     FirstEnergy and GPU Close Merger ,
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November 7, 2001=20



FirstEnergy and GPU Close Merger



By Will McNamara
Director, Electric Industry Analysis


[News item from PR Newswire] FirstEnergy Corp. (NYSE: FE) closed its merger=
 with GPU Inc. on Nov. 6 and announced that members of its Board of Directo=
rs had been named. The effective date of the merger is Nov. 7, 2001. "With =
today's closing of our merger, we will begin operating as a larger, stronge=
r company, better positioned to provide significant benefits to our custome=
rs, shareholders and employees," said FirstEnergy Chief Executive Officer H=
. Peter Burg.

Analysis: When compared to 2000 and 1999, 2001 has turned out to be a rathe=
r anti-climatic year with regard to merger and acquisition activity in the =
energy industry. In fact, when compared to the early days of deregulation, =
M&A activity has slowed from a flood to a slow drip. The days of combining =
two vertically integrated utility companies to gain scale and guarantee sur=
vival appear to be on the decline. Partnerships will still continue, of cou=
rse, but they are now of a different breed than before and have become far =
more focused on a particular market niche. One exception to the rather unev=
entful M&A scoreboard this year is the just-completed $4.2-billion partners=
hip between FirstEnergy and GPU, which reportedly will create an electric u=
tility serving 4.2 million customers from Toledo, Ohio to the New Jersey sh=
ore. The two companies have positioned their partnership as creating the "p=
remier supplier in a 13-state region." However, while one of the few intere=
sting deals this year, the FirstEnergy / GPU partnership has not been witho=
ut controversy, especially with regard to lingering financial obligations t=
hat GPU has in the Three Mile Island nuclear plant.=20

First, let's establish the basics about this partnership. Akron, Ohio-based=
 FirstEnergy has purchased Morristown, N.J.-based GPU Inc., paying a divide=
nd of $0.42392 a share that will be payable on Nov. 28. FirstEnergy-itself =
a product of a 1997 merger between Ohio Edison and Centerior Inc. -is alrea=
dy an energy services holding company serving 2.2 million customers within =
13,200 square miles of northern and central Ohio and western Pennsylvania. =
FirstEnergy also provides natural-gas service to approximately 50,000 custo=
mers in the Midwest and is involved in the exploration and production of oi=
l and natural gas, and the transmission and marketing of natural gas, with =
resources that include proven reserves of 450 billion cubic feet equivalent=
 of natural gas and oil-about 90 percent natural gas-and approximately 5,00=
0 miles of pipelines. FirstEnergy also owns 7,500 miles of transmission lin=
es, with 35 interconnections in 6 electric systems, and is a member of the =
Alliance RTO. FirstEnergy has a market capitalization of $8.1 billion, a P/=
E ratio of 12.99, and its shares currently are priced at $35.72.=20

GPU Inc. is an international provider of energy-related infrastructure and =
services. Domestically, its three electric utility subsidiaries-doing busin=
ess as GPU Energy-serve two million customers in Pennsylvania and New Jerse=
y. Through the GPU International Group, GPU develops, owns and operates tra=
nsmission and distribution facilities overseas. GPU has a market capitaliza=
tion of $4.8 billion, a P/E ratio of 10.51, and on its last day of trading =
(Nov. 6) its shares were priced at $40.39.

From its inception, the primary objective of this acquisition was to enable=
 FirstEnergy to become the premier regional energy and related services pro=
vider in the northeastern quadrant of the United States. A key part of this=
 strategy is the expansion of the combined company's unregulated marketing =
opportunities, including the acceleration of a retail business that FirstEn=
ergy gains by buying GPU.

