WPS Resources Corp. moved to expand its growing stable of gas and electric utilities across the upper Midwest on Monday, announcing it has agreed to buy Peoples Energy Corp. for stock worth about $1.52 billion in a deal giving it 1 million new customers in northeastern Illinois.
The Wisconsin-based holding company, which also owns utilities in Michigan and Minnesota as well as non-regulated businesses in the Northeast and Canada, said it will relocate its headquarters to Chicago from Green Bay once the deal is approved.
The combined company, which will have assets of $9.2 billion, would vault into the Fortune 500 based on 2005 revenue of $5 billion. Its name has yet to be chosen, although each of its regulated utilities will maintain its current name.
Larry Weyers, the chairman and chief executive of WPS and leader of the new firm, called the transaction another step toward WPS’ vision of creating a world-class energy company.
“The energy industry is consolidating ... and to succeed we will need to achieve greater scale and diversity,” he said at a news conference in Chicago. “Our combined company will be a regional energy leader that is focused on customer service excellence.”
Combining the two would result in $80 million of annual savings after $200 million of upfront costs such as relocation expenses and the costs associated with an unspecified number of job cuts, Weyers said.
If it goes through, this would be the holding company’s fifth acquisition of a utility since 1997, including two gas companies in Michigan last year, and would increase its size by about one-third. It would have 1.6 million gas customers and 477,000 electric customers in four states.
The deal must first be approved not only by shareholders but also the Illinois Commerce Commission and the Wisconsin Public Service Commission. The company said it expects the deal to close by the end of the first quarter of 2007.
Hoping to aid those chances, Peoples Energy CEO Thomas Patrick said the Chicago-based utility was dropping its widely discussed plan to apply as soon as this month for its first rate increase since 1995.
Public utility watchdogs in Illinois and Wisconsin indicated that WPS will have to do more than that, however, to prove the pairing will be good for consumers.
“WPS is going to have to show that as a result of this deal consumers are going to be better off — that there aren’t going to be rate hikes, that service quality is improved,” said David Kolata, executive director of the Chicago-based Citizens Utility Board.
Both CUB and its Madison-based counterpart, the Wisconsin Citizens Utility Board, said they would have to study the details of the proposed combination before deciding whether to support or oppose it.
But Charlie Higley, executive director of the Wisconsin Citizens Utility Board, said he was concerned that the pairing would bring together two holding companies with a lot of unregulated assets and utilities located in separate jurisdictions, making the benefits to consumers hard to identify.
“Generally mergers don’t provide any benefit to ratepayers and often they can be harmful,” he said. “Utilities for years have tried to do diversification and generally they have not been very successful at it.”
Morningstar analyst Mark Sadeghian said Peoples Energy has been underperforming financially for several years. “Maybe new management is the answer here,” he said. “It certainly can’t hurt.”
The Chicago utility has been hurt by soaring natural gas prices, which have pushed gas distribution volumes down. It also has been mired in troubles that include disputes over maintenance of its system and a required $100 million payout to customers for an overcharge resulting from a 1999 deal with Enron.
Patrick, 60, under fire for those problems and a falling stock price, already has said he will retire by the end of the year.
James Boris, 61, current lead director for Peoples Energy, will serve as non-executive chairman of the combined company’s board, which will have 16 members, nine selected by WPS Resources and seven by Peoples Energy.
WPS Resources’ shareholders will own 57.6 percent of the combined company, and Peoples Energy shareholders will own 42.4 percent, according to a joint news release.
WPS Resources is swapping 0.825 of its shares for each Peoples Energy share. At Friday’s closing price for WPS, that is worth $39.58 a share.
On Monday, Peoples Energy rose 42 cents to close at $39.09 on the New York Stock Exchange after jumping $3.08 last Friday when word of the impending acquisition got out. WPS rose 53 cents to $48.51.
Weyers said he will continue to be treasurer of the Green Bay Packers despite WPS’ move to the home of the football team’s archrival, citing the benefits associated with the job and the fact it doesn’t take much of his time.
“I would be glad to talk to the Bears about being their treasurer also,” he quipped.