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<http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient=
ech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09 <http://secure.s= cientech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/C= orner_TR.jpg<=09 =09 <http://secure.scientech.com/rci/wsimages/ia_banner02.gif<=09=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.sciente= ch.com/specialpages/Multi_Client.asp< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 =09 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_TR.jpg<=09 =09 <http://secure.scientech.com/images/spacer.gif<; <http://www.thestructu= regroup.com< <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/specialpages/Strategic_Planning.asp< <http://secure.scientech.com/ima= ges/spacer.gif< <http://secure.scientech.com/rci/details.asp?ProductID=3D90= 9< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 November 7, 2001=20 FirstEnergy and GPU Close Merger By Will McNamara Director, Electric Industry Analysis [News item from PR Newswire] FirstEnergy Corp. (NYSE: FE) closed its merger= with GPU Inc. on Nov. 6 and announced that members of its Board of Directo= rs had been named. The effective date of the merger is Nov. 7, 2001. "With = today's closing of our merger, we will begin operating as a larger, stronge= r company, better positioned to provide significant benefits to our custome= rs, shareholders and employees," said FirstEnergy Chief Executive Officer H= . Peter Burg. Analysis: When compared to 2000 and 1999, 2001 has turned out to be a rathe= r anti-climatic year with regard to merger and acquisition activity in the = energy industry. In fact, when compared to the early days of deregulation, = M&A activity has slowed from a flood to a slow drip. The days of combining = two vertically integrated utility companies to gain scale and guarantee sur= vival appear to be on the decline. Partnerships will still continue, of cou= rse, but they are now of a different breed than before and have become far = more focused on a particular market niche. One exception to the rather unev= entful M&A scoreboard this year is the just-completed $4.2-billion partners= hip between FirstEnergy and GPU, which reportedly will create an electric u= tility serving 4.2 million customers from Toledo, Ohio to the New Jersey sh= ore. The two companies have positioned their partnership as creating the "p= remier supplier in a 13-state region." However, while one of the few intere= sting deals this year, the FirstEnergy / GPU partnership has not been witho= ut controversy, especially with regard to lingering financial obligations t= hat GPU has in the Three Mile Island nuclear plant.=20 First, let's establish the basics about this partnership. Akron, Ohio-based= FirstEnergy has purchased Morristown, N.J.-based GPU Inc., paying a divide= nd of $0.42392 a share that will be payable on Nov. 28. FirstEnergy-itself = a product of a 1997 merger between Ohio Edison and Centerior Inc. -is alrea= dy an energy services holding company serving 2.2 million customers within = 13,200 square miles of northern and central Ohio and western Pennsylvania. = FirstEnergy also provides natural-gas service to approximately 50,000 custo= mers in the Midwest and is involved in the exploration and production of oi= l and natural gas, and the transmission and marketing of natural gas, with = resources that include proven reserves of 450 billion cubic feet equivalent= of natural gas and oil-about 90 percent natural gas-and approximately 5,00= 0 miles of pipelines. FirstEnergy also owns 7,500 miles of transmission lin= es, with 35 interconnections in 6 electric systems, and is a member of the = Alliance RTO. FirstEnergy has a market capitalization of $8.1 billion, a P/= E ratio of 12.99, and its shares currently are priced at $35.72.=20 GPU Inc. is an international provider of energy-related infrastructure and = services. Domestically, its three electric utility subsidiaries-doing busin= ess as GPU Energy-serve two million customers in Pennsylvania and New Jerse= y. Through the GPU International Group, GPU develops, owns and operates tra= nsmission and distribution facilities overseas. GPU has a market capitaliza= tion of $4.8 billion, a P/E ratio of 10.51, and on its last day of trading = (Nov. 6) its shares were priced at $40.39. From its inception, the primary objective of this acquisition was to enable= FirstEnergy to become the premier regional energy and related services pro= vider in the northeastern quadrant of the United States. A key part of this= strategy is the expansion of the combined company's unregulated marketing = opportunities, including the acceleration of a retail business that FirstEn= ergy gains by buying GPU. After Nov. 7, FirstEnergy will begin operating as a registered holding comp= any with seven electric utility operating companies-Ohio Edison, The Illumi= nating Company, Toledo Edison, Metropolitan Edison, Pennsylvania Electric, = Pennsylvania Power, and Jersey Power & Light-which reportedly will comprise= the fourth-largest investor-owned electric system in the United States, ba= sed on amount of customers. As noted the combined company has billed itself= as the premier supplier in a 13-state region. Those 13 states are New York= , Pennsylvania, New Jersey, Delaware, Maryland, Virginia, West Virginia, Oh= io, Kentucky, Indiana, Michigan, Illinois, and Wisconsin. However, it is cl= ear that, among these 13 states, the combined company has already establish= ed a particularly strong business in New Jersey, Pennsylvania and Ohio, whe= re it will maintain a geographic presence of 23 percent, 28 percent and 49 = percent, respectively.