Consolidated Edison Inc. (ConEd) announced the purchase ofNortheast Utilities (NU) last week, creating a huge utility withover five million electric and 1.4 million gas customers in NewYork and New England. ConEd expects the $7.5 billion transaction tobe completed in 12 to 18 months.

The combined company will have annual revenues of $11 billionand a total enterprise value of $19 billion. NU will become awholly-owned subsidiary of ConEd. Eugene McGrath will remainConEd’s CEO and NU CEO Michael Morris will become the New Yorkcompany’s president.

“This is a good growth maneuver for ConEd, and NU shareholdersshould get great value out of this as well,” said Ed Tirello, ananalyst for Deutsche Banc Alex. Brown. “I think they’re half waythere to being the major player in the Northeast. Once this isdone, look for them to move again, maybe set their sights onNiagara Mohawk or BEC Energy. It could happen very soon. ConEdknows that companies need to be picked up before others swoop inand grab what is available. Look at Energy East. They’ve got threemergers in the works now.”

While the merger may create the largest combined utility interms of customer base, the recent PECO merger with Unicom waslarger financially. That union created a company with $12.4 billionin revenues and an enterprise value of $31.8 billion. Rob Mullin, aJefferies & Co. analyst, said the two mergers form companieswith different agendas.

“The Unicom deal with PECO was more of a generation play,whereas the ConEd purchase of NU was more transmission anddistribution oriented. ConEd will not necessarily be competing withUnicom, because the crux of this deal is the regulatory operationsin New York and New England. The challenge for the new ConEd willbe to handle the deregulation process in the Northeast in such away that favors its bottom line.”

Both companies are already heavily involved in the Northeastregion’s deregulating efforts. ConEd is in the second phase of aretail choice program for its electric customers, with almost 20%of its electric load already participating. NU’s three electricutilities, Connecticut Light and Power (CL&P), Public Serviceof New Hampshire (PSNH) and Western Massachusetts Electric Co.(WMECO), plan to or already have implemented rate reductions as aresult of state deregulation. Officials for both companies saidthese reductions will not be affected by the merger.

Officials expect the merger to result in savings of nearly $1billion over the next 10 years. They did not elaborate on how thosesavings would be accumulated. Morris did say in a teleconference nolayoffs are planned and that the merged company will createsynergies through normal attrition and re-training.

Under the terms of the agreement, which has been approved by theboards of both companies, ConEd will offer NU shareholders$25/share in a combination of cash and ConEd common stock. Theoffer is subject to proration if the elections exceed 50% stock or50% cash. ConEd is also required to pay an additional $1/share ifNU sells units 2 and 3 of the Millstone nuclear plant before themerger’s projected closing date. In the teleconference, NUofficials said the sales do not pose a problem. In addition, theamount of stock Northeast shareholders receive may increase if thedeal does not close by Aug. 5, 2000.

“I think it’s a fair price,” Mullin said. “We thought fair valuefor NU stock was in the $22 to $23 range. The 15% premium paid ontop of that gives good value to NU shareholders, but doesn’t burdenConEd too much.”

ConEd will assume all of NU’s debt, capitalized leases andpreferred securities. The transaction is being accounted for as apurchase and is expected to be accretive to ConEd’s earnings in thefirst full year after closing. The company will be based in NewYork, but all the utility subsidiaries will keep their headquartersin place.

“This transaction is consistent with our strategy of growing ourcore wires and pipes business and enables us to leverage what bothcompanies do best,” McGrath said when ConEd announced the merger.”The merged company will have a strong, regionalfoundation……Our neighboring service territories will allow usto generate significant synergies and operating efficiencies.”

One of the main additions ConEd is gaining is Select Energy,NU’s unregulated arm. It provides energy services to 11,000customers in eight states in the Northeast, and has plans to enterthree more, said Select Energy spokesman Joel Weinberg. In additionto its electric service contracts, Select also has a large gaspresence. Last May, Select purchased all the New England retailcontracts and their associated natural gas supplies fromDallas-based Aurora Natural Gas. The acquisition, with contractedannual volumes in excess of 8 Bcf, represented hundreds of largecommercial and industrial customers in Connecticut, Rhode Island,Massachusetts and New Hampshire.

Mullin does not expect any regulatory hang ups. “I think 12months is stretching it, but 18 months is definitely doable.”

John Norris

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