As the spring thaw hits full stride, electric utilities are coming out of hibernation and mating. Today's announced merger of New Century Energies (NCE) and Northern States Power (NSP) - Get Report is the latest in a string of mergers that suggest 1999 may be the year the utility industry begins to reshape itself in earnest.

But while the merger represents a milestone -- the combined company will be the first to provide electric service from Canada to Mexico -- the market has already begun questioning some of the assumptions used to justify the deal. How the companies address these concerns will determine whether the merger is greeted by cheers or by howls.

Border to Border

The deal, valued at about $4.6 billion, will give shareholders of New Century 1.55 shares of the combined company for each share held. Holders of Northern States will receive one share of the new company for each share. "I like the deal," says

BT Alex. Brown

analyst Ed Tirello. "Especially the fact the combined companies will stretch from border to border."

The combined company will be the fifth largest electric generator in the U.S., the third-largest transmission company and the third-largest distribution company. "The deal transforms two second-tier utilities into a company with a major national presence," says David Wagman of Denver's

Resource Data International

, a utilities consulting firm.

"It gets them closer to the bulk they need to be a survivor," says Tirello. "They'll need more, but 3 million

customers is a good start." The merged companies will also serve 1.5 million natural gas customers. Add to that the 2.5 million customers in the U.K. to which the company provides power and natural gas.

With $15.1 billion in assets and $6.4 billion in annual revenue, the combination of New Century and Northern States creates a megautility in the central U.S. "They could begin to dominate in the central U.S. like

Southern

(SO) - Get Report

and

Duke

(DUK) - Get Report

are dominating in the South and East," says one utility insider. "The combination creates a real player in the middle third of the country." And its sheer size virtually guarantees access: "They'll now be at the table in discussions regarding future mergers in the central part of the country," he says. The combined company will have a market cap of nearly $9 billion.

Good Idea, Poor Pricing

The companies say the deal should be mutually accretive to earnings in the first full year of the merger, and cost savings of $1.1 billion are anticipated over a 10-year period from "elimination of duplicative programs, purchasing efficiencies and streamlined business processes," according to New Century COO Wayne Brunetti. However, management would not estimate the number of job cuts required to reach those savings, saying only, "We hope to achieve job reductions through attrition and recommendations of employee-based merger transition teams." Utilities are reluctant to quantify merger-related job cuts, as these often spark close scrutiny by the regulators involved in the merger approval process.

While the initial reaction to the deal was positive, both companies sold off in midday trading as investors and analysts began to question the assumptions in the deal. "This is a crappy deal for New Century shareholders," says one buy-side analyst. "The company says it's accretive, but the assumptions are unrealistic. It's at least a penny dilutive to New Century shareholders."

Northern States dropped 1 1/16, or 3.9%, to close at 26 3/16, while New Century slipped 2 3/16, or 5.7%, to close at 36 1/2.

The buy-side analyst also questions the ability of the combined companies to meet growth projections. "How you take two companies growing at about 5% a year and combine them to grow at 7% to 9% a year is beyond me," he says.

The company says the combined balance sheet will provide better access to capital and an ability to compete for control of large blocks of generation assets. Northern States unregulated subsidiary,

NRG Energy

, has become increasingly involved in the purchase of generating assets both here and abroad.

Still, some think the deal isn't worth tethering the companies during the two years it will take to obtain necessary regulatory approvals. "It's not a bad deal for Northern States," says the buy-side analyst. "However, it's not worth two years of merger hell. It's just not a good deal."

The Writing Is on the Wall

While the efficacy of this particular deal can be questioned, the fact that two utilities are combining to form a border-to-border operation may signal a new urgency on the part of smaller utilities. "It's likely to increase the pace," says Tirello. "That's especially true in Wisconsin, where something has to happen." Tirello also believes the proximity of both Missouri and Illinois to the combined company's territory makes those three states places to watch for the next deal.

Others suggest the southern end of the combined territories present interesting opportunities, especially Texas and New Mexico. "The merger is probably a sign of things to come," says RDI's Wagman.

Adds the buy side analyst, "The writing is on the wall. It's been there for some time." But now, it's bolder.

Beginning next week, a complete look at the electric utility landscape, by regions, across the U.S. We'll take a look at likely buyers and likely sellers -- and take a stab at handicapping the coming merger combinations. It should be enlightening.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds was long Southern Company, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.