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Today's IssueAlert Sponsors:=20
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Rapidpartsmart increases= =20 supply options, reduces outage risks and cuts inventory investment. Contac= t=20 John Kelly at (727) 669-3006 for more information or go to=20 www.rapidpartsmart.com =20 [IMAGE] The most comprehensive, up-to-date map of the North American Power System b= y=20 RDI/FT Energy is now available from SCIENTECH. =20 [IMAGE] IssueAlert for March 19, 2001=20 FPL Group, Entergy Merger May Be in Trouble by Will McNamara=20 Director, Electric Industry Analysis FPL Group Inc. (NYSE: FPL) and Entergy Corp. (NYSE: ETR), whose proposed=20 merger would create the largest power distribution company in the United=20 States (6.3 million customers), said their deal has hit some significant=20 snags. In a joint statement, Juno Beach, Fla.-based FPL Group and=20 Louisiana-based Entergy said "certain issues have arisen in connection with= =20 their pending merger, including governance structure/value-related issues a= nd=20 integration of the two companies going forward." The companies said they wi= ll=20 be meeting in the near future to address the issues, but did not elaborate.= =20 They added that they would have no further comment on the status of the=20 merger at the present time.=20 Analysis: FPL Group and Entergy join what appears to be a growing list of= =20 companies experiencing problems with pending mergers. Just within the last= =20 month, Con Edison and Northeast Utilities announced significant problems=20 related to their proposed partnership that most likely will find resolution= =20 only in a courtroom. Following that, we heard about problems surrounding=20 Sierra Pacific Resources' ability to finance its pending purchase of Portla= nd=20 General from Enron. However, the fact that the "merger of equals" between F= PL=20 Group and Entergy may not proceed is big news as it represents the largest= =20 partnership among energy companies that the U.S. energy industry has ever= =20 witnessed.=20 First, let me provide some background. FPL Group and Entergy Corp. announce= d=20 their merger in July 2000. The $27 billion partnership reportedly will crea= te=20 the largest power company in the nation, eclipsing the now-completed merger= =20 between PECO and Commonwealth Edison that created Exelon Corp. The new=20 company, which will be named at a later date, will own and operate generati= ng=20 capacity of more than 48,000 megawatts, and as noted will serve more than 6= .3=20 million customers. Although this is referred to as a "merger of equals," FP= L=20 is purchasing Entergy. FPL Group shareholders will own 57 percent of the=20 common equity of the combined company, and Entergy shareholders will own 43= =20 percent. The benefits of this merger are too many to name here, but some= =20 advantages=01*beyond the staggering earnings potential=01*certainly stand o= ut. =20 First, the combined company will be a leader in wholesale generation and on= e=20 of the nation's largest independent power producers with nearly 10,000=20 megawatts of unregulated generating capacity. Related to this is Entergy's= =20 announced joint venture with Koch Industries, under which Entergy gains=20 10,000 miles of natural-gas pipeline assets and becomes a world leader in= =20 weather derivatives. Second, the two companies come together with an=20 important affinity in their competitive approaches. Both have divested thei= r=20 non-core businesses, and are focused on expanding utility operations and=20 generation businesses. Along these lines, both companies support=20 emission-free energy, with Entergy being particularly strong in nuclear and= =20 FPL Group being strong in renewable energies (particularly wind). Third, th= e=20 regulated business of Florida Power & Light=01*FPL Group's subsidiary=01*is= in a=20 strong growth mode. Today, the utility serves 600,000 more customers than i= t=20 did in 1990. In 1999 alone, FPL added nearly 76,000 new accounts=01*a 2-per= cent=20 increase over 1998. Fourth, FPL Group is the stronger of the two with regar= d=20 to telecom, and the company's subsidiary FPL FiberNet will gain considerabl= y=20 from new opportunities available in Entergy's service territory. Overall, t= he=20 combined forces of Entergy and FPL Group create a multi-diversified company= ,=20 potentially strong not only in the distribution side of the business, but= =20 wholesale generation as well as trading, telecom and renewable energy.