Analysts say smaller local utilities may not be able to fight takeovers

The Outlook

August 18, 1996|By Kevin L. McQuaid

Experts agree that federally inspired deregulation will vastly alter the utility industry of the future. As a result, once-staid utility companies are beginning to pair up in anticipation of fierce competition for customer bases and to offer new services. In other words, in the brave new utility world, only the largest and strongest will survive.

In the Baltimore area, Baltimore Gas and Electric Co. and Potomac Electric Power Co. last September cited a desire to "control their own destiny" as part of the rationale for forming Constellation Energy Corp., a deal that will create a utility with 2.3 million natural gas and electric customers and $15.4 billion in assets.

When Delmarva Power & Light Co. and Atlantic Energy Inc. announced plans last week for a merger, they denied that fear of a hostile takeover played a role, even though their combined company will have a customer base of less than 1 million and assets of only $5.6 billion.

If only the largest and strongest utilities will survive as the industry embraces competition, will Delmarva and Atlantic Energy together be able to stave off regional giants such as Peco Energy of Pennsylvania, the planned Constellation Energy and GPU Corp. of New Jersey or other potential suitors?

Michael Worms

Utility analyst, CS First Boston

I don't think they'll be nearly big enough. In Delmarva and Atlantic Energy you have two relatively weak companies financially. My feeling is their announcement was more defensive than anything else. There are any number of candidates that would want a foothold into that area, and both companies are potential candidates for a hostile takeover.

Delmarva and Atlantic have to start at a certain level, but it may not be enough. The ideal is to have access to a large number of customers. Once you're in someone's house, the sky's the limit in terms of potential services.

How big is big enough? No one can say. But Western Resources, in announcing a