Ohio Edison Company and Centerior Energy Corp. announced an agreement September 17 on a tax-free, stock-for-stock merger to form a new holding company, FirstEnergy Corp., worth about $4.8 billion, based on stock prices that closed several days earlier.
The news came a month after two other merger deals were announced in mid-August: 1) Atlantic Energy, Inc. and Delmarva Power & Light Co. ($2.2 billion), and 2) Houston Industries Inc. and NorAm Energy Corp. ($3.8 billion). NorAm is the nation's third-largest U.S. natural gas utility.
Elsewhere, MidAmerican Energy Co. had launched an unsolicited offer for IES Industries, which, if approved, could derail the proposed three-way merger of IES Industries with WPL Holdings, Inc. and Interstate Power Co. At the same time, Cinergy Corp., rumored to be engaged in merger talks with two natural gas pipelines, Williams Cos. and PanEnergy Corp., was denying "anything other than preliminary or exploratory discussions with any third parties regarding such a transaction."
Ohio Edison/Centerior. If approved, the FirstEnergy merger would create the nation's 11th largest investor-owned electric system, based on annual electric sales of 64 billion kilowatt-hours. FirstEnergy would serve 2.1 million customers within 13,200 square miles of northern and central Ohio and western Pennsylvania. As of June 30, 1996, the combined assets of Ohio Edison and Centerior Energy totaled nearly $20 billion, with $5 billion in annual revenues, but Centerior has been warned by the Ohio Public Utilities Commission to write down billions in uneconomic assets.
The transaction would create FirstEnergy Corp. as a holding company for the operating units of Ohio Edison and Centerior (which owns The Cleveland Electric Illuminating Co. and The Toledo Edison Co.). Pennsylvania Power Co. will remain a wholly owned subsidiary of Ohio Edison. Ohio Edison shareholders would receive one share of FirstEnergy common stock for each share of Ohio Edison common stock that they currently hold. Centerior Energy shareholders would receive a 0.525 share of FirstEnergy's common stock for each share of Centerior common stock that they currently hold.
Atlantic Energy/Delmarva Power. The union of Atlantic Energy and Delmarva Power & Light would create a diversified energy company with over one million customers and over 5,500 megawatts of electric generation resources. The companies predict merger savings of over $500 million over a 10-year period. Employee reductions are expected to affect 10 percent of the consolidated workforce (em about 400 positions.
Delmarva Power shareholders would receive one share of the new company's stock for each share held, while Atlantic Energy shareholders would receive 0.75 shares of the new company's common stock and 0.125 shares of the new company's "Class A" common stock for each share held. "Class A" is a so-called "letter stock" that absorbs the most at-risk portions of the merger deal.
The Class A stock would represent, in aggregate, a 30-percent interest in earnings by Atlantic Energy's regulated electric business in excess of $40 million per year. The first $40 million and the remaining 70 percent of earnings above that amount would be attributed to those holding common stock in the new company, together with all earnings of Delmarva Power 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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