FirstEnergy of Akron, OH, will acquire New Jersey’s GPU Inc. ina $12 billion deal that will create the sixth largestinvestor-owned electric system in the country with the largestcustomer base in the Pennsylvania-New Jersey-Maryland (PJM) powerpool.

The boards of directors of both companies have approved the dealin which FirstEnergy would acquire all of GPU’s outstanding sharesof common stock for about $4.5 billion plus the absorption of $7.4billion of GPU’s preferred stock and debt.

FirstEnergy, a diversified energy services holding company, andGPU, a public utility holding company, combined will serve about4.3 million customers throughout 37,200 square miles of Ohio,Pennsylvania and New Jersey. The combined revenues of the twocompanies for the 12 months ended June 30, 2000 totaled $12billion, and the assets will equal $38.6 billion. The transaction,which both companies expect to complete within a year’s time, is tobe financed by a combination of long-term debt and bank creditlines. The transaction will be accounted for as a purchase, and isexpected to be accretive to FirstEnergy’s earnings per share andcash flow immediately upon the completion of the merger.

“One of the company’s big plans regarding this [merger] is to beable to sell power, to take some of their generation richness fromthe Midwest and ship it. GPU is short power, and FirstEnergy islong power. The company wants to go that direction,” said DanPoole, an analyst with National City Capital Investments.FirstEnergy would also be able to get more out of its plants bytweaking them and running them as baseload instead of cycling them,Poole added. GPU’s Advanced Resources subsidiary, in turn, offers awindow into eastern markets through its competitive retail energysales and services in the Mid-Atlantic region.

Earlier in the week during the rumor phase of the merger, ThomasHamlin, utility analyst with First Union in Richmond, VA, said,”What I’m saying is if they were to do this deal, it makes a lot ofsense.” A merged FirstEnergy-GPU would have 4.2 million customers,making it the “top five or so” utility in the electric industry,and would have a combined market capitalization of $10.3 billion,he told NGI.

For Hamlin, a merger between FirstEnergy and GPU would be a goodfit. “FirstEnergy has made a big move into Pennsylvania and NewJersey, which is where GPU serves, and [is] selling in thederegulated marketplace. This [would help] them along that way.FirstEnergy [also] has a lot of baseload capacity, which GPU hasnone. So it [the merger] helps in that area. And it also helps intheir [non-regulated] businesses. GPU recently acquired amechanical services contracting company, called the Myr Group.FirstEnergy is also very big in that business. So there’s somenatural synergies there as well,” he said. FirstEnergy has grownits unregulated activities, acquiring 12 mechanical construction,contracting and energy management companies, with sales exceeding$445 million annually.

Each GPU share of common stock would receive $36.50, payable incash or its equivalent in FirstEnergy common stock, as long asFirstEnergy’s common stock price is between $24.24 and $29.63.Shareholders will be able to choose either form of consideration,subject to proration so that the aggregate consideration consistsof 50% cash, and 50% FirstEnergy common stock.

“The positives are the increase in earnings per share, the factthat it’s immediately accretive and the fact that the companiesshould be able to operate their plants a little more efficiently.The negatives are the incremental debt increase, because debt willbe going up as a percent of the total cap,” Poole explained.

Peter Burg, CEO of FirstEnergy, said, “By doubling the retailcustomer base and leveraging both companies’ customerrelationships, we will be able to maximize the utilization of ourexisting energy and related resources. Those resources includeelectricity from our more than 12,000 MW of generating capacity;natural gas from our exploration and production operations; fiberoptics and long-distance phone service from our telecommunicationsoperations; and a wide range of energy-related services from ournetwork of mechanical contracting and construction companies.”

First Energy’s electric utility operating companies —ClevelandElectric Illuminating, Toledo Edison, Ohio Edison and itssubsidiary Pennsylvania Power — will likely retain their namesand current facilities as will GPU’s electric operating companies,including Jersey Central Power & Light, Metropolitan Edison andPennsylvania Electric.

In addition to its electric power operations, FirstEnergyprovides natural gas service to approximately 50,000 customers. Ithas interests in more than 7,700 oil and gas wells, oil and naturalgas drilling rights to about 980,000 acres in the Appalachian Basinand proved reserves of 450 Bcf equivalent of natural gas and oilreserves, about 90% of which is natural gas, and 5,000 miles ofpipeline.

Fred D. Hafer, CEO of GPU, said, “This is an extraordinarytransaction for our shareholders and all of our other constituents.Our access to FirstEnergy’s generation and its expertise inproviding cost-effective supply options in competitive markets willbe a tremendous advantage in GPU’s efforts to accommodate customerswho rely on us for their supply of electricity. Our merger willprovide other important benefits, including increased ownership intwo exciting ventures already under way — America’s FiberNetwork, which is positioned to reach about 35% of the nationalwholesale communications market, and Pantellos Corp., which willoperate an Internet-based e-marketplace for the purchase of goodsand services between the energy industry and its suppliers.”

Hafer, who is 59, would become chairman of FirstEnergy until hisretirement at age 62; Burg who is 54, would become vice chairmanand CEO of FirstEnergy. The board of directors is to be comprisedof 10 existing board members of FirstEnergy and six from GPU’sboard. The union is conditioned on a number of things, includingapprovals from both companies’ shareholders as well as variousregulatory agencies including the states of Ohio, Pennsylvania andNew Jersey.

FirstEnergy’s combined utility companies make up the nation’s10th largest investor-owned electric system, serving 2.2 millioncustomers in northern and central Ohio and western Pennsylvania.FirstEnergy has $6 billion in annual revenues and more than $18billion in assets. It has 16 power plants that produce about 12,000MW, and it owns about 60,000 miles of transmission and distributionlines, and 35 interconnects and six regional electric systems. Thecompany markets about 62 billion kilowatt-hours of electricity eachyear.

In the United States, GPU, through its three electric utilitysubsidiaries, serves two million customers in Pennsylvania and NewJersey. GPU Advanced Resources Inc. sells retail energy andservices in the Mid-Atlantic region. It also owns transmission anddistribution facilities overseas, where it caters to an additional2.3 million customers.

Alex Steis

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