=20 The pending merger between the two companies had already experienced some= =20 previous setbacks related to its timetable for completion. In January, an= =20 Administrative Law Judge (ALJ) issued a procedural schedule that called for= =20 hearings related to the merger to begin in October 2001, which was expected= =20 to delay the merger closing by three to six months. Entergy filed a motion= =20 for reconsideration of the schedule. In mid-February, a new ALJ ruling move= d=20 up to July the Louisiana Public Service Commission's scheduled hearings on= =20 the merger, returning the regulatory proceedings to their original 15-month= =20 timetable. Consequently, prior to this latest announcement of new problems= =20 associated with the merger, the partnership between FPL Group and Entergy w= as=20 scheduled to close by the end of this year. =20 With that overview, we can speculate on the reasons why the proposed merger= =20 is hitting some snags. Keep in mind that FPL is the buying partner in the= =20 merger and more than likely would be the company to contest certain element= s=20 of the deal that may have been altered since the merger was first announced= .=20 From the start, it was understood that the new headquarters would be locate= d=20 in Florida and that FPL Group would gain majority ownership of the new=20 company. In the announcement of "issues" related to the merger, the two=20 companies identified "integration of the two companies going forward" as on= e=20 of the factors. This could be an indication that one of the companies is=20 seeking to modify previously agreed-upon terms of the merger contract. =20 In addition, the companies made reference to "governance structure /=20 value-related issues and integration of the two companies." This, of course= ,=20 could mean many different things. However, one major issue that may be=20 impacting the merger was revealed in a recent report which suggested that= =20 Entergy Wholesale Operations (the non-utility power development, marketing= =20 and trading subsidiary of Entergy) is considering the divestiture of its tw= o=20 U.K. generating assets, Damhead Creek and Saltend. According to Power Finan= ce=20 & Risk, power traders familiar with inside knowledge have reported that the= =20 Entergy subsidiary is considering the sale of the units, which could earn u= p=20 to $2 billion in the secondary market. Both units are combined-cycle gas=20 turbines and together represent about 2,000 MW. Damhead Creek generates abo= ut=20 800 MW and is located in Kent, England; Saltend generates about 1,200 MW an= d=20 is located in Yorkshire.=20 According to the report, Entergy has declined to comment on the matter.=20 However, rival traders say the possible divestiture may reflect the tough= =20 economics of operating gas-fired plants in the United Kingdom, and Entergy'= s=20 preference for more lucrative markets in Southern and Eastern Europe. As=20 noted, one of the main appeals of the pending merger between FPL Group and= =20 Entergy is that it will create a company that is a leader in wholesale with= =20 nearly 10,000 megawatts of unregulated generating capacity. At least that w= as=20 the blueprint at the time the two companies entered into their agreement. A= ny=20 plans to divest assets, on either side of the negotiating table, clearly=20 changes the deal and may in fact be one of the "value-related issues" that= =20 has complicated this deal. Many mergers of equals also include "pooling of= =20 interest" clauses restricting either party from altering its value (up or= =20 down) by a specified percentage. Certainly, the divestiture of assets could= =20 have an impact on the value of Entergy's portfolio.=20 The announcement of potential problems associated with the merger was not= =20 made until early this morning, so it is too early to assess any impact that= =20 the announcement might have on the companies' stocks. On March 16, FPL=20 shares closed at $64.25 while Entergy finished at $37.50. As of mid-morning= =20 on March 19, FPL shares had fallen to $60.63 and Entergy shares had dropped= =20 to about $36.35. Both companies are considered "stocks to watch" today as= =20 further impact from the problems associated with the merger may become more= =20 apparent.=20 An archive list of previous IssueAlerts is available at www.ConsultRCI.com Reach thousands of utility analysts and decision makers every day. Your=20 company can schedule a sponsorship of IssueAlert by contacting Nancy Spring= =20 via e-mail or calling (505)244-7613. Advertising opportunities are also=20 available on our website.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us=20 know if we can help you with in-depth analyses or any other SCIENTECH=20 information products. If you would like to refer a colleague to receive ou= r=20 free, daily IssueAlerts, please reply to this email and include their ful= l=20 name and email address or register directly on our site. =20 If you no longer wish to receive this daily email, send a message to=20 IssueAlert, and include the word "delete" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= =20 of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlert= s=20 are not intended to predict financial performance of companies discussed, = or=20 to be the basis for investment decisions of any kind. SCIENTECH's sole=20 purpose in publishing its IssueAlerts is to offer an independent perspecti= ve=20 regarding the key events occurring in the energy industry, based on its=20 long-standing reputation as an expert on energy issues. =20 Copyright 2001. SCIENTECH, Inc. All rights reserved.
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