Following their confirmation of merger talks last week, WPS Resources Corp. and Peoples Energy Corp. said Monday they plan to form a diversified company with regulated utilities in four midwestern states and nonregulated businesses serving customers in the Northeast and Canada.
The focus for the combined company will be on its core regulated electric and natural gas operations, which will serve about 1.6 million natural gas customers and 477,000 electric customers. When considered with WPS Resources’ investment in American Transmission Co., a significant portion of the combined company’s operations will be regulated. This business profile is expected to maintain strong credit ratings, which is a key financial and strategic objective, the companies said. The combined company will include the energy marketing businesses of WPS and Peoples.
Under the merger agreement, which was unanimously approved by both companies’ boards, each outstanding common share of Chicago-based Peoples Energy will be converted into 0.825 shares of Green Bay, WI-based WPS Resources’ common stock. Based on closing prices on July 5 (prior to the publication of an article in The Wall Street Journal), this would result in an approximate value of $41.39 per share for Peoples. This represents a premium to Peoples Energy’s shareholders of 14.2%, based on the 20-day average of closing prices for Peoples ending July 5, and a premium of 15%, based on the closing price for Peoples on July 5.
Last week Argus Research Co. analyst David Rewcastle told NGI that he had been considering upping his rating on Peoples from “hold” to “buy” (see Daily GPI, July 7). According to his notes from May 8, it would appear that Peoples is about to turn a corner, leaving behind regulatory rate squabbles and some bad hedges in both its utility and production businesses.
“[Peoples] is facing pressure from its regulators and suffering from a lag in rate relief,” said Rewcastle. “High natural gas prices and [a] warmer-than-average winter heating season have depressed its customers’ consumption.”
However, he said Peoples (PGL) has adequate cash flow to cope with new regulatory requirements, and he noted that the company enjoys investment-grade status with a stable outlook at the rating agencies.
“It should also benefit from future rate relief and from the expiration of defensive hedges on oil and gas sales later in 2006 and 2007. In addition, PGL should see a rebound in earnings if oil and gas prices hold firm past 2007, especially since it is strengthening its E&P operations to sell more production at high spot prices.”
Monday Standard & Poor’s Ratings Services placed WPS on CreditWatch with negative implications and affirmed its ratings on Peoples. Moody’s Investors Service said it might downgrade WPS and upgrade Peoples.
Upon consummation of the merger, WPS shareholders will own about 57.6% of the combined company, and Peoples shareholders will own 42.4%. After closing, it is intended that the dividend of the combined company will be 66 cents per quarter.
The combined company will be led by Larry L. Weyers, 61, chairman, president, and CEO of WPS Resources, who will serve as its president and CEO. James R. Boris, 61, the current lead director for Peoples Energy, will serve as nonexecutive chairman of the board. Thomas M. Patrick, 60, chairman, president and CEO of Peoples Energy, announced his intention to retire earlier this year. The combined company’s board will have 16 members, nine selected by WPS Resources and seven by Peoples Energy.
The combined holding company headquarters will be in Chicago, and a new company name will be selected. Each of the regulated utility businesses will maintain its current name and headquarters. The nonregulated energy marketing businesses of the combined company will be headquartered in Green Bay.
“This combination creates a diversified regulated utility business that will be better positioned to compete in a consolidating industry in which size and scale matter. Our regulated businesses have good operational fit and will benefit from our constructive regulatory approach and greater market and regulatory diversity when they are combined,” Weyers said.
“The combination will benefit the customers, employees and shareholders of both companies,” Patrick said. “Both companies have outstanding utility franchises at the core and our complementary, non-regulated businesses that provide additional growth opportunities. In addition, we have a shared commitment to a lower-risk operating approach, financial strength, fiscal discipline, and a strong dividend.”
Weyers added, “By combining our nonregulated energy marketing businesses, we will create a stronger, more competitive, and better balanced growth platform.”
The transaction is subject to receipt of all necessary regulatory and shareholder approvals. The companies will be requesting expedited regulatory approval, and if granted, the transaction is expected to be completed by the end of the first calendar quarter of 2007.
“We expect the transaction to be earnings accretive to shareholders in calendar year 2008, excluding residual transition costs, once the companies have been integrated and regulatory plans have been executed. We already have $80 million in identified potential annual synergies, about $72 million in our regulated businesses and another $8 million in our nonregulated businesses. These synergies will be achieved over time and it is expected that the one-time costs to obtain these synergies will be approximately $200 million,” Weyers said.
After closing, it is intended that the dividend of the combined company will be 66 cents/share per quarter, a 16.8% increase to the current quarterly dividend rate for WPS, and after taking into account the exchange ratio, effectively continuing the dividend at the current level for Peoples. Regulated gas and electric utility operations will provide a majority of the earnings of the combined company.
The combined company will have substantial capital investment opportunities in its regulated operations. WPS Resources’ Weston 4 low sulfur coal-fired baseload generation facility in Wisconsin is less than two years away from planned commercial operation. In Illinois, the combined company is prepared to accelerate Peoples’s infrastructure modernization capital expenditures in Chicago. The combined company also has significant investment opportunities through WPS’s current 33% interest in the regulated American Transmission Co.
WPS and Peoples’ complementary, nonregulated wholesale and retail energy marketing businesses share a strong customer service focus and will be combined to create a larger and geographically diverse business, the companies said. The combined business will leverage the expertise, reputation, and assets of both companies. It will be well-positioned to compete when Illinois’ electric market opens in 2007 and to expand WPS Resources’ presence in the Northeast quadrant of the U.S., adjacent portions of Canada, and Texas. In addition to asset and market synergies, potential cost synergies of $8 million per year have been identified in the combined energy marketing business.
In addition to their energy marketing businesses, WPS owns various unregulated power plants and Peoples has a substantial oil and natural gas production business that has been a significant source of earnings growth for that company. Peoples is exiting the power business and earlier this year announced the sale of its stake in the Southeast Chicago Energy Project to Exelon Generation. Last month WPS agreed to sell its Sunbury generation facility in Shamokin Dam, PA, to Corona Power LLC for $30.4 million. WPS also is selling its interest in the Guardian pipeline.
Prior to closing, a transition team consisting of members from both WPS and Peoples will evaluate what if any businesses might be sold or spun off.
The merger would combine WPS Resources, named Fortune magazine’s “Most Admired Company” in the energy industry and Forbes magazine’s “Best Managed Utility Company in America” earlier this year, and Peoples Energy, which has a 150-year tradition of reliable customer service.
“The combined company will emphasize strong employee relations,” Weyers said, pointing out that the larger company will offer more opportunity for employees across different industry segments in a broader service area. “Union agreements will be honored, and the combined company will be committed to working closely with its employees to grow the company.”
“While we certainly anticipate gaining efficiencies will lead to some reductions in staff, in the past we’ve been able to accomplish that largely by normal attrition,” Weyers added. “We expect to emphasize that same approach in this combination.”
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