Southeast Merger Creates Largest U.S. Utility

Florida-based FPL Group Inc., the largest power company in one of the fastest growing states, agreed last week to buy New Orleans-based Entergy Corp. for $13.9 billion in stock and assumed debt to form the largest utility in the United States. When the deal is done, the new company will serve 6.3 million customers and have a combined generating capacity of more than 48,000 MW.

The merger, approved by both companies' boards, is expected to be completed in about 15 months. The combined company will have a value of $27 billion, with $16.4 billion in stock market capitalization and $10.7 billion in debt and preferred stock. FPL Group shareholders will own 57% of the new company, and Entergy shareholders will own 43%.

FPL owns power plants in Maine and Florida, and has windmill generators in Texas. Entergy owns electric utilities in Arkansas, Louisiana, Mississippi and Texas, along with projects in Europe, South America and Australia. Entergy also has been buying nuclear plants along the East Coast of the United States.

"This is a fine match," said Deutsche Banc Alex Brown analyst Edward Tirello. "The earnings outlook of 10% growth beginning in 2002 (when the merger is expected to be finalized) is excellent, and I like the fact that there will be 48,000 MW. There's also going to be a huge excess cash flow from this, which will help their growth plans. It looks pretty good." He said there was no downside to the merger from what each were bringing to the table, and he was high on what the new Entergy team will bring to FPL. "Entergy has exceptionally good management, and FPL will benefit from that," he said.

FPL CEO James Broadhead will chair the new company, while Entergy CEO Edwin Lupberger, who came aboard in 1998, will be the new CEO. Broadhead has said recently that he may retire in about two years.

The combined company will become one of the largest independent power producers in the country, with nearly 10,000 MW of unregulated generating capacity. Through Entergy's pending venture with Koch Industries (see NGI, May 1), the new company will be one of the largest U.S. marketers of both natural gas and electric power, owning 10,000 miles of strategic natural gas pipeline assets. It also will become a market leader in weather derivatives.

The merger could prompt Entergy and Koch Industries, with whom it has a business venture, to carry out an expansion of Koch Gateway's pipeline system into the Florida market, the merger partners said.

Entergy has been on the rebound in the past two years, selling billions in mostly foreign assets and investing most of that money into new businesses. It sold London Electricity PLC for $2.9 billion in 1999, and also bought two New York Power Authority nuclear plants in 1999 for $967 million. Entergy became the first utility to buy a U.S. nuclear plant when it purchased the Pilgrim facility in Massachusetts for $80 million. It owns five nuclear plants, and has indicated it wants to buy more. Last year, it had revenue of $8.8 billion and net income of $613.9 million.

FPL has remained mostly a regional utility, but it is gaining customers faster than most because of its location in Florida. The company owns energy operations from Maine to California, but most of its revenues come from its utility subsidiary Florida Power & Light, which generates more than 18,000 MW of electricity from oil, gas and nuclear power. It currently sells electricity to 3.8 million customers in Miami and along Florida's eastern coast and the southern part of the state. Subsidiary FPL Group Capital funds its nonutility holdings.

FPL Energy manages the unregulated energy businesses, with projects that generate more than 3,000 MW in 13 U.S. states and Colombia. It also wholesales natural gas, oil and electric power. FPL also is now the largest U.S. producer of wind electricity. In July, it agreed to build and operate 242 wind turbines in western Texas for TXU Corp.

Last year, FPL bought some plants in Maine for $845 million (see NGI, March 15, 1999). It also is spending $225 million to expand fiber optic networks along transmission rights of way. It had sales of $6.4 billion and net income of $712 million last year.

The merger is expected to grow the natural gas and electricity trading business that Entergy has created, including deals with Koch Industries Inc. and The Shaw Group. The Koch Industries venture, announced in April, will have more than $6 billion in annual revenue and $1 billion assets. The Shaw Group wholesale power market deal will provide management, engineering, procurement, construction and commissioning services to build electric power plants (see NGI, June 5). Still unnamed, the new company will be headquartered in Juno Beach, FL,

In the deal, Entergy investors will receive 0.585 FPL share for each of their shares, for a total of about $7 billion. The offer is valued at $30.90 per share, which is about 1.9% more than Entergy's closing price on Friday (July 28). FPL assumes $6.9 billion in debt and preferred stock. FPL will purchase $570 million of its shares before the acquisition, and Entergy will buy back $430 million.

The merger did not sit well with Wall Street last week, as shares of FPL dropped. Entergy, which had begun to rebound after its sell-off of foreign investments in 1999, also watched as its stock fell. Tirello said the drop of both stocks was normal.

"It's going to take 15 months for anything to happen, and we know that for the next 15 months, nothing else is going to happen at these companies, so the hot money isn't there," said Tirello. Deutsche Banc Alex Brown placed Entergy as a "buy" and FPL as a "hold" last week.

Fitch affirmed the credit ratings of Entergy following the announcement, calling it "supportive of the operating subsidiaries' stand-alone credit quality." Fitch said the "merger combines two companies with similar strategies, which includes continued strong core utility operations and targeted growth in wholesale energy markets, primarily in clean, low-cost generation." It said the merger should generate "strong free cash flow," helping fund the projected growth of the unregulated businesses.

Carolyn Davis, Houston

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