Northeast Utilities and NSTAR have agreed on a merger that would create one of the country's largest utilities with an enterprise value of $17.5 billion. The combined company would be called Northeast Utilities and would have 500,000 natural gas customers as well as three million electric customers.
The companies intend to combine in an all-stock "merger of equals" to create a company that would provide electricity and natural gas to more than half of the energy customers in New England. It would operate six regulated electric and gas utilities in three states and would have nearly 3.5 million electric and gas customers. Northeast Utilities would have nearly 4,500 miles of electric transmission lines, 72,000 miles of electric distribution lines and 6,000 miles of gas distribution lines. Dual headquarters would be in Hartford, CT, and Boston, MA.
"The combination of Northeast Utilities and NSTAR will create a great New England based company, assuring the regional benefits of a locally controlled energy company for years to come," said Northeast Utilities CEO Charles W. Shivery. "Our companies already have a strong track record of working together for New England.
"NSTAR's strong cash flows are very complementary to Northeast Utilities' attractive regulated investment opportunities, mitigating the need for future equity issuances, which is a significant benefit for our shareholders. This merger, upon completion, will provide a significant increase in the dividend for Northeast Utilities shareholders and will enable long-term dividend growth opportunities that are so important to all of our investors."
NSTAR shareholders would receive 1.312 Northeast Utilities common shares for each NSTAR share that they own in a transaction with a total equity value of $9.5 billion. The exchange ratio reflects a no-premium merger based on the average closing share price of each company for the preceding 20 trading days.
Shares of both companies closed down less than 1% each Monday.
It is anticipated that Northeast Utilities shareholders would own approximately 56% and NSTAR shareholders would own approximately 44% of the combined company. Upon closing, Northeast Utilities' dividend per share increase to a rate equivalent to NSTAR's on an exchange ratio-adjusted basis. The transaction is expected to be accretive to Northeast Utilities earnings in the first year following close.
NSTAR CEO Thomas J. May noted his company's "strong balance sheet" and said that it complemented Northeast Utilities' transmission investment opportunities and diversified suite of distribution businesses. "Merging with Northeast Utilities provides more diverse, stable and higher earnings and dividend growth than NSTAR would have achieved on its own," he said.
During a conference call with financial analysts the CEOs declined to discuss merger synergies. Shivery noted that the deal is a merger of equals and does not include a premium. "We haven't spent a lot of time focused on the synergy number," he said. "At this stage it is premature. We haven't done our integration work and we are not commenting on what the expectation is there."
The companies said that for every $10 million of pretax transaction benefits, pro forma earnings improve by about 1-2 cents/share, based on 315 million pro forma shares outstanding.
The combined company would have a rate base of $10.8 billion. Fifty-four percent of that would come from electric distribution; 31% would come from electric transmission; 4% would come from power generation; and 11% would be from gas distribution, the companies said.
Shivery would be non-executive chairman of Northeast Utilities for 18 months. May would serve as president and CEO and assume the additional role of chairman after 18 months. The board of directors would be composed with seven members from each merger partner.
For Northeast Utilities the transaction eliminates the need for a previously planned equity issuance in 2012, the company said. It also provides shareholders with an approximate 20% increase in the dividend from the current level and gives the company an enhanced credit profile.
NSTAR shareholders will have a stake in a company with a larger utility footprint, giving the company access to project development opportunities not available today, the company said.
Hartford-based Northeast Utilities operates New England's largest utility system with annual revenues of $5.4 billion and assets of $14.2 billion. Its companies in Connecticut, New Hampshire and Massachusetts serve more than 2.1 million electric and natural gas customers in nearly 500 cities and towns. NSTAR, headquartered in Boston, has annual revenues of $3 billion and assets of $8 billion and serves 1.4 million customers in Massachusetts, including approximately 1.1 million electric distribution customers in 81 communities and 300,000 natural gas distribution customers in 51 communities.
The merger partners said they have plans to invest $9 billion in New England's energy infrastructure over the next five years. "The combined scope and scale of Northeast Utilities will make investment more cost effective, spread over a larger customer base, allowing investments on a scale that might not be attractive to the companies on a stand-alone basis," the companies said. "In addition, the combined company will share best practices and implement them over the entire customer base. For example, Northeast Utilities and NSTAR have been long recognized by many national and international organizations for the success of their energy-efficiency programs that, when combined, total more than $200 million in annual spending."
The deal is subject to shareholder approval and antitrust review as well as reviews by the Massachusetts Department of Public Utilities, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the Securities and Exchange Commission and the Federal Communications Commission. Approvals are expected in nine to 12 months with a shareholder vote early next year.
Shivery suggested that because the deal does not include a premium to shareholders of either company, it should have an easier time passing muster with state regulators.
Standard & Poor's Ratings Services (S&P) placed its "BBB" ratings on Northeast Utilities and its subsidiaries, Connecticut Light & Power Co., Public Service Co. of New Hampshire, Western Massachusetts Electric Co. and Yankee Gas Services Co., on CreditWatch with positive implications and placed the "A+" ratings on NSTAR and its subsidiaries, NSTAR Electric and NSTAR Gas, on CreditWatch with negative implications.
"The positive CreditWatch listing on [Northeast Utilities] reflects that the company's credit quality will benefit from the merger with the higher-rated NSTAR. Because NSTAR is also focused on electric and gas transmission and distribution operations, we expect the combined entity to have an excellent business risk profile," S&P said.
"In addition, the merger will provide regulatory diversity, with the combined entity generating about 70% of operating income from Massachusetts, Connecticut and New Hampshire while the balance will be FERC [Federal Energy Regulatory Commission]-regulated. Finally, the transaction is expected to be completed in an all stock manner without the need for additional external debt financing which could weaken the pro forma financial risk profile.
"The negative CreditWatch listing on NSTAR reflects that its ratings will be lowered once the transaction is completed, owing to the combination with an entity that has a weaker financial risk profile."
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