After Nov. 7, FirstEnergy will begin operating as a registered holding comp=
any with seven electric utility operating companies-Ohio Edison, The Illumi=
nating Company, Toledo Edison, Metropolitan Edison, Pennsylvania Electric, =
Pennsylvania Power, and Jersey Power & Light-which reportedly will comprise=
 the fourth-largest investor-owned electric system in the United States, ba=
sed on amount of customers. As noted the combined company has billed itself=
 as the premier supplier in a 13-state region. Those 13 states are New York=
, Pennsylvania, New Jersey, Delaware, Maryland, Virginia, West Virginia, Oh=
io, Kentucky, Indiana, Michigan, Illinois, and Wisconsin. However, it is cl=
ear that, among these 13 states, the combined company has already establish=
ed a particularly strong business in New Jersey, Pennsylvania and Ohio, whe=
re it will maintain a geographic presence of 23 percent, 28 percent and 49 =
percent, respectively.=20

According to a presentation made by CEO Peter Burg earlier this year, the a=
cquisition of GPU Inc. will "optimize FirstEnergy's generation portfolio," =
by, among other things, increasing its customer load and the utilization of=
 its baseload units. Prior to the acquisition, FirstEnergy operated 16 powe=
r plants with a total system capacity of nearly 13,000 MW. Out of this tota=
l generating capacity, 58 percent (7,471 MW) is produced using coal; 29 per=
cent (3,779 MW) comes from nuclear plants; 10 percent (1,273 MW) is fueled =
by natural gas or oil; and 3 percent (435 MW) comes from pumped-storage hyd=
roelectric facilities. Through the acquisition of GPU, FirstEnergy reported=
ly will gain 1,155 MW in peaking generation and the opportunity for over 80=
0 MW of capacity releases. Company information indicates that FirstEnergy p=
roduced nearly 70 million MWh of electricity over the last year.=20

As noted, while the partnership between FirstEnergy and GPU is for the most=
 part quite synergistic and has obtained its necessary regulatory approvals=
 in a comparatively smooth fashion, the deal has not been completely withou=
t controversy. For instance, a Pittsburgh-based consumer group known as Cit=
izen Power has expressed concern that the partnership will ultimately prove=
 harmful for consumers of the combined company. Specifically, the group cla=
ims that FirstEnergy customers have already been paying $9 billion in stran=
ded costs and could be forced to pay for additional charges associated with=
 GPU's partial ownership of the Three Mile Island Nuclear plant. Despite th=
e fact that the merger is now officially completed, Citizen Power reportedl=
y has asked a Pennsylvania court to require state energy regulators in that=
 state to reverse the approval of the merger. One of the group's arguments =
is that the Pennsylvania PUC did not require either FirstEnergy or GPU to d=
emonstrate how the merger would benefit or otherwise impact the public and =
did not seek approval from the groups involved in GPU's restructuring agree=
ment with the state. Other groups in Ohio have similar frustrations with th=
e PUC in that state and are concerned about any increases in FirstEnergy ra=
tes that may occur as a result of payments that GPU is still making toward =
Three Mile Island.=20

There is some public confusion surrounding GPU's holdings in Three Mile Isl=
and, which can be easily clarified. There are two nuclear units at the Thre=
e Mile Island (TMI) nuclear plant, Units 1 and 2. In late 1999, GPU sold TM=
I-1 to AmerGen Energy, the joint venture between PECO Energy and British En=
ergy Co., for $100 million, which was about one-sixth of the book value for=
 the unit. The ownership of the plant known as TMI-2 has remained with GPU.=
 In 1979, TMI-2 was the site of the nation's worst nuclear accident, in whi=
ch nearly half the uranium core melted. The TMI-2 unit is essentially dead =
and has not functioned since 1979. However, GPU has continued to keep the p=
lant in a state of "monitored storage," and has encountered some expenses r=
elated to staff, etc., which continue to monitor the unit. The concern from=
 some consumers, whether it is valid or not, is that FirstEnergy, which now=
 owns TMI-2 due to its acquisition of GPU, will be picking up any residual =
expenses related to this unit. Specifically, TMI-2 is not scheduled to be d=
ecommissioned until 2014 at the earliest, and there may be some cleanup cos=
ts associated with the decommissioning that may exceed current estimates.

