|
FPL-Constellation
tie aimed
at competitive markets
Marries
Constellation's selling skill
to strong FPL balance sheet
FPL Group CEO
Lew Hay III wants to build the nation's leader in competitive energy
markets, he told investors on a conference call announcing the FPL-Constellation
Energy Group merger (RT,
12/15).
The
"modified merger of equals" is to provide the skills,
scale and scope crucial to the long-term success in rapidly changing
competitive markets, Hay added.
Imagine
-- the FPL CEO talking about that!
What's
in the deal for Constellation?
Stability,
CEO Mayo Shattuck replied.
The
deal lowers the volatility Constellation now faces and gives it
a stronger chance to grow, he said.
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And
Constellation's eager to gain from FPL's lower-risk, A-grade credit
rating.
That
puts the firm on par to go head-to-head with big investment banks
such as Goldman Sachs Group, Bear Stearns and Morgan Stanley.
Standard & Poor's Ratings Services routinely put FPL's A-rating
on a negative credit watch after the deal was announced.
S&P
sees the move boosting FPL's business risk and harming finances
because the new firm is to rely heavily on higher-risk competitive
energy sales, S&P said.
But
the combined company should benefit from regulatory diversity and
a greater asset base for competitive energy operations, S&P
conceded.
Fitch
Ratings gave a stable outlook for both firms, noting the all-stock
deal avoids added debt and that the firm's non-regulated units are
highly complementary.
Shattuck
was worried that "moving target" credit ratings would
stifle Constellation's potential for wholesale and retail growth
but FPL's robust balance sheet eases the problem.
He
is convinced greater consolidation in the industry is coming and
wanted to pick the right partner to pursue growth while not compromising
strong finances.
The
merger is to set up a "virtual utility" where a merchant
fleet backs up and supplies low-cost power to competitive wholesale
and retail sales.
The
deal creates the nation's biggest generation portfolio -- over 46,000
mw. About 25,000 mw comes from merchant plants.
The
merged firm -- to be called Constellation Energy -- will serve thousands
of competitive wholesale and retail customers, including 72 of the
Fortune 100 companies.
Hay
is to be CEO of the new firm while Shattuck will be chairman of
the board and is to head the firm's competitive energy business.
Shattuck
sees Constellation more than doubling its competitive generation
fleet, building scale and efficiency into the unit.
A
50% jump in merchant plant gross margins is coming by 2008, Shattuck
added, as lower-priced contracts expire.
The
merger creates a balanced footprint and strengthens Constellation's
position in New England and Texas by backing (Gexa) sales with FPL's
generation.
Constellation
expects that more closely matching power sales with output from
its own larger plant fleet will cut operating costs and create
a competitive advantage.
Constellation
sees green power driving earnings growth and plans to add 1,500
mw of wind power to the combined 3,200 mw it will control.
FPL
is the national leader in wind power and expects big growth in marketing
renewable energy credits and green tags through Constellation's
enhanced competitive retail businesses.
The
merger diversifies the fuel mix of the firm, cutting commodity exposure
and boosting buying power.
Constellation's
fuel mix is 41% oil and natural gas, 32% nuclear and 23% coal. FPL's
is 73% oil and gas, 13% nuclear and 10% wind.
Analysts
expect the firm to be able to take advantage of high gas prices
to get higher profits from its coal and nuclear fleets.
Constellation
will become the country's third-largest nuclear operator with 11
units at seven plants.
The
consolidation brings cost savings, the firms noted, creating a platform
for additions and new plants.
Regulated
sales will make up about half of the combined firm's earnings as
the firm will serve more than 5.5 million electric customers in
Florida and Maryland and 625,000 gas customers in Maryland.
The
new firm will have dual headquarters in Juno Beach, Fla, (for fossil
and renewable units) and Baltimore (competitive unit).
The
deal is to create nearly $250 million annually (pre-tax) in cost
savings by the end of the third year, mostly from the competitive
unit -- combining non-regulated business operations, sharing of
best practices and improved buying strategies.
The
merger is to benefit customers through balance sheet strength, cost
savings, improved reliability and boosted nuclear assets, the firms
said.
The
deal would be the biggest merger since Congress repealed PUHCA in
August (RT,
12/12).
The
$11 billion deal is entirely a stock swap -- with a 15% premium
on Constellation's stock based on a 20-day average -- and was unanimously
approved by each firm's board.
The
new firm will be worth $28 billion (based on current market values)
with combined annual revenues of $27 billion.
That's
$57 billion in total assets.
Originally
published in Restructuring
Today on December 20, 2005
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