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WisBusiness: WPS-Peoples Merger May Take Until 2007
11/7/2006

By Brian E. Clark
WisBusiness.com

When WPS Resources announced during the summer that it planned to buy Illinois’ problem-plagued Peoples Energy for nearly $1.6 billion, executives were hoping for quick regulatory approval.

It isn’t turning out that way, though officials at Green Bay-based WPS Resources remain optimistic.

To date, only the Federal Trade Commission has signed off on the deal. To be consummated, the transaction must be approved by the Illinois Commerce Commission (ICC), the Wisconsin Public Service Commission (PSC) and the Federal Energy Regulatory Commission (FERC). Shareholders’ votes by both utilities are scheduled for December.

If the merger goes through, WPS Resources will change its name to Integrys Energy Group and greatly expand the utility holding firm’s natural gas business in the Upper Midwest into the Windy City and its northern suburbs. It will also move its headquarters from Green Bay to Chicago.

In a best-case scenario, approval could have come as quickly as the end of next month. It now appears, however, that the deal could take nine months or even a year to come together.

However long it takes, WPS Resources officials they are prepared to see the process through.

“Of course, we’d still like a quick resolution, but we know these things can take time,” said Jim Schott, who heads the utility’s regulatory affairs division.

He acknowledged that Peoples Energy has had its troubles, but said he and other executives are convinced the purchase is good for WPS Resources’ shareholders. He also said he is confident the merger will be approved.

“We think we can take our successes and hope to expand those at Peoples,” he said. “They have had management issues, but they are working through them.”

Though no serious red flags have been raised to stop the merger, David Kolata, executive director of the Illinois Citizens Utility Board, said his group, plus the city of Chicago, the Illinois attorney general and the union that represents many workers at Peoples Energy all want the Illinois Commerce Commission to do a thorough review.

“No one is saying it shouldn’t occur,” said Kolata, whose group represents consumers. “But I think the parties are going to have to sit down some time within the next six months and see if this can be settled. It won’t happen overnight.

“Because as it stands now, the proposal that WPS has made is not good enough,” he said. “The company says there will be savings to customers, so we want have more information on that. Service quality standards need to be improved and more must be done on energy efficiency.”

Kolata noted that Kevin Wright, an ICC member, said Peoples Energy has a “dismal record” for serving its customers. Other state leaders called for the ouster of Peoples’ top management because of a controversial gas-purchasing deal with Enron that critics said produced higher natural gas prices for up to 1 million Chicago and suburban consumers.

Earlier this year, Peoples CEO Thomas Patrick said he would step down in the near future. His announcement followed a $198 million settlement between Peoples and the Illinois attorney general covering gas overcharges from 2001 to 2004.

In addition, Peoples was fined $500,000 by the state earlier this year for failing to properly inspect its gas meters. It was also probed over allegations it had not inspected its pipelines for decay.

“Wright’s comments may be an understatement,” said Kolata, who called Peoples Energy one of the “worst-run” utilities he has seen.

“The public down here has little confidence in Peoples,” he said bluntly. “It will take a lot of work by the new management to turn that around.”

Schott, who is helping guide the merger effort for WPS Resources, said his company is confident it can improve the operation of Peoples. “We plan to operate this business with integrity,” he said.

To move the merger process forward, he said company officials are negotiating with all the various interest groups to reach a settlement that WPS can take to regulators in Illinois and Wisconsin.

Though Schott said he believes the end of the first quarter next year is a realistic scenario for approval, “it would be great to get a resolution in both states by the end of this year,” he said. “Then again, things could always fall off the rocks. And I don’t want to jinx this process.”

If agreements are not reached, it could require hearings and testimony before both the ICC and the PSC that would not start until next year. All those interviewed by WisBusiness said they did not expect FERC to hold hearings on the merger plans.

Schott said he is not frustrated by the ongoing negotiations.

“It is part of the process,” he said. “You hope for the best, but expect the worst. We have to get the parties comfortable with this transaction. We’ll do whatever it takes. We’d love for it all to happen rapidly. But we can go the other way, too.”

Nor did Schott indicate he was disappointed that the Wisconsin PSC had decided to examine the merger, though that review could delay the transaction.

“However, we still don’t think we need Wisconsin approval,” he said. “But since they have decided to take this up, we will work with them. But we are qualifying that by saying we are reserving our right to appeal.”

WPS filed testimony on the merger with the PSC last week and other parties will file in early January, PSC spokeswoman Amanda Wollin said. Because the case is under consideration, she said commissioners could not comment on the possible merger.

Charlie Higley, executive director of the Wisconsin Citizens Utility Board, said he is pleased this state’s PSC is reviewing the merger. Todd Stuart, head of the Wisconsin Industrial Energy Group, concurred.

Though Higley has concerns, he said he believes the merger will most likely go through. Still, he noted, some state utility commissions have imposed such stringent conditions that mergers on the East Coast and another in Chicago fell through in recent months.

While such deals might be good for growing companies and their executives, Higley said he does not believe the merger will benefit consumers.

Some analysts have said they have questions about the wisdom of the merger and warned that Peoples will need to raise its rates significantly for the deal to make economic sense for the Wisconsin buyers.

“I view this as a slight negative from a stock perspective, but I don’t believe it will hurt WPS ratepayers,” said Brian Youngberg, a senior utility analyst with the Edward Jones brokerage firm.

“However, it will definitely be a challenge for WPS to improve the relationship Peoples had with regulators here in Illinois,” he added.

But if WPS can increase Peoples’ rates over time and improve that regulatory relationship, it could turn out that they bought Peoples “relatively cheap,” he concluded.

Higley said utilities usually “suggest that there will be cost savings because of economies of scale, but we believe those are difficult to achieve. There are a lot of costs that go into making a merger successful and we worry that those will outweigh the savings.”

Ultimately, he said, the deal might benefit Illinois consumers and Peoples Energy more than their Wisconsin counterparts.

“That’s what we are worried about,” he said. “We also wonder if WPS will have its hands full keeping an eye on Illinois and not be paying attention to Wisconsin.”

WIEG’s Stuart, said he, too, is skeptical of WPS claims of savings for customers.

“WPS says they will get $80 million each year in ‘synergy’ savings from the merger through combining administrative staffs, staff cuts and economies of scale,” he said.

“But we are concerned that we’ll end up paying $200 million up front and that the ratepayers will see little for it. Are we going to see $80 million in annual savings? We’re not sure that’s actually going to happen.”

“Our board needs to talk about this some more,” he said. “But in general, we want to be sure that ratepayers get the best deal out of this. So we will be asking hard questions.”

Stuart, who is concerned that WPS Resources may pursue other utility acquisitions in 2007, said he believes approval from the ICC on the Peoples merger will be forthcoming in the first quarter of 2007.

“I think it will clear Illinois because Peoples has had problems and folks down there would welcome new management,” he said. “But we need to do our own thorough review in Wisconsin because this affects us, certainly, as well.

“I would be nice to believe that this merger will result in millions of dollars of savings, as WPS contends,” he said. “But I have my doubts. And if they really do take place, I want to make sure a lot of those savings go to ratepayers."
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