BGE's marriage expected to cost over $86 million Merger with Pepco holds transition costs for the 2 utilities

Billions in future savings?

'On the surface, it looks pretty expensive,' one analyst remarks

February 01, 1996|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

The Baltimore Gas and Electric Co. and the Potomac Electric Power Co. expect to spend more than $86 million to merge the two companies, according to a recent federal regulatory filing.

The $86.3 million in anticipated transition costs to complete the merger include items such as employee severance packages, systems integration, facilities consolidation, telecommunications networking and employee retraining.

Although a key BGE and Pepco consultant testified in the Federal Energy Regulatory Commission (FERC) filing that some transition costs will be spread over 10 years, utility industry analysts said the $86 million figure appears high.

"On the surface, it looks pretty expensive," said Alex Hart, a Ferris, Baker Watts Inc. utility analyst. "But, without the knowledge of systems investment required, it's hard to make a definitive statement that the BGE/Pepco costs are excessive."

Surprisingly, the transition expense figure appears to exclude the cost of developing a new headquarters for the planned Constellation Energy Corp. in the Annapolis area. Based on the future company's office needs, a new headquarters is expected to cost roughly $15 million.

The transition cost figure also excludes the more than $30 million that will be paid in investment banking, consulting and legal fees relating to the merger, which is slated to create the nation's ninth-largest power concern with $15.1 billion in assets.

A BGE spokesman said other merging utilities often factor transition costs differently, and many fail to include severance packages in their total cost to integrate.

In fact, Constellation's projected severance total is $51.5 million, the largest single transition cost item. The new company expects to achieve considerable cost savings by eliminating more than 1,200 positions, or just over 10 percent of the total work force.

By comparison, the next-largest cost is systems integration, at $20 million.

"The $86 million is intended to buy savings in the future," said Ronald S. Tanner, a Legg Mason Wood Walker Inc. analyst. "More aggressive companies will cut more employees, which will cost them more up front, but they will then get the benefits of those savings for every year after that."

The FERC filing also sheds new light on and raises the projected cost savings of a BGE/Pepco combination.

BGE and Pepco executives said in announcing the merger that savings of $1.3 billion after transition costs would result by 2007, or $688 million on a net present value basis.

The filing, however, projects the total savings from the merger at $2.43 billion on a net present value basis, including the savings over the first 10 years.

The bulk of the savings would come from reduction of labor, facilities consolidation, administrative cuts and increased purchasing power, the documents state. In all, Constellation has identified 19 different areas in which to achieve cost savings.

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