FPL Group and Entergy to combine in merger of equals

Jul 31, 2000 02:00 AM

FPL Group and Entergy Corporation announced they have agreed to combine in a merger of equals, creating the largest power company in the nation. The new company, which will be named at a later date, will be the largest US electric utility and the largest power producer. Based on the closing stock prices of both companies, the combined company will have a total enterprise value of more than $ 27 bn, ($ 16.4 bn in equity market capitalisation and $ 10.7 bn in debt and preferred stock).
The new company will combine and leverage strategically positioned assets to create a premier energy company. The company will have a strong market position in wholesale generation, trading, marketing and transportation.
Under the terms of the agreement, which was approved unanimously by the boards of directors of both companies, each holder of FPL Group common stock will receive 1.00 share of the new holding company for each share of FPL Group common stock, and each holder of Entergy common stock will receive 0.585 of a share of the new holding company for each share of Entergy common stock, in a tax-free, stock-for-stock exchange. The transaction will be immediately accretive to both companies, based on consensus security analysts' earnings estimates. Average annual earnings per share growth for the combined company is expected to be 10 % or more.

FPL Group and Entergy have authorised share repurchase programs totalling $ 1 bn to be implemented prior to the close of the merger. The programs ($ 570 mm at FPL Group and $ 430 mm at Entergy) include remaining authorisations from the companies' existing share repurchase programs.
The newly combined company expects to pay a dividend that is consistent with FPL Group's current dividend policy. Based on FPL Group's current annual dividend of $ 2.16 per share, Entergy's shareholders would receive $ 1.26 per share on an as-converted basis compared to Entergy's current dividend of $ 1.20 per share.
The merger combines two high performance cultures to create a company that will be ranked the: #1 electric utility serving more than 6.3 mm customers #1 power producer with a generating capacity of more than 48,000 MW #2 nuclear power generator with more than 10,000 MW #2 among utilities in market capitalisation at $ 16.4 bn The combined company will be one of the nation's largest independent power producers with nearly 10,000 net MW of unregulated generating capacity.
Also, through Entergy's pending venture with Koch Industries, the combined company will be one of the largest US marketers of both electric power and natural gas, will own 10,000 miles of strategic natural gas pipeline assets, and will be the world market leader in weather derivatives.

In addition to becoming one of the largest energy organisations, the new company will be a top performer on a number of operational criteria. Florida Power & Light, the principal subsidiary of FPL Group, has long achieved customer service ratings in the top 10 % of the industry, and an independent study published in April ranked Entergy first among all US electric utilities for year-over-year improvement in customer satisfaction.
The combined electric generation fleet will be an environmental leader, with emission rates among the lowest of all US generating companies. It will also be one of the most efficient, with operating costs among the lowest in the industry. The new company will be the US leader in natural gas generating capacity -- and the nation's largest user of natural gas.
"We are creating a company with the scope and scale to prosper in the changing industry marketplace," said James L. Broadhead, chairman and CEO of FPL Group. "We expect to deliver average annual earnings per share growth of 10 % or more over the next several years fuelled by a combination of revenue enhancement opportunities and cost savings. Our strong balance sheet and increased cash flows will enable our new company to more aggressively pursue profitable growth opportunities."

"The merger combines two strategically aligned, financially healthy companies into an organisation that has no equal in the industry," said J. Wayne Leonard, CEO of Entergy Corporation. "We both have divested non-core businesses and are focusing on enhancing our utility operations. At the same time, we are rapidly growing our wholesale generation businesses with an emphasis on clean energy from nuclear, natural gas, and renewable energy sources. The Entergy-Koch venture brings premier trading and risk management skills and creates the potential to link our industry-leading gas positions through the Gateway Pipeline. Combining our assets and skills will not only enhance our ability to achieve these strategic goals, but will also create the opportunity to move to a new level as a leading energy company."
"FPL has demonstrated consistent year-over-year improvement in key performance and customer satisfaction measures and is an industry leader in plant operations, customer service and system reliability," said Mr. Leonard. "Over the past two years, our employees at Entergy have dramatically improved our service quality as well. When we combine best practices, we expect to further enhance the level of service provided by both companies. Stakeholders can count on our new company to carry on the values shared by both Entergy and FPL Group: safety as our highest priority, quality service, environmental responsibility and good corporate citizenship."

