New Century Energies (NCE) and Northern States Power (NSP), twoefficiently-run but merely mid-sized combination utilities, joinedthe merger parade last week, promising savings, greaterefficiencies and economies of scale. But the horns on Wall Streetdidn’t toot.

In contrast to the generally favorable reaction of the Streettoward other recent major energy company mergers, the stock pricesof both companies plummeted. The transaction was announced Thursdaywith multiple conference calls throughout the day. And a secondround of calls were scheduled Friday to explain in finer detail allthe positive components of the deal to institutional investors. Butshares kept falling. At the close of trading Friday, NSP shareswere at $24.50, down 10% from Wednesday’s close, and NCE shareswere $35.56, down 8% from Wednesday. That by itself would not havebeen very surprising if analysts and observers had not spent thosetwo days glorifying the transaction.

The $8.62 billion merger of equals (based on combined marketcapitalization), will create a Minneapolis-based electric and gasutility conglomerate with 3 million power customers and 1.5 milliongas customers in 12 states from Mexico to Canada. The company,which has not yet been named, also will have a large number ofinternational assets and operations, including 2 million electriccustomers and 400,000 gas customers in the United Kingdom. Powergeneration capacity will total 21,720 MW, of which 15,133 MW isregulated in the U.S. Based on 1998 results, the new company wouldhave revenues of $6.4 billion, earnings of $618.8 million andassets 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. Uponcompletion, holders of NCE stock will receive 1.55 shares of themerged company stock for each share of NCE stock. Each share of NSPstock will continue as one share of the combined company. Based onoutstanding shares, New Century Energies shareholders will own 54%of the common equity of the combined company, and Northern StatesPower shareholders will own 46%.

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

“I like it. I think it was a very smart move,” Ed Tirello of BTAlex. Brown said Thursday. “I like the Mexico-to-Canada concept. Ilike both these companies’ foreign operations. Together it willmake them a nice force globally. I also like the fact that when youlook at the numbers they are forming the fifth largest generatorand the third largest [electric] transmission company and the thirdlargest [electric] distribution company. This is the way theindustry is going, and they are right on top of it. Also, it givesthem about 8%/year growth in earnings after the first year of themerger, and it’s accretive in the first year.

“I don’t see anything [bad here],” said Tirello. “I mean there’sno regulatory hassle. There are no market power issues here,”unlike the previous NSP merger. This merger comes nearly two yearsafter federal regulators scuttled NSP’s proposed combination withWisconsin Energy Corp. But the service territories of NCE and NSPare about 600 miles apart. Their power grids are not connected,though they say the grids probably will be linked in the nearfuture.

Why then did Wall Street react negatively?

“Wall Street is focused on what’s going to happen in the next 90days, not what’s going to happen over the next year,” said RonTanner of Baltimore, MD-based Legg Mason.

“I think this merger is in the best interests of both companieslong-term, but Northern States Power did not pay a high premium tomerge the two companies together and that’s why analysts aredisappointed; they’re not going to get an immediate bump in thestock.

“It’s a good merger,” he said. “If they had paid a higher pricefor it, Northern States Power’s stock would have gone down evenmore. It’s the right thing to do but it just doesn’t fit in to whatWall Street likes to see.

“We’ve made it a buy this morning,” he said Friday. “We’veraised 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 inthe bottom five out of 85 companies. It’s trading 10 times year2000 earnings.

“Basically you’re taking two companies that are very healthy,very competitive, serve different areas of the country and you’recombining them together to get a bigger company. The plus is thatyou have a bigger company that’s better able to compete in anindustry that’s changing. They can spread new investments intechnology over a larger customer base and make them moreefficient.”

The winners in this industry are going to be the ones that havethe most customers, he added. There have been a number ofhigh-priced mergers lately. But NCE and NSP are “bulking up withouthaving to pay a big premium. It’s good for the shareholders of bothcompanies longer term.”

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 Energies serves 1.5 million electricity customersand 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 &ampPower. Other subsidiaries include, New Century International, whichowns a 50% interest in Yorkshire Electricity in the UK; UtilityEngineering, which provides engineering services to utilities;Quixx, which develops cogeneration; Planergy, which provides energyservices; and eprime, an unregulated commodity marketing affiliate.

Rocco Canonica

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