=20 According to a presentation made by CEO Peter Burg earlier this year, the a= cquisition of GPU Inc. will "optimize FirstEnergy's generation portfolio," = by, among other things, increasing its customer load and the utilization of= its baseload units. Prior to the acquisition, FirstEnergy operated 16 powe= r plants with a total system capacity of nearly 13,000 MW. Out of this tota= l generating capacity, 58 percent (7,471 MW) is produced using coal; 29 per= cent (3,779 MW) comes from nuclear plants; 10 percent (1,273 MW) is fueled = by natural gas or oil; and 3 percent (435 MW) comes from pumped-storage hyd= roelectric facilities. Through the acquisition of GPU, FirstEnergy reported= ly will gain 1,155 MW in peaking generation and the opportunity for over 80= 0 MW of capacity releases. Company information indicates that FirstEnergy p= roduced nearly 70 million MWh of electricity over the last year.=20 As noted, while the partnership between FirstEnergy and GPU is for the most= part quite synergistic and has obtained its necessary regulatory approvals= in a comparatively smooth fashion, the deal has not been completely withou= t controversy. For instance, a Pittsburgh-based consumer group known as Cit= izen Power has expressed concern that the partnership will ultimately prove= harmful for consumers of the combined company. Specifically, the group cla= ims that FirstEnergy customers have already been paying $9 billion in stran= ded costs and could be forced to pay for additional charges associated with= GPU's partial ownership of the Three Mile Island Nuclear plant. Despite th= e fact that the merger is now officially completed, Citizen Power reportedl= y has asked a Pennsylvania court to require state energy regulators in that= state to reverse the approval of the merger. One of the group's arguments = is that the Pennsylvania PUC did not require either FirstEnergy or GPU to d= emonstrate how the merger would benefit or otherwise impact the public and = did not seek approval from the groups involved in GPU's restructuring agree= ment with the state. Other groups in Ohio have similar frustrations with th= e PUC in that state and are concerned about any increases in FirstEnergy ra= tes that may occur as a result of payments that GPU is still making toward = Three Mile Island.=20 There is some public confusion surrounding GPU's holdings in Three Mile Isl= and, which can be easily clarified. There are two nuclear units at the Thre= e Mile Island (TMI) nuclear plant, Units 1 and 2. In late 1999, GPU sold TM= I-1 to AmerGen Energy, the joint venture between PECO Energy and British En= ergy Co., for $100 million, which was about one-sixth of the book value for= the unit. The ownership of the plant known as TMI-2 has remained with GPU.= In 1979, TMI-2 was the site of the nation's worst nuclear accident, in whi= ch nearly half the uranium core melted. The TMI-2 unit is essentially dead = and has not functioned since 1979. However, GPU has continued to keep the p= lant in a state of "monitored storage," and has encountered some expenses r= elated to staff, etc., which continue to monitor the unit. The concern from= some consumers, whether it is valid or not, is that FirstEnergy, which now= owns TMI-2 due to its acquisition of GPU, will be picking up any residual = expenses related to this unit. Specifically, TMI-2 is not scheduled to be d= ecommissioned until 2014 at the earliest, and there may be some cleanup cos= ts associated with the decommissioning that may exceed current estimates. It is important to note that GPU has very little of its own generation asse= ts. The company has followed a revised strategy over the last year that inc= luded the exit of the merchant energy business and a clear focus on the tra= nsmission and distribution sectors of the industry, as well as new non-regu= lated businesses. Another pending acquisition of some remaining GPU assets = involves UtiliCorp's $2.1 billion offer for Avon Energy Partners Holdings s= ubsidiary, the holding company for Midlands Electricity, which reportedly i= s the fourth-largest regional electricity company in the United Kingdom. Th= is deal should move forward, although it was contingent on the completion o= f FirstEnergy's acquisition of GPU. FirstEnergy had previously established = that it had no interest in retaining GPU's international assets, which incl= ude small holdings in Great Britain, Australia and South America. In additi= on, the offer makes sense for FirstEnergy, because it provides the company = with available capital to pay down acquisition debt and possibly fund addit= ional acquisitions.