Mr. Broadhead said, "In addition to strengthening our utility operations, we will be creating one of the largest, most financially sound, and fastest growing wholesale generating companies, with all the critical capabilities in place to ensure even greater success. By combining our premier operating skills, solid project development expertise and vast energy marketing and trading resources, we expect to accelerate our growth and to maximise the value of our portfolio.
"Through its pending ventures with other industry leaders such as Koch Industries and The Shaw Group, Entergy has taken an innovative approach to add to its capabilities and to expand its growth opportunities," said Mr. Broadhead. "We would expect these partnerships to provide added benefit to our combined company as we grow our wholesale generation portfolio."

The new company will carry out the closely aligned business strategies of FPL Group and Entergy, which are based on strong core utility operations and growth in wholesale energy markets, primarily in clean, low-cost electric generation. It will pursue additional growth through development of electric, natural gas, weather and telecommunications products and services for a large and diverse customer base.
The regulated utility business within the merged company will serve more than 6.3 mm customers through its affiliates Florida Power & Light, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi and Entergy New Orleans. The super-regional utility will own and operate 38,400 MW of capacity. It will be the largest operator of gas-fired power plants and the largestbuyer of natural gas and residual fuel oil in the country.
Through concerted efforts to reduce costs and improve service, the combined company expects to effectively compete in any market environment. As unregulated retail opportunities continue to expand, the combined company will be well positioned to leverage its superior scale and scope through deploying e-commerce applications for customer aggregation, transactions and billing.

The combined company will be a premier national nuclear company, a strategic goal adopted by Entergy in 1998. It will be the second-largest nuclear generator in the country, with more than 10,000 MW of utility and competitive nuclear capacity at eight Entergy units -- including two units on which Entergy expects to complete purchase later this year -- and four FPL Group units.
The new company expects to leverage its combined nuclear expertise and experience -- including efficient plant operations, turnaround of underperforming units, acquisitions, decommissioning, and license extension -- to capitalise on opportunities in the consolidating nuclear industry. The merger will combine FPL Group's nuclear units, recognised as some of the best-run plants in the country, with Entergy's growing fleet.
For 1997-1999, Entergy's and FPL Group's nuclear units achieved a combined capacity factor of 10 percentage points above the industry average. Bringing together the companies' nuclear generation operations will enhance the ability to manage risk, serve customers and leverage the talent and resources in the two organisations across nuclear operations in the company's regulated utility businesses and competitive generation markets.

By combining both companies' wholesale operations, the merged company expects to more aggressively grow its portfolio and capture more value from its assets. The two companies have almost 10,000 MW of non-utility generating capacity today and, after the merger, we plan to grow to more than 30,000 MW by 2004.
Several factors that will enable the combined company to profitably grow its wholesale generation business include: World class operating skills; Strong, proven development teams; Scale and scope to execute projects more quickly; 76 gas turbines under contract with General Electric for delivery through 2005; A venture with The Shaw Group, which is expected to close soon, to accelerate construction and reduce costs of new projects; A soon-to-be-completed venture with Koch Industries to fully leverage its current and future portfolio, manage risks and to capitalise on new markets such as weather derivatives.
These integrated wholesale capabilities -- from trading and risk management to origination to development to asset financing and management will allow the combined company to create and capture more value from existing assets and to deploy more capital-efficient strategies.

Once merged, Entergy and FPL Group will benefit from one of the largest energy marketing and trading operations in the country. Later this year, Entergy expects to close its previously announced agreement with Koch Industries under which the companies agreed to form Entergy-Koch, which is expected to rank among the nation's top 10 energy commodity traders in terms of combined volumes of electricity and natural gas.
Entergy-Koch is expected to trade more than 100 mm MW/year and to create a significant marketing platform to sell the company's wholesale generation. It also will procure more than 7-8 bn cfpd of gas for the combined company. The venture also includes Koch's Gateway natural gas pipeline, a 10,000-mile system serving the Gulf South region.
The combined company expects its trading organisation to enhance its utility and wholesale operations, as well as develop new products, such as Koch's innovative weather derivatives, to generate additional revenue opportunities. The combined company will also offer the opportunity for expansion of the Gateway pipeline into the growing Florida market.

