Green Bay, WI-based WPS Resources Corp. and Chicago-based Peoples Energy confirmed Thursday that they are talking about a potential business combination. According to the Wall Street Journal, WPS could buy Peoples for about $1.5 billion.

Argus Research Co. analyst David Rewcastle told NGI that he had been considering upping his rating on Peoples from “hold” to “buy.” According to his notes on Peoples from May 8, it would appear the company is about to turn a corner, leaving behind regulatory rate squabbles and some bad hedges in both its utility and production businesses.

“The company [Peoples] is facing pressure from its regulators and suffering from a lag in rate relief,” according to Rewcastle’s note of May 8. “High natural gas prices and [a] warmer-than-average winter heating season have depressed its customers’ consumption.”

However, Rewcastle said Peoples (PGL) has adequate cash flow to cope with new regulatory requirements being placed on it, and he noted that Peoples 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.”

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 (see Power Market Today, April 3). Last month WPS agreed to sell its Sunbury generation facility in Shamokin Dam, PA, to Corona Power LLC for $30.4 million (see Power Market Today, June 14).

WPS closed down $2.03 Thursday at $48.14; volume was more than five times normal. The 52-week range for WPS is $47.39-$60. Peoples closed up $3.08 at $39.06; volume was nearly five times normal. The 52-week range for Peoples is $34.34-$45.52.

Both Peoples and WPS Resources said they won’t comment on their discussions until they are are abandoned or an agreement is reached.

Holding company WPS Resources’ largest subsidiary is Wisconsin Public Service Corp., a regulated electric and gas utility serving northeastern Wisconsin and a portion of Michigan’s Upper Peninsula, including more than 425,000 electric customers and 308,000 gas customers. Another subsidiary, Upper Peninsula Power Co., is a regulated electric utility serving approximately 52,000 electric customers on Michigan’s Upper Peninsula. Michigan Gas Utilities Corp. is a regulated gas utility serving 161,000 customers in lower Michigan. Minnesota Energy Services Corp. is a regulated gas utility serving more than 200,000 customers throughout Minnesota.

WPS’ major nonregulated subsidiary consists of WPS Energy Services Inc., a diversified energy supply and services company serving commercial, industrial and wholesale customers and aggregated groups of residential customers. Its principal market is the northeast quadrant of the United States and adjacent portions of Canada. Its principal operations are in Illinois, Maine, Michigan, Ohio, Texas, Virginia, and Wisconsin in the United States and Alberta, Ontario, and Quebec in Canada. WPS Energy Services also owns and/or operates nonregulated electric generation facilities in Wisconsin, Maine, Pennsylvania, New York, and New Brunswick, Canada; steam production facilities in Arkansas and Oregon; and a partial interest in a synthetic fuel processing facility in Kentucky.

Peoples Energy is a diversified energy company headquartered in Chicago and composed of five business units: gas distribution, power generation, midstream services, oil and gas production, and retail energy services. The core gas distribution business serves more than one million residential and business customers in Chicago and northern Illinois through Peoples Gas and North Shore Gas. Peoples Energy Resources Corp. develops, constructs, owns and operates gas-fired power plants. Houston-based Peoples Energy Production Co. is active in selected onshore U.S. basins.

©Copyright 2006Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.