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IssueAlert for  March 19, 2001 

FPL Group, Entergy Merger May Be in Trouble

by Will McNamara 
Director, Electric Industry Analysis

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

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

First, let me provide some background. FPL Group and Entergy Corp. announced 
their merger in July 2000. The $27 billion partnership reportedly will create 
the largest power company in the nation, eclipsing the now-completed merger 
between PECO and Commonwealth Edison that created Exelon Corp. The new 
company, which will be named at a later date, will own and operate generating 
capacity of more than 48,000 megawatts, and as noted will serve more than 6.3 
million customers. Although this is referred to as a "merger of equals," FPL 
is purchasing Entergy. FPL Group shareholders will own 57 percent of the 
common equity of the combined company, and Entergy shareholders will own 43 
percent.  The benefits of this merger are too many to name here, but some 
advantages*beyond the staggering earnings potential*certainly stand out.  

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

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

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

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

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

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

An archive list of previous IssueAlerts is available at
www.ConsultRCI.com




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