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Wall Street Turns Cold Shoulder To Impressive NCE, NSP Merger

Wall Street Turns Cold Shoulder To Impressive NCE, NSP Merger

New Century Energies (NCE) and Northern States Power (NSP), two efficiently-run but merely mid-sized combination utilities, joined the merger parade last week, promising savings, greater efficiencies and economies of scale. But the horns on Wall Street didn't toot.

In contrast to the generally favorable reaction of the Street toward other recent major energy company mergers, the stock prices of both companies plummeted. The transaction was announced Thursday with multiple conference calls throughout the day. And a second round of calls were scheduled Friday to explain in finer detail all the positive components of the deal to institutional investors. But shares kept falling. At the close of trading Friday, NSP shares were at $24.50, down 10% from Wednesday's close, and NCE shares were $35.56, down 8% from Wednesday. That by itself would not have been very surprising if analysts and observers had not spent those two days glorifying the transaction.

The $8.62 billion merger of equals (based on combined market capitalization), 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. The company, which has not yet been named, also will have a large number of international assets and operations, including 2 million electric customers and 400,000 gas customers in the United Kingdom. Power generation capacity will total 21,720 MW, of which 15,133 MW is regulated in the U.S. Based on 1998 results, the new company 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. 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%.

NCE and NSP anticipate the merger will be accretive in the first full year and there will be $80 million in savings primarily through the reduction of about 100 staff positions through attrition. The merger is expected to save $1.1 billion over 10 years as a result of consolidating operations, such as procurement and transportation of fuels, particularly coal.

"I like it. I think it was a very smart move," Ed Tirello of BT Alex. Brown said Thursday. "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. There are no market power issues here," unlike the previous NSP merger. This merger comes nearly two years after federal regulators scuttled NSP's proposed combination with Wisconsin Energy Corp. But the service territories of NCE and NSP are about 600 miles apart. Their power grids are not connected, though they say the grids probably will be linked in the near future.

Why then did Wall Street react negatively?

"Wall Street is focused on what's going to happen in the next 90 days, not what's going to happen over the next year," said Ron Tanner of Baltimore, MD-based Legg Mason.

"I think this merger is in the best interests of both companies long-term, but Northern States Power did not pay a high premium to merge the two companies together and that's why analysts are disappointed; they're not going to get an immediate bump in the stock.

"It's a good merger," he said. "If they had paid a higher price for it, Northern States Power's stock would have gone down even more. It's the right thing to do but it just doesn't fit in to what Wall Street likes to see.

"We've made it a buy this morning," he said Friday. "We've raised our rating on the company. It's just way too cheap here. This is a top-20 company in terms of quality and it's trading in the bottom five out of 85 companies. It's trading 10 times year 2000 earnings.

"Basically you're taking two companies that are very healthy, very competitive, serve different areas of the country and you're combining them together to get a bigger company. The plus is that you have a bigger company that's better able to compete in an industry that's changing. They can spread new investments in technology over a larger customer base and make them more efficient."

The winners in this industry are going to be the ones that have the most customers, he added. There have been a number of high-priced mergers lately. But NCE and NSP are "bulking up without having to pay a big premium. It's good for the shareholders of both companies longer term."

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 &amp 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.

Rocco Canonica

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