It is important to note that GPU has very little of its own generation asse=
ts. The company has followed a revised strategy over the last year that inc=
luded the exit of the merchant energy business and a clear focus on the tra=
nsmission and distribution sectors of the industry, as well as new non-regu=
lated businesses. Another pending acquisition of some remaining GPU assets =
involves UtiliCorp's $2.1 billion offer for Avon Energy Partners Holdings s=
ubsidiary, the holding company for Midlands Electricity, which reportedly i=
s the fourth-largest regional electricity company in the United Kingdom. Th=
is deal should move forward, although it was contingent on the completion o=
f FirstEnergy's acquisition of GPU. FirstEnergy had previously established =
that it had no interest in retaining GPU's international assets, which incl=
ude small holdings in Great Britain, Australia and South America. In additi=
on, the offer makes sense for FirstEnergy, because it provides the company =
with available capital to pay down acquisition debt and possibly fund addit=
ional acquisitions.=20

Moreover, FirstEnergy executives believe any possible negatives in its acqu=
isition of GPU are outweighed by the positives. Again, the fundamental bene=
fit of the FirstEnergy / GPU partnership is that it should create one of th=
e leading-if not the leading-electric providers in a stretch of territory f=
rom Ohio to New Jersey. FirstEnergy gains significantly in the deal by acqu=
iring GPU's customer base and the ability to optimize its own existing and =
growing generation arsenal. Plus, FirstEnergy also gains GPU's remaining ge=
neration capacity, which is rather minimal but does include about 1,155 MW =
in peaking generation. From a broad perspective, FirstEnergy and GPU have f=
ollowed through with a rather smooth merger process, which certainly repres=
ents an atypical development against a landscape of terminated consolidated=
 deals this year.=20

UPDATE ON SAN FRANCISCO MUNICIPALIZATION VOTE: See the 11/6/01 IssueAlert  =
<http://secure.scientech.com/issuealert/article.asp?id=3D979>for a full des=
cription of Measures F and I that appeared on the ballot in San Francisco a=
nd Brisbane, Calif., in yesterday's election. Both measures related to muni=
cipalizing the electric system currently owned by Pacific Gas & Electric Co=
. According to data obtained from the San Francisco Department of Elections=
 as of early morning on Nov. 7, voter turnout in the area was 25.16 percent=
. Measure F, which would create a Municipal Water & Power Agency in San Fra=
ncisco only, passed by a very slim margin of 56,008 votes (51.02 percent) t=
o 53,760 votes (48.98). The passage of this measure will create a new agenc=
y in the city of San Francisco (not a municipal utility district) that will=
 not include the city of Brisbane. The agency will be governed by an electe=
d seven-member board of directors and reportedly will replace the current j=
urisdictional oversight by the California Public Utilities Commission.=20

Measure I, which would have created a Municipal Utility District (MUD) in b=
oth San Francisco and Brisbane, did not pass. However, it was defeated by a=
 very slim margin of 53,865 votes (50.63 percent) to 52,524 votes (49.37 pe=
rcent).=20

It is not presently clear whether or not all of the absentee votes have bee=
n calculated in this election, and thus there is a good chance that the abo=
ve tally may change in the next few days and could possibly alter the outco=
me of this election.=20

While Pacific Gas & Electric Co. put a positive spin on the election result=
s in a press release that is circulating today, the fact of the matter is t=
hat this was a very close election. While the city of Brisbane shot down th=
e idea of a MUD, San Francisco is proceeding with a Municipal Water & Power=
 Agency, which at some point may also attempt to seize the transmission and=
 distribution assets of Pacific Gas & Electric Co. Without question, the pu=
blic power debate in this area is far from over and in many ways has receiv=
ed a boost from this election. I will continue to follow the story and prov=
ide further updates that occur from regional analysis.=20


An archive list of previous IssueAlert articles is available at
www.scientech.com <http://secure.scientech.com/issuealert/>=20


  _____ =20

We encourage our readers to contact us with their comments. We look forward=
 to hearing from you. Nancy Spring  <mailto:nspring@scientech.com>

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pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz  <mai=
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Our staff is comprised of leading energy experts with diverse backgrounds i=
n utility generation, transmission & distribution, retail markets, new tech=
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d international issues. Contact consulting@scientech.com <http://consulting=
@scientech.com> or call Nancy Spring at 505.244.7613.=20

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