The new company also will operate a wholly owned subsidiary, FPLFiberNet, offering fibre optic capacity in Florida on a wholesale basis. Formed in January 2000, the company operates a 1,600-route mile fibre optic network in Florida and is building intra-city networks to serve Florida's top 15 metropolitan markets. Through agreements with other providers, it offers an 8,500-route mile network throughout the fast-growing Southeast market.
FPL FiberNet will add to its existing 45,000-fibre mile system to reach approximately 500,000 fibre-miles within the next few years in order to meet the exploding demand for fibre capacity in Florida and connections to Latin America. The combination with Entergy provides additional telecommunications opportunities in Entergy's traditional service territory.

Based on the number of common shares currently outstanding, FPL Group shareholders will own 57 % of the common equity of the combined company, and Entergy shareholders will own 43 %. The combined company expects the merger will provide annual synergies growing from $ 150 mm to $ 275 mm over the first few years after closing. Of the total, the regulated businesses should realise annual cost savings of $ 110 mm to $ 150 mm, derived from eliminating duplicate corporate and administrative positions and programs, as well as procurement economies.
The competitive businesses expect annual cost savings and revenue enhancements of $ 40 mm to $ 125 mm. Additionally, the competitive businesses expect to realise annual capital expenditure savings of $ 50 mm to $ 100 mm. The companies will seek to minimise workforce effects of the merger through a variety of efforts. All union contracts will be honoured.

Mr. Broadhead will serve as chairman of the combined company, and Mr. Leonard will become president and CEO. The new company's board of directors, which will include both Mr. Broadhead and Mr. Leonard, will initially consist of 15 members, eight from FPL Group and seven from Entergy.
The merged company will locate its corporate headquarters in Juno Beach, FL and will have its utility group headquarters in New Orleans. Each of the company's six utilities will continue to maintain its headquarters at its present location.
The merger requires the approval of shareholders of both companies, the Securities and Exchange Commission, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, and the Federal Communications Commission; the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act; and the completion of regulatory procedures in Arkansas, Florida, Louisiana, Mississippi, Texas and the city of New Orleans. The companies' objective is to complete the transaction within 15 months.
Merrill Lynch & Co. acted as financial advisor to FPL Group. Morgan Stanley Dean Witter and J.P. Morgan & Co. acted as financial advisors to Entergy. Cravath, Swaine and Moore acted as legal counsel to FPL Group. Skadden, Arps, Slate, Meagher & Flom acted as legal counsel to Entergy.

FPL Group, with annual revenues of more than $ 6 bn, is one of the nation's largest providers of electricity-related services with a generating capacity of more than 20,000 MW. Its principal subsidiary, Florida Power & Light, serves 3.8 mm customer accounts in Florida. FPL Group employs 11,350 employees and operates in 17 states. FPL Energy, FPL Group's independent power production subsidiary, is a leader in generating electricity from clean and renewable fuels.

Entergy Corporation, with annual revenues of nearly $ 9 bn, is a major global energy company engaged in power production, distribution operations, and related diversified services, with more than 12,200 employees. It is also a leading provider of wholesale energy marketing and trading services. Entergy owns, manages or invests in power plants generating nearly 30,000 MW of electricity domestically and internationally and delivers electricity to about 2.5 mm customers in portions of Arkansas, Louisiana, Mississippi and Texas.

Information on Entergy's venture partners:
Koch Industries, the second-largest privately held company and one of the most successful energy traders in the United States, is involved in virtually all phases of the oil and gas industry, as well as in chemicals, plastics, energy services, chemical and environmental technology products, asphalt products, metals and mineral services, ranching, financial services, and ventures.

The Shaw Group, the world's leading innovator of turnkey piping solutions and provider of erection services, has experience in the construction of over 200,000 MW of electric generation world-wide.

Source: FPL Group, Inc. via Newspage
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