FirstEnergy, GPU Form Mid-Atlantic Team
FirstEnergy of Akron, OH, will acquire New Jersey's GPU Inc. in
a $12 billion deal that will create the sixth largest
investor-owned electric system in the country with the largest
customer base in the Pennsylvania-New Jersey-Maryland (PJM) power
The boards of directors of both companies have approved the deal
in which FirstEnergy would acquire all of GPU's outstanding shares
of common stock for about $4.5 billion plus the absorption of $7.4
billion of GPU's preferred stock and debt.
FirstEnergy, a diversified energy services holding company, and
GPU, a public utility holding company, combined will serve about
4.3 million customers throughout 37,200 square miles of Ohio,
Pennsylvania and New Jersey. The combined revenues of the two
companies for the 12 months ended June 30, 2000 totaled $12
billion, and the assets will equal $38.6 billion. The transaction,
which both companies expect to complete within a year's time, is to
be financed by a combination of long-term debt and bank credit
lines. The transaction will be accounted for as a purchase, and is
expected to be accretive to FirstEnergy's earnings per share and
cash flow immediately upon the completion of the merger.
"One of the company's big plans regarding this [merger] is to be
able to sell power, to take some of their generation richness from
the Midwest and ship it. GPU is short power, and FirstEnergy is
long power. The company wants to go that direction," said Dan
Poole, an analyst with National City Capital Investments.
FirstEnergy would also be able to get more out of its plants by
tweaking them and running them as baseload instead of cycling them,
Poole added. GPU's Advanced Resources subsidiary, in turn, offers a
window into eastern markets through its competitive retail energy
sales and services in the Mid-Atlantic region.
Earlier in the week during the rumor phase of the merger, Thomas
Hamlin, 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 of
sense." 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 good
fit. "FirstEnergy has made a big move into Pennsylvania and New
Jersey, which is where GPU serves, and [is] selling in the
deregulated marketplace. This [would help] them along that way.
FirstEnergy [also] has a lot of baseload capacity, which GPU has
none. So it [the merger] helps in that area. And it also helps in
their [non-regulated] businesses. GPU recently acquired a
mechanical services contracting company, called the Myr Group.
FirstEnergy is also very big in that business. So there's some
natural synergies there as well," he said. FirstEnergy has grown
its 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 in
cash or its equivalent in FirstEnergy common stock, as long as
FirstEnergy'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 consists
of 50% cash, and 50% FirstEnergy common stock.
"The positives are the increase in earnings per share, the fact
that it's immediately accretive and the fact that the companies
should be able to operate their plants a little more efficiently.
The negatives are the incremental debt increase, because debt will
be going up as a percent of the total cap," Poole explained.
Peter Burg, CEO of FirstEnergy, said, "By doubling the retail
customer base and leveraging both companies' customer
relationships, we will be able to maximize the utilization of our
existing energy and related resources. Those resources include
electricity from our more than 12,000 MW of generating capacity;
natural gas from our exploration and production operations; fiber
optics and long-distance phone service from our telecommunications
operations; and a wide range of energy-related services from our
network of mechanical contracting and construction companies."
First Energy's electric utility operating companies ---Cleveland
Electric Illuminating, Toledo Edison, Ohio Edison and its
subsidiary Pennsylvania Power --- will likely retain their names
and current facilities as will GPU's electric operating companies,
including Jersey Central Power & Light, Metropolitan Edison and
In addition to its electric power operations, FirstEnergy
provides natural gas service to approximately 50,000 customers. It
has interests in more than 7,700 oil and gas wells, oil and natural
gas drilling rights to about 980,000 acres in the Appalachian Basin
and proved reserves of 450 Bcf equivalent of natural gas and oil
reserves, about 90% of which is natural gas, and 5,000 miles of
Fred D. Hafer, CEO of GPU, said, "This is an extraordinary
transaction for our shareholders and all of our other constituents.
Our access to FirstEnergy's generation and its expertise in
providing cost-effective supply options in competitive markets will
be a tremendous advantage in GPU's efforts to accommodate customers
who rely on us for their supply of electricity. Our merger will
provide other important benefits, including increased ownership in
two exciting ventures already under way --- America's Fiber
Network, which is positioned to reach about 35% of the national
wholesale communications market, and Pantellos Corp., which will
operate an Internet-based e-marketplace for the purchase of goods
and services between the energy industry and its suppliers."
Hafer, who is 59, would become chairman of FirstEnergy until his
retirement at age 62; Burg who is 54, would become vice chairman
and CEO of FirstEnergy. The board of directors is to be comprised
of 10 existing board members of FirstEnergy and six from GPU's
board. The union is conditioned on a number of things, including
approvals from both companies' shareholders as well as various
regulatory agencies including the states of Ohio, Pennsylvania and
FirstEnergy's combined utility companies make up the nation's
10th largest investor-owned electric system, serving 2.2 million
customers in northern and central Ohio and western Pennsylvania.
FirstEnergy has $6 billion in annual revenues and more than $18
billion in assets. It has 16 power plants that produce about 12,000
MW, and it owns about 60,000 miles of transmission and distribution
lines, and 35 interconnects and six regional electric systems. The
company markets about 62 billion kilowatt-hours of electricity each
In the United States, GPU, through its three electric utility
subsidiaries, serves two million customers in Pennsylvania and New
Jersey. GPU Advanced Resources Inc. sells retail energy and
services in the Mid-Atlantic region. It also owns transmission and
distribution facilities overseas, where it caters to an additional
2.3 million customers.