2 area utilities set giant merger Entity will be 9th-largest power generator in U.S.

Competition brings change

Move is part of consolidation sweeping industry

September 26, 1995|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Baltimore Gas and Electric Co., anticipating vast changes in the utility industry of the future, yesterday announced a corporate marriage with the Potomac Electric Power Co. that will create the nation's ninth-largest power company.

The merger agreement -- the largest ever between two utilities -- will result in an entity with $15 billion in assets that serves a population of 4.5 million in Maryland and Washington when completed in early 1997.

As part of the stock-swap transaction, BGE intends to relocate its 180-year-old corporate headquarters to the Annapolis area from downtown Baltimore, the largest in a series of symbolic losses that have cut into the city's deteriorating professional and corporate base.

"This gives us a lot of flexibility going forward," said Christian H. Poindexter, BGE's chairman and chief executive, who will become chief executive of the as-yet-unnamed combined company. "This combination creates a larger, stronger company that allows us to compete in a way neither of our companies could do alone. We will be able to provide service at a lower cost than would otherwise be possible."

The combined BGE-PEPCO utility, with 1.8 million electricity customers and more than 530,000 natural gas customers, expects to save $1.3 billion over a 10-year period.

AThe merger comes as the utility industry is bracing for increased competition and deregulation brought about primarily by the 1992 Energy Policy Act. With that law, the Federal Energy Regulatory Commission overseeing utilities has directed states to adopt policies leading to increased competition between power suppliers and transmitters.

"The Energy Policy Act changed the world, and it's still changing," said Edward F. Mitchell, PEPCO's chairman and chief executive, who will be chairman of the future company. "We were faced with a decision: Do you remain small or look aggressively for other alternatives? We think we've done that."

Various utilities have unveiled plans to band together as a result of the 1992 act, both to create operating efficiencies and to stave off unwanted takeovers. Most recently, Philadelphia-based PECO Energy Co. proposed a $3.8 billion hostile takeover of PP&L Resources Inc., its counterpart in northeastern Pennsylvania, after attempts at a friendly merger failed. The two continue to battle.

"I think the merger between BGE and PEPCO was inevitable," said Ronald S. Tanner, a Legg Mason Wood Walker Inc. utility industry analyst. "There are analogies to be made to the telecommunications industry, where you now have only a handful of significant players."

"Leading edge"

Many analysts predict that by the end of the decade, the 160 utility firms in the United States could shrink to roughly 100 through partnerships similar to the one planned by BGE and PEPCO.

"This is the leading edge of a wave," said Bruce G. Humphrey, director of research for Cambridge Energy Research Associates, Massachusetts-based consulting firm. "I think you'll see a lot more mergers this year, perhaps as many as one a month. There's a strong view out there that, as competition becomes more prevalent, bigger is better."

Both Mr. Poindexter and Mr. Mitchell cited geographic size and competition as the primary factors in the union but noted that the proposed company's $5 billion in annual revenues made it a difficult target for a hostile raid.

"Small companies will have less control over their own destiny," Mr. Mitchell said. "This allows us to maintain control."

A significant portion of the anticipated BGE-PEPCO savings are expected to come from the elimination of 1,200 jobs. Mr. Mitchell said the new company will trim roughly 10 percent of the combined work force through layoffs, an immediate hiring freeze and attrition.

"It will be a hardship for some, but if the savings come to bear, it will mean economic growth for the region as a whole," Mr. Mitchell said at a press conference to announce the merger.

Each company also will shift its corporate headquarters from its home base to the Annapolis area, a symbolic mid-point between Baltimore and Washington that will be easily accessible to executives. Roughly 200 BGE and PEPCO executives will be affected by the move.

"We'll do everything we can to maintain a presence in Baltimore," said Edward A. Crooke, BGE's president and chief operating officer, who will become vice chairman of the new company and chairman of the concern's non-regulated subsidiaries. "This is not similar to a merger where the headquarters ends up in Charlotte, after all."

Mr. Crooke added that BGE has no plans to either sell or vacate its 21-story headquarters building at 39 W. Lexington St., where it has operated since 1916.

BGE has 1,350 employees in downtown Baltimore, down from 1,700 three years ago.

The proposed marriage must be approved by shareholders, the Securities & Exchange Commission, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission and the Maryland and Washington Public Service Commissions. BGE expects to hold a special shareholders meeting in January.

Frank B. Fulton Jr., a spokesman for the Maryland Public Service Commission, said the agency could not comment on the merger until an official plan is submitted.

New Company

Name:

To be determined

Headquarters:

Annapolis area

Chief Executive:

Christian H. Poindexter

Chairman:

Edward F. Mitchell for a year. To be succeeded by Mr. Poindexter.

Assets:

$15.1 billion

Revenues:

$4.8 billion

Service area:

Electric: 2,940 sq. miles

Gas: 627 sq. miles

Customers:

Electric 1,756,656

Gas 537,397

Employees:

10,870 projected

Projected dividend:

$1.67 at the expected 1997 closing date

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