WPS Resources Corp. would become a bigger Midwest energy provider next year under a $1.5 billion transaction unveiled Monday that calls for the Green Bay energy company to move its corporate headquarters to Chicago.
WPS plans to buy Peoples Energy Corp. of Chicago by converting each share of Peoples stock into 0.825 shares of WPS stock. Larry Weyers, WPS chairman and chief executive, is expected to serve as president and chief executive of the combined company. A new name for the parent company will be selected, WPS and Peoples said.
The purchase would give WPS access to 969,968 new natural gas customers now served by Peoples, compared with about 668,000 gas customers now served by the company. Peoples has no electricity customers, while WPS has about 476,000.
In an interview after the announcement, Weyers, 61, said that given rapid consolidation in the industry, "size and scale" are becoming more and more important for utility companies. Several other utility deals have been announced recently.
"In an industry that's consolidating, you either consolidate and control your own destiny or someone is going to consolidate you and maybe not enable you to control your own destiny," he said. "We decided to be proactive, step forward, and control our destiny to some extent."
Projected to be completed by the end of March, the transaction faces shareholder approval from both companies, as well as approval from federal and state regulators in Illinois.
WPS says state regulators in Wisconsin will have only a limited review of the matter. However, a state Public Service Commission spokesman said the agency plans "a thorough review."
The sale would mean changes are likely for employees of both companies. Transition teams would be set up to decide whether to consolidate functions such as call centers, human resources and information technology departments. It's unclear how many jobs could be cut in Chicago, Green Bay or elsewhere, WPS and Peoples said.
For shareholders, WPS shareholders will see a 17% increase in their quarterly dividend, based on a new 66-cent per share quarterly dividend announced July 10. Peoples shareholders would get a chance to sell their stock for a roughly 15% premium to the price in the month or so before the deal was publicized. The stock price of each company rose roughly 1% after the sale was announced.
Weyers said WPS' Wisconsin customers could see a share of the $80 million in synergy savings that have been identified by the consulting firm Booz Allen Hamilton. But customer groups in Wisconsin are worried that a major acquisition like the one announced recently could distract management attention from needed day-to-day oversight of its Wisconsin utility.
For Green Bay, the deal would mean the loss of another corporate headquarters, a source of civic pride for a city that has lost several such headquarters in recent years.
WPS officials said the move would entail the transfer of "a dozen or fewer" of the company's employees, principally the executive management team and their aides.
The Green Bay area would continue to remain home to at least 1,500 employees, spokesman Kerry Spees said. That includes workers at both Wisconsin Public Service Corp., the electric and natural gas utility serving northeastern Wisconsin, and the company's energy marketing business, which competes in more than a dozen states and parts of Canada. That business, known as WPS Energy Services Inc., will continue to be based in De Pere.
The company is not taking advantage of a new wrinkle in state law that allows utilities based in Wisconsin to incorporate outside the state.
WPS, which is incorporated in Wisconsin, plans no changes to its legal structure, chief financial officer Joe O'Leary said, and Peoples is expected to become a subsidiary of WPS Resources.
The driving force for the headquarters move, Weyers said in an interview from Chicago, is to win sale approval in Illinois.
"We need to have approval from the (Illinois Commerce Commission) for this to go through," he said. "Peoples is an old-line company that has been here for about 150 years, and we knew there would be resistance to moving them out of Chicago."
"We felt that having our holding company headquartered down here might lessen that resistance - and Chicago's a reasonable place to have a headquarters for a company our size," he said.
The deal would significantly increase the market capitalization of WPS to nearly $3.6 billion, or slightly less than Wisconsin counterparts Alliant Energy Corp. ($4.1 billion) and Wisconsin Energy Corp. ($4.7 billion).
Weyers noted that WPS has been hiring at least 150 people a year; jobs that are eliminated after the merger may be able to be cut through attrition.
Though described in press releases as a merger, the deal clearly leaves WPS in control of the new company. Weyers becomes president and chief executive, and WPS would have nine seats on the board of directors; Peoples would have seven.
The transaction carries some risks, analysts said, given the contentious relationship Peoples has had with Illinois regulators and civic leaders.
Peoples was under fire for a joint venture it had with Enron Corp. to sell natural gas. The utility was accused of overcharging for natural gas and sending profits from those sales to Enron and itself.
While it didn't admit wrongdoing, Peoples agreed to settle Enron- related lawsuits by paying $100 million in customer refunds and spending another $96 million on conservation and other initiatives.
Weyers said he's not concerned about the past problems.
"Every company in almost any industry experiences some bumps along the way, and certainly Peoples has had their share of bumps the last few years," he said. "But we believe that we should be able to establish a very good relationship with the ICC and get reasonable rate treatment."
But the hard feelings from the settlement mean that Illinois regulators pose the biggest hurdle for approval, analysts said.
"That's by far the biggest challenge," said David Parker, analyst at Robert W. Baird & Co. But it's something that's needed, since Peoples' profit growth has been limited by the fact it hasn't had a rate increase in 11 years, he added.
WPS is taking steps to woo the Illinois regulators. Peoples announced it will delay filing a proposed rate increase of up to $115 million with Illinois regulators, saying the main focus is to receive approval from the Illinois Commerce Commission. The Illinois Citizens Utility Board warned last week that it would oppose a rate increase while the merger was pending.
WPS plans to increase by about 50% the amount of investment Peoples is making in upgrading the natural gas distribution system in the Chicago area, Weyers said.
Milwaukee Journal Sentinel