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NU Closes NSTAR Merger Deal

Zacks Equity Research

Diversified utility company Northeast Utilities (NU) has completed the proposed merger with NSTAR in a stock-for-stock transaction. Now, NSTAR will operate as a subsidiary of Northeast Utilities in Massachusetts. The merged company will have two headquarters, one in Boston, Massachusetts and another in Hartford, Connecticut.

In October 2010, Northeast Utilities had entered into an agreement to merge with NSTAR.  As per the agreement, the shareholders of NSTAR will get 1.312 shares of Northeast Utilities common stock in exchange for each share of NSTAR common stock.

The merger brings cost synergies of $780 million over the next 10 years, driven by consolidation of processes and operational improvement.

The merged entity will meet the guidelines of Massachusetts and Connecticut’s Renewable Portfolio Standard Program. It is planning to embark on green initiatives such as the installation of modern technologies including development of electric vehicle infrastructure, microgrids and other renewable energy generation instruments.

This merger creates a win-win situation for both the companies and for consumers. As per the merger-related agreement with the Office of Consumer Counsel and the Connecticut Attorney General, Northeast Utilities’ subsidiary, The Connecticut Light and Power Company will provide a one-time credit totaling $25 million to customers and freeze distribution rates until December 1, 2014.

Per the merger contract, the board of directors of Northeast Utilities is expected to increase the current quarterly dividend to 34.25 cents from 29.375 cents. If approved, the new quarterly rate will take effect from second quarter of 2012.

We view this merger as a positive catalyst for Northeast Utilities’ future position. Post-merger, the company is expected to become the nation’s leading regulated electricity and natural gas provider with a strong customer base of 3.5 million across three states.

The consolidated entity will be able to produce power at lower costs with NSTAR’s existing scale, human capital and financial inflows. At the same time, Northeast Utilities can expand its operations in New England and cater to the growing demand for energy in the region.

At present, mergers and acquisitions seem to be a common phenomenon in the utilities sector. A few days back, two industry giants Exelon Corporation (EXC) and Constellation Energy completed their proposed merger. The merger between Duke Energy Corporation (DUK) and Progress Energy, Inc. (:PGN) is also underway.

Headquartered in Hartford, Connecticut and Boston, Massachusetts, Northeast Utilities is engaged in the energy delivery business and serves residential, commercial, and industrial customers.

We currently retain a Zacks #3 Rank on Northeast Utilities, which translates into a short-term Hold recommendation.

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