FPL Group, Entergy Merger May Be in Trouble ,
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IssueAlert for  March 19, 2001=20

FPL Group, Entergy Merger May Be in Trouble

by Will McNamara=20
Director, Electric Industry Analysis

FPL Group Inc. (NYSE: FPL) and Entergy Corp. (NYSE: ETR), whose proposed=20
merger would create the largest power distribution company in the United=20
States (6.3 million customers), said their deal has hit some significant=20
snags. In a joint statement, Juno Beach, Fla.-based FPL Group and=20
Louisiana-based Entergy said "certain issues have arisen in connection with=
=20
their pending merger, including governance structure/value-related issues a=
nd=20
integration of the two companies going forward." The companies said they wi=
ll=20
be meeting in the near future to address the issues, but did not elaborate.=
=20
They added that they would have no further comment on the status of the=20
merger at the present time.=20

Analysis: FPL Group and Entergy join what appears to be a growing list of=
=20
companies experiencing problems with pending mergers. Just within the last=
=20
month, Con Edison and Northeast Utilities announced significant problems=20
related to their proposed partnership that most likely will find resolution=
=20
only in a courtroom. Following that, we heard about problems surrounding=20
Sierra Pacific Resources' ability to finance its pending purchase of Portla=
nd=20
General from Enron. However, the fact that the "merger of equals" between F=
PL=20
Group and Entergy may not proceed is big news as it represents the largest=
=20
partnership among energy companies that the U.S. energy industry has ever=
=20
witnessed.=20

First, let me provide some background. FPL Group and Entergy Corp. announce=
d=20
their merger in July 2000. The $27 billion partnership reportedly will crea=
te=20
the largest power company in the nation, eclipsing the now-completed merger=
=20
between PECO and Commonwealth Edison that created Exelon Corp. The new=20
company, which will be named at a later date, will own and operate generati=
ng=20
capacity of more than 48,000 megawatts, and as noted will serve more than 6=
.3=20
million customers. Although this is referred to as a "merger of equals," FP=
L=20
is purchasing Entergy. FPL Group shareholders will own 57 percent of the=20
common equity of the combined company, and Entergy shareholders will own 43=
=20
percent.  The benefits of this merger are too many to name here, but some=
=20
advantages=01*beyond the staggering earnings potential=01*certainly stand o=
ut. =20

First, the combined company will be a leader in wholesale generation and on=
e=20
of the nation's largest independent power producers with nearly 10,000=20
megawatts of unregulated generating capacity. Related to this is Entergy's=
=20
announced joint venture with Koch Industries, under which Entergy gains=20
10,000 miles of natural-gas pipeline assets and becomes a world leader in=
=20
weather derivatives. Second, the two companies come together with an=20
important affinity in their competitive approaches. Both have divested thei=
r=20
non-core businesses, and are focused on expanding utility operations and=20
generation businesses. Along these lines, both companies support=20
emission-free energy, with Entergy being particularly strong in nuclear and=
=20
FPL Group being strong in renewable energies (particularly wind). Third, th=
e=20
regulated business of Florida Power & Light=01*FPL Group's subsidiary=01*is=
 in a=20
strong growth mode. Today, the utility serves 600,000 more customers than i=
t=20
did in 1990. In 1999 alone, FPL added nearly 76,000 new accounts=01*a 2-per=
cent=20
increase over 1998. Fourth, FPL Group is the stronger of the two with regar=
d=20
to telecom, and the company's subsidiary FPL FiberNet will gain considerabl=
y=20
from new opportunities available in Entergy's service territory. Overall, t=
he=20
combined forces of Entergy and FPL Group create a multi-diversified company=
,=20
potentially strong not only in the distribution side of the business, but=
=20
wholesale generation as well as trading, telecom and renewable energy.=20

The pending merger between the two companies had already experienced some=
=20
previous setbacks related to its timetable for completion. In January, an=
=20
Administrative Law Judge (ALJ) issued a procedural schedule that called for=
=20
hearings related to the merger to begin in October 2001, which was expected=
=20
to delay the merger closing by three to six months. Entergy filed a motion=
=20
for reconsideration of the schedule. In mid-February, a new ALJ ruling move=
d=20
up to July the Louisiana Public Service Commission's scheduled hearings on=
=20
the merger, returning the regulatory proceedings to their original 15-month=
=20
timetable. Consequently, prior to this latest announcement of new problems=
=20
associated with the merger, the partnership between FPL Group and Entergy w=
as=20
scheduled to close by the end of this year. =20

With that overview, we can speculate on the reasons why the proposed merger=
=20
is hitting some snags. Keep in mind that FPL is the buying partner in the=
=20
merger and more than likely would be the company to contest certain element=
s=20
of the deal that may have been altered since the merger was first announced=
.=20
From the start, it was understood that the new headquarters would be locate=
d=20
in Florida and that FPL Group would gain majority ownership of the new=20
company. In the announcement of "issues" related to the merger, the two=20
companies identified "integration of the two companies going forward" as on=
e=20
of the factors. This could be an indication that one of the companies is=20
seeking to modify previously agreed-upon terms of the merger contract. =20

In addition, the companies made reference to "governance structure /=20
value-related issues and integration of the two companies." This, of course=
,=20
could mean many different things. However, one major issue that may be=20
impacting the merger was revealed in a recent report which suggested that=
=20
Entergy Wholesale Operations (the non-utility power development, marketing=
=20
and trading subsidiary of Entergy) is considering the divestiture of its tw=
o=20
U.K. generating assets, Damhead Creek and Saltend. According to Power Finan=
ce=20
& Risk, power traders familiar with inside knowledge have reported that the=
=20
Entergy subsidiary is considering the sale of the units, which could earn u=
p=20
to $2 billion in the secondary market. Both units are combined-cycle gas=20
turbines and together represent about 2,000 MW. Damhead Creek generates abo=
ut=20
800 MW and is located in Kent, England; Saltend generates about 1,200 MW an=
d=20
is located in Yorkshire.=20

According to the report, Entergy has declined to comment on the matter.=20
However, rival traders say the possible divestiture may reflect the tough=
=20
economics of operating gas-fired plants in the United Kingdom, and Entergy'=
s=20
preference for more lucrative markets in Southern and Eastern Europe. As=20
noted, one of the main appeals of the pending merger between FPL Group and=
=20
Entergy is that it will create a company that is a leader in wholesale with=
=20
nearly 10,000 megawatts of unregulated generating capacity. At least that w=
as=20
the blueprint at the time the two companies entered into their agreement. A=
ny=20
plans to divest assets, on either side of the negotiating table, clearly=20
changes the deal and may in fact be one of the "value-related issues" that=
=20
has complicated this deal. Many mergers of equals also include "pooling of=
=20
interest" clauses restricting either party from altering its value (up or=
=20
down) by a specified percentage. Certainly, the divestiture of assets could=
=20
have an impact on the value of Entergy's portfolio.=20

The announcement of potential problems associated with the merger was not=
=20
made until early this morning, so it is too early to assess any impact that=
=20
the announcement might have on the companies' stocks.  On March 16, FPL=20
shares closed at $64.25 while Entergy finished at $37.50. As of mid-morning=
=20
on March 19, FPL shares had fallen to $60.63 and Entergy shares had dropped=
=20
to about $36.35. Both companies are considered "stocks to watch" today as=
=20
further impact from the problems associated with the merger may become more=
=20
apparent.=20

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