The USA saw the creation of a new power industry leader in late July with the announcement by FPL Group and Entergy Corporation that they are to merge to form an entity with a total enterprise value of $27bn, close to 30 000 MW of generating capacity and over 6 m customers. Hot on the heals of this came news that FirstEnergy Corp. will acquire GPU Inc., and that Peco had bought a large share in Sithe North America (see page 13).
These are by no means the first utility mergers to be seen in the US this year, but they indicate that electricity deregulation and competitive forces faced by the industry are bringing consolidation. The past 12 months has seen similar moves in Europe – particularly in Germany and the UK – and this seems set to continue, indicating that the US consolidation wave is far from over.
August 8 saw an announcement by Ohio-based FirstEnergy that it would buy rival GPU Inc. for $4.5bn in cash and stock to create a dominant player in the markets of Ohio, New Jersey and Pennsylvania. Together, the companies will have an equity value of $8.5bn and will serve 4.3m customers in the three states.
Peter Burg, chairman and CEO of FirstEnergy, said: “Joining our companies will enable us to realise our strategic vision of being the premier retail energy and related services provider in a 13-state region in the northeastern quadrant of the nation while offering substantial economic benefits that should grow both our top and bottom lines.”
Scale and efficiency are evidently the objectives behind these mergers, and where scale is concerned, the Entergy-FPL deal is a clear winner: the no-premium, all-share deal will create the largest power company in the USA, and one that will dominate the Gulf states, serving 6.3m customers across Florida, Mississippi, Arkansas, Louisiana and Texas. In terms of market capitalization, it will be the USA’s second largest utility at $16.4bn.
The merged FPL-Entergy company will be the nation’s largest power generator with over 48 000 MW of capacity in the USA and overseas. It will also be the USA’s second largest nuclear power generator with over 10 000 MW of capacity, and one of its largest independent power producers.
The two companies have said that the transaction is a good strategic fit, will bring benefits to customers and has clear potential for strong earnings growth. “We expect to deliver average annual earnings per share growth of ten per cent or more over the next several years fuelled by a combination of revenue enhancement opportunities and cost savings,” said James L. Broadhead, chairman and CEO of FPL Group.
The combined company expects to provide annual synergies growing from $150m to $275m over the first few years after closing. Much of this will come from the regulated businesses, which will be able to eliminate duplicate corporate and administrative programmes and gain procurement economies.
While GPU and FirstEnergy are clearly focused on the retail sector, this appears to be of less concern to FPL and Entergy, which both have strong growth strategies for their power generation units. This is hardly surprising given that the Gulf states are slow to deregulate: only Texas and Arkansas have passed legislation to open their electricity markets to competition. For now, most of the merged company’s retail customers are captive.
The merged entity will have around 38 400 MW of regulated capacity from FPL Group’s Florida Power & Light utility and Entergy’s four utility units, as well as almost 10 000 MW of non-utility capacity in the USA and abroad through their respective IPP arms: FPL Energy and Entergy Wholesale Operations.
Both companies have said that the merged company will grow its non-regulated generation portfolio “more aggressively”, and are aiming to have 30 000 MW of capacity by 2004. Crucial to this plan is a contract with GE Power Systems for the supply of 76 gas turbines for delivery between now and 2005, and Entergy’s proposed venture with the Shaw Group to create an electric power plant management, engineering, procurement, construction and commissioning company.
Joining with FPL Group will also give Entergy access to the Florida power generation market. Independent power producers are desperate to get their hands on this market, which is poorly interconnected to neighbouring states will require around 8000-10 000 MW of new capacity over the next ten years. A recent court ruling prohibits outside companies from building non-utility plants in the state – Florida Power & Light and its rival, Florida Power, want this market for themselves.
Another strength area, particularly for Entergy, is nuclear power operation. Entergy Nuclear operates five nuclear plants in its regulated service territory with a combined capacity of 4785 MW and is aggressively expanding this portfolio.
The combined company will leverage this nuclear expertise to capture emerging opportunities in the nuclear industry.
Complementing this growth strategy in clean generation technologies are the companies’ energy marketing and trading operation. Entergy’s proposed alliance with Koch Industries to deliver, market and trade power, natural gas and other energy related commodities, will also bolster the merged company.
Entergy-Koch is expected to rank in the top ten of the nation’s energy commodity traders, trading over 100 TW/year. It will create a strong platform to sell the merged company’s wholesale power, leverage its growing portfolio, manage risks, enhance its utility operations and capitalize on new markets such as weather derivatives.