=20 Moreover, FirstEnergy executives believe any possible negatives in its acqu= isition of GPU are outweighed by the positives. Again, the fundamental bene= fit of the FirstEnergy / GPU partnership is that it should create one of th= e leading-if not the leading-electric providers in a stretch of territory f= rom Ohio to New Jersey. FirstEnergy gains significantly in the deal by acqu= iring GPU's customer base and the ability to optimize its own existing and = growing generation arsenal. Plus, FirstEnergy also gains GPU's remaining ge= neration capacity, which is rather minimal but does include about 1,155 MW = in peaking generation. From a broad perspective, FirstEnergy and GPU have f= ollowed through with a rather smooth merger process, which certainly repres= ents an atypical development against a landscape of terminated consolidated= deals this year.=20 UPDATE ON SAN FRANCISCO MUNICIPALIZATION VOTE: See the 11/6/01 IssueAlert = <http://secure.scientech.com/issuealert/article.asp?id=3D979<;for a full des= cription of Measures F and I that appeared on the ballot in San Francisco a= nd Brisbane, Calif., in yesterday's election. Both measures related to muni= cipalizing the electric system currently owned by Pacific Gas & Electric Co= . According to data obtained from the San Francisco Department of Elections= as of early morning on Nov. 7, voter turnout in the area was 25.16 percent= . Measure F, which would create a Municipal Water & Power Agency in San Fra= ncisco only, passed by a very slim margin of 56,008 votes (51.02 percent) t= o 53,760 votes (48.98). The passage of this measure will create a new agenc= y in the city of San Francisco (not a municipal utility district) that will= not include the city of Brisbane. The agency will be governed by an electe= d seven-member board of directors and reportedly will replace the current j= urisdictional oversight by the California Public Utilities Commission.=20 Measure I, which would have created a Municipal Utility District (MUD) in b= oth San Francisco and Brisbane, did not pass. However, it was defeated by a= very slim margin of 53,865 votes (50.63 percent) to 52,524 votes (49.37 pe= rcent).=20 It is not presently clear whether or not all of the absentee votes have bee= n calculated in this election, and thus there is a good chance that the abo= ve tally may change in the next few days and could possibly alter the outco= me of this election.=20 While Pacific Gas & Electric Co. put a positive spin on the election result= s in a press release that is circulating today, the fact of the matter is t= hat this was a very close election. While the city of Brisbane shot down th= e idea of a MUD, San Francisco is proceeding with a Municipal Water & Power= Agency, which at some point may also attempt to seize the transmission and= distribution assets of Pacific Gas & Electric Co. Without question, the pu= blic power debate in this area is far from over and in many ways has receiv= ed a boost from this election. I will continue to follow the story and prov= ide further updates that occur from regional analysis.=20 An archive list of previous IssueAlert articles is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 _____ =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<at 505.244.7650. Advertising opportunities are also= available on our Website.=20 _____ =20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission & distribution, retail markets, new tech= nologies, I/T, renewable energy, regulatory affairs, community relations an= d international issues. Contact consulting@scientech.com <http://consulting= @scientech.com< or call Nancy Spring at 505.244.7613.=20 _____ =20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer colleagues to receive our fre= e, daily IssueAlert articles, please register directly on our site at secur= e.scientech.com/issuealert <http://secure.scientech.com/issuealert/<;.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = <http://secure.scientech.com/account/<; to unsubscribe. Otherwise, please se= nd an e-mail to to IssueAlert <mailto:IssueAlert@scientech.com<, with "Dele= te IA Subscription" in the subject line.=20 _____ =20 SCIENTECH's IssueAlert(SM) articles are compiled based on the independent a= nalysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's Iss= ueAlerts are not intended to predict financial performance of companies dis= cussed, or to be the basis for investment decisions of any kind. SCIENTECH'= s sole purpose in publishing its IssueAlert articles is to offer an indepen= dent perspective regarding the key events occurring in the energy industry,= based on its long-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D11/7/2001<;
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