Surprise! FirstEnergy of Akron, OH and Morristown, NJ-based GPUInc. formally announced that Monday’s widely circulated and detailedrumors of a merger were indeed true (see Daily GPI, Aug. 8). In meetings yesterday, bothcompanies’ boards of directors unanimously approved the merger underwhich FirstEnergy would acquire all of GPU’s outstanding shares ofcommon stock for about $4.5 billion in cash and common stock.

FirstEnergy, a diversified energy services holding company, andGPU, a public utility holding company, will create the sixthlargest investor-owned electric system serving about 4.3 millioncustomers throughout 37,200 square miles of Ohio, Pennsylvania andNew Jersey. The combined revenues of the two companies for the 12months ending June 30, 2000, totaled $12 billion, and the assetsequaled $38.6 billion. The combined company would also have thegreatest customer base in the PJM power pool.

FirstEnergy would also absorb approximately $7.4 billion ofGPU’s preferred stock and debt. The transaction, which bothcompanies expect to complete within a year’s time, is to befinanced by a combination of long-term debt and bank credit lines.The transaction will be accounted as a purchase, and is expected tobe accretive to FirstEnergy’s earnings per share and cash flowimmediately upon the completion of the merger.

“One of the company’s big plans regarding this is to be able tosell power, to take some of their generation richness from theMidwest and ship it. GPU is short power, and FirstEnergy is longpower, the company wants to go that direction,” said Dan Poole, ananalyst with National City Capital Investments. FirstEnergy wouldalso be able to get more out of its plants by tweaking them andrunning them as baseload instead of cycling them, Poole added.GPU’s Advanced Resources subsidiary offers a window into easternmarkets through its competitive retail energy sales and services inthe Mid-Atlantic region.

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.”FirstEnergy has aggressively grown its unregulated activities,acquiring 12 mechanical construction, contracting and energymanagement companies, with sales exceeding $445 million annually.

First Energy’s electric utility operating companies, ClevelandElectric Illuminating, Toledo Edison, Ohio Edison and itssubsidiary Pennsylvania Power, will likely retain their names andcurrent facilities as will GPU’s electric operating companies,including Jersey Central Power & Light, Metropolitan Edison andPennsylvania Electric. In addition to its electric power operationsFirstEnergy provides natural gas service to approximately 50,000customers. It has interests in more than 7,700 oil and gas wells,oil and natural gas drilling rights to about 980,000 acres in theAppalachian Basin and proved reserves of 450 Bcf equivalent ofnatural gas and oil, about 90% of which is natural gas.

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 underway — America’s Fiber Network,which is positioned to reach about 35% of the national wholesalecommunications market, and Pantellos Corp., which will operate anInternet-based e-marketplace for the purchase of goods and servicesbetween 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.

©Copyright 2000 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.