Electric and gas utility WPS said Monday that it had agreed to buy Peoples Energy for $1.6 billion in a move to expand further into gas distribution.Peoples Energy distributes natural gas to more than 1 million customers in Illinois. The combined company will have regulated utilities in four Midwestern states and nonregulated businesses serving customers in the Northeast United States and Canada.

Under the terms of the deal, each share of Peoples Energy (Charts) will be converted into 0.825 share of WPS Resources (Charts) common stock. WPS Resources shareholders would own about 57.6 percent of the combined company.

The deal marks a move by smaller utilities to increase in size to compete in the rapidly consolidating industry, which has pushed energy mergers and acquisitions to record levels this year. WPS previously acquired two gas utilities serving more than 360,000 customers in southern Michigan and Minnesota from Aquila (Charts).

The agreement comes at a time when acquisitions of utilities have been closely scrutinized. Exelon’s (Charts) planned purchase of Public Service Enterprise Group (Charts) has been awaiting regulatory approvals for 18 months while FPL’s (Charts) proposed acquisition of Constellation Energy Group (Charts) has been mired in local politics.

WPS and Peoples said they would request expedited regulatory approval and expect the deal to close by the end of the first quarter of 2007.

The companies confirmed last week that they were in discussions. WPS Chief Executive Larry Weyers will take the reins of the new company while Peoples’ top executive will continue with plans to retire.

The companies said WPS intends to pay a dividend of 66 cents per quarter. It will have 1.6 million natural gas customers and 477,000 electric customers and will also combine its non-regulated energy marketing business. WPS also has unregulated power plants. The deal is expected to yield about $72 million in cost savings in its regulated business and $8 million in its non-regulated marketing business.