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

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

“This merger combines two well-managed, Midcontinent electricand gas companies in order to provide a strong platform forassuring low-cost, quality service to the region during a time ofrapid change in the utility industry,” NSP Chairman James J. Howardsaid in a statement.

The merger is expected to be a tax-free, stock-for-stockexchange and will be accounted for as a pooling of interests. NCEand NSP anticipate the merger will be accretive in the first fullyear and thereafter to both sets of shareholders, assumingrealization of anticipated net cost savings of $1.1 billion in thefirst 10 years of operations. The savings are expected to come fromconsolidating operations, such as coal procurement andtransportation. However, the companies said they do not expectcorporate downsizing and major staff reductions.

Upon completion, holders of NCE stock will receive 1.55 sharesof the merged company stock for each share of NCE stock. Each shareof NSP stock will continue as one share of the combined company.Based on outstanding shares, New Century Energies shareholders willown 54% of the common equity of the combined company, and NorthernStates 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 likeboth these companies’ foreign operations. Together it will makethem a nice force globally. I also like the fact that when you lookat the numbers they are forming the fifth largest generator and thethird largest [electric] transmission company and the third largest[electric] distribution company. This is the way the industry isgoing, and they are right on top of it. Also, it gives them about8%/year growth in earnings after the first year of the merger, andit’s accretive in the first year.

“I don’t see anything [bad here],” said Tirello. “I mean there’sno regulatory hassle.” This merger comes nearly two years afterfederal regulators scuttled Minneapolis-based NSP’s proposed mergerwith Wisconsin Energy Corp. “But there are no market power issueshere.” The two companies’ service territories are separated andtheir power grids are not connected, though they say the gridsprobably will be linked in the near future.

New Century was just formed two years ago through a merger ofPublic 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 havebreadth to you,” said Tirello. “You have to have the ability tomove large blocks of power. You also have to have a stronginternational operation because you have to spread the risk. Andthese guys have all that.”

Northern States Power provides electricity to about 1.5 millioncustomers in five Midwestern states and distributes gas to morethan 475,000 customers in four Midwestern states and Arizona. Italso owns NRG Energy, a non-regulated energy company, and VikingGas Transmission, an interstate pipeline. New Century Energiesserves 1.5 million electricity customers and more than a milliongas customers in six Southwestern states. Its operating companiesinclude Public Service Co. of Colorado, Southwestern Public ServiceCo. and Cheyenne Light, Fuel & Power. Other subsidiariesinclude, New Century International, which owns a 50% interest inYorkshire Electricity in the UK; Utility Engineering, whichprovides engineering services to utilities; Quixx, which developscogeneration; Planergy, which provides energy services; and eprime,an unregulated commodity marketing affiliate.

Despite the expected savings, projected earnings growth and thefact that Wall Street has accepted most recent utility mergers withopen arms, this deal didn’t sit well with investors. Observersspeculated there was concern about the length of time it will taketo complete the deal, up to 18 months, and the fact that NSP’s lastattempt at a merger with Wisconsin Energy failed. NCE share pricessunk nearly 6%, or $2.19/share, to close at $36.50, and NSP’s stockfell 4%, or $1.06/share, closing at $26.19. PaineWebber downgradethe stock of both companies to neutral.

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