Stock of the Day
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FPL Group, Inc. (FPL)
FPL and Constellation Merger Valued at $11bn
Good news for those struggling with their holiday lights: the power going out is not the reason half the strands don't seem to work. FPL Group, Inc., based out of Juno Beach, FL, moved forward with its plans to purchase Baltimore's Constellation Energy Group (CEG: Charts, News, Offers) in a deal valued at $11bn. The deal, if approved, would create one of the largest energy conglomerates in the nation, with the new company controlling regulated and unregulated power assets in roughly half of the United States. So instead of contemplating whether you want to test hundreds of bulbs to see which one is the culprit or throw the whole lot in the trash, read on to see whether a lower utility bill is reason enough to ring in the New Year.
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'Tis the season for mergers and buyouts. Last Friday saw the historic proposed $9.6bn buyout of Albertson's (ABS: Charts, News, Offers) by a consortium. Then came Monday's announcement that FPL had been eyeing gift-wrapped Constellation under the tree. The executive boards for both companies have already approved of the merger, and all signs are pointing to shareholders following suit. The deal has FPL shareholders maintaining a 60% stake in the new company, Constellation Energy, as well as a 60% control in the governing seats in the new executive board. Current FPL Group chairman and CEO Lewis Hay would control the new organization. The only remaining hurdle is obtaining regulatory approval, which is likely to be decided upon in late 2006.
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What do utility company mergers mean to consumers? The company expects to save between $200m and $250m by 2010, which is expected to be the third post-merger year. While this figure is a pre-tax measurement, and while it also does not take into account the costs of actually conducting the merger, it does represent significant savings. The two companies will also share their methodologies, once guarded closely, as well as combine their systems and support activities to streamline the organization. While this might result in some labor cuts, especially in areas where redundant operations would occur, the majority of both companies' labor should remain relatively safe. As for consumers, the reduced operating costs and increased efficiencies could theoretically be seen in future utility bills, providing that these savings actually exist. Florida Power and Light, the revenue-driving utility subsidiary of FPL Group, utilizes natural gas as one of its energy-creating resources. Natural gas prices skyrocketed this past fall after Gulf supplies were hit repeatedly during the hurricane season. If prices stabilize or fall, then consumers are more likely to see some savings. If demand continues to remain high, or if supply systems are not repaired, then utility bills might see little change at all.
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The new merger is expected to allow the company to pursue new opportunities in a heavily-competitive industry. With a combined market capitalization of roughly $28bn, Constellation would be right up there with Duke Energy (DUK: Charts, News, Offers) ($25.3bn market cap), TXU Corp (TXU: Charts, News, Offers) ($25.7bn), Southern Corp. (SO: Charts, News, Offers) ($26.2bn) and Dominion Resources (D: Charts, News, Offers) ($28.1bn) in terms of market power. Combining the figures of the two companies as a rough estimate of performance indicates that Constellation would have over $26bn in revenue, also bringing it in-line with its competitors. Both FPL and Constellation had been performing relatively well year-to-date, with Constellation recovering from a dry spell that lasted from summer 2001 to spring 2003.
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Since the new company will have its fingers in roughly half of the U.S., energy deregulation might play a significant role in profitability. Part of the shortcomings of 2000 and 2001 came from utilities facing soaring wholesale prices without being able to pass on the cost to consumers. While there were a variety of reasons for problems, competition in a capital-intensive industry makes profitability that much harder to obtain. Currently, roughly twenty states have proposed allowing customers to choose which companies they want to purchase power from. While deregulation might still be a blip on the radar, investors should not expect competitors to sit idly by as the merger progresses. Confusion resulting from the reconciliation of the two companies leaves open many opportunities for competitors to erode Constellation's market share through various means, including possible price reductions.
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All in all, the merger of FPL and Constellation into one of the nation's largest utility companies will most likely come to fruition. Expansion will allow the diffusion of better business practices between the two companies, as well as give them more buying power when it comes to natural gas reserves. If the new company pursues new avenues of profitability and takes advantage of energy resources such as wind (gas and oil won't last forever), brighter futures just might be on the horizon. As for putting up those decorations…you'll probably still be on your own.
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Profile |
The Company's principal activity is to generate, transmit, distribute and market electric energy. The Company conducts its operations primarily through its wholly-owned subsidiary Florida Power & Light Company (FPL), FPL Company Capital and its wholly-owned indirect subsidiary FPL Energy, LLC (FPL Energy). FPL, a rate-regulated public utility, supplies electric service to approximately 4.2 million customer accounts throughout most of the east and lower west coasts of Florida. FPL Company Capital, a wholly-owned subsidiary of the Company, holds the capital stock and provides funding for the operating subsidiaries other than FPL. FPL Energy invests in independent power projects through both controlled and consolidated entities and non-controlling ownership interests in joint ventures. The Company operates in domestic market. As on 17-Jun-2005, the Company acquried Gexa Corp.
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