Feb. 28 (Bloomberg) -- Astoria Generating Co. and EBG Holdings, closely held owners of power plants in New York City and Boston, said they will merge in a move designed to capitalize on rising regional power demand and limited supply.

The newly formed entity, U.S. Power Generating Co., will be run from New York by Astoria Chief Executive Officer Jacob Worenklein, the companies said today. Hedge funds that own EBG will get 54 percent of the closely held company. Astoria owners, including Madison Dearborn Partners LP and the Hunt Oil family, will get 46 percent. Other details of the agreement weren't disclosed.

The combined value of the plants held by the two companies may be worth $4.25 billion to $5 billion, analysts said. Combined output will be about 5,000 megawatts.

``You've got two great, growing and constrained metropolitan areas, so they are both very attractive generation markets,'' said Barry Sullivan, vice chairman of New York-based K Road Power, which has run the Boston plants since Dec. 31, 2005. ``This gives a bigger platform to operate both sets of assets and others we'd hope that will become available over time.''

Astoria Generating's three plants supply 20 percent of New York City's power supply and EBG's five plants meet half the electricity needs of Boston, the companies said. U.S. Power Generating expects to benefit from tariffs regulators plan to impose on power customers to encourage costly construction of plants and power lines as both metropolitan areas grow. Power demand in New York and Boston probably will rise 2 percent a year, Sullivan said.

Regional Demand Growth

Rising electricity demand and planned plant retirements may leave the New York City area short of generating capacity needed to meet demand on the hottest days as early as next year, the New York Independent System Operator, which runs the state's power grid, said in August.

The deal may be worth $4.25 billion to $4.5 billion based on recent power plant sales, said Steve Thumb, principal at Energy Ventures Analysis Inc. in Arlington, Virginia, a consultant to companies that buy and sell power plants.

U.S. Power valued the deal at $5 billion, or $1,000 a kilowatt of capacity. That would be among the highest prices paid for gas-fueled plants with contracts that lock in fuel costs and power sales, said Jeff Bodington, Chief Executive Officer at Bodington & Co., a San Francisco-based investment bank that specializes in power-plant deals.

Contract details on the plants will not be released, Sullivan said.

Little Golden Apples

``There's an argument to put these in the top half by value because they are little golden apples,'' Thumb said. ``You have a pretty good market up there because they use the damn plants unlike other areas where they were overbuilt. And those cities are so landlocked those plants will be there forever. They're not going to be replaced by the next new technology.''

The combination needs approval of EBG shareholders, the New York Public Service Commission, the Federal Energy Regulatory Commission, and federal antitrust approval, Sullivan said. The deal is expected to close by midyear, Sullivan said.

Credit Suisse Group advised Astoria and Lehman Brothers Holdings Inc. advised EBG.

Days After TXU Deal

The merger comes two days after TXU Corp., the largest electricity supplier in Texas, agreed to be purchased by a private investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group for $45 billion, a record leveraged buyout.

Astoria owns Astoria Generation Station, Gowanus Gas Turbine Facility and Narrows Gas Turbine Facility, divested by utility owner Consolidated Edison Inc. under a state law opening power markets to competition and purchased from Reliant Energy Inc. in 2005.

EBG owns Boston-area plants that Chicago-based Exelon Corp. handed over to banks in 2004 after problems with their completion and financing. Sithe Energies Inc. had begun the projects before it was purchased, by Exelon.

``Hedge funds began to take pieces of the equity and we ultimately made a deal to buy a minority piece and the management, Sullivan said.

EBG has 75 shareholders, and 15 of those would control 75 percent of the company, he said. He declined to name EGB's owners.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.

Last Updated: February 28, 2007 14:04 EST