8%/year growth in earnings after the first year of the merger, and it's accretive in the first year.

"I don't see anything [bad here]," said Tirello. "I mean there's no regulatory hassle." This merger comes nearly two years after federal regulators scuttled Minneapolis-based NSP's proposed merger with Wisconsin Energy Corp. "But there are no market power issues here." The two companies' service territories are separated and their power grids are not connected, though they say the grids probably will be linked in the near future.

New Century was just formed two years ago through a merger of Public Service Company of Colorado and Southwestern Public Service. But its hunger to continue growing was well known.

"Look, in this industry you have to be big. You have to have breadth to you," said Tirello. "You have to have the ability to move large blocks of power. You also have to have a strong international operation because you have to spread the risk. And these guys have all that."

Northern States Power provides electricity to about 1.5 million customers in five Midwestern states and distributes gas to more than 475,000 customers in four Midwestern states and Arizona. It also owns NRG Energy, a non-regulated energy company, and Viking Gas Transmission, an interstate pipeline. New Century Energies serves 1.5 million electricity customers and more than a million gas customers in six Southwestern states. Its operating companies include Public Service Co. of Colorado, Southwestern Public Service Co. and Cheyenne Light, Fuel & Power. Other subsidiaries include, New Century International, which owns a 50% interest in Yorkshire Electricity in the UK; Utility Engineering, which provides engineering services to utilities; Quixx, which develops cogeneration; Planergy, which provides energy services; and eprime, an unregulated commodity marketing affiliate.

Despite the expected savings, projected earnings growth and the fact that Wall Street has accepted most recent utility mergers with open arms, this deal didn't sit well with investors. Observers speculated there was concern about the length of time it will take to complete the deal, up to 18 months, and the fact that NSP's last attempt at a merger with Wisconsin Energy failed. NCE share prices sunk nearly 6%, or $2.19/share, to close at $36.50, and NSP's stock fell 4%, or $1.06/share, closing at $26.19. PaineWebber downgrade the stock of both companies to neutral.

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