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Merger Mania Continues

Fortnightly Magazine - October 15 1996

businesses and the businesses of Atlantic Energy other than Atlantic Energy's regulated electric utility business. The merger plan proposes creating a new holding company regulated by the SEC.

Fitch Investors Service placed subsidiary Atlantic City Electric Co.'s A-rated first mortgage bonds, A-debentures, and A- cumulative preferred stock on negative FitchAlert. Fitch is concerned that Atlantic City Electric is not well positioned to deal with emerging competition due to nuclear exposure, expensive purchased power, and high retail rates. Fitch also is concerned that the merger will not ameliorate those circumstances. Fitch does not rate the securities of Delmarva Power & Light.

Houston Industries/NorAm Energy. Houston Industries plans to assume $1.4 billion of NorAm's debt and preferred stock and to pay $2.4 billion for its common stock. The combined companies would have a total market capitalization of $14.3 billion. The companies plan to reconfigure so as to avoid regulation under the Public Utility Holding Company Act.

Based on the merger proposal, Standard & Poor's (S&P) has placed the ratings of Houston Industries Inc. and its subsidiary Houston Lighting & Power Co. (HL&P) on CreditWatch with negative implications, while placing the ratings of NorAm Energy on CreditWatch with positive implications. S&P explained that while NorAm offers Houston Industries the opportunity to become a full service provider of energy in the United States and other countries, the company also adds a significant amount of debt to the consolidated balance sheet. The $3.8-billion price tag includes $1.4 billion of NorAm debt. The remaining $2.4 billion will be financed half with a new issue of Houston Industries stock, half with short-term debt (commercial paper and bank debt) and internally generated funds. The negative CreditWatch implications for Houston Industries and its utility subsidiary reflect the fact that final debt ratings will recognize the overall increased debt burden and the generally weaker financial performance of NorAm.

S&P pointed out that the positive CreditWatch implications for NorAm recognize that its creditworthiness will benefit from the credit support of the

relatively strong cash flow of HL&P. But NorAm's senior unsecured debt will still be rated below the secured debt at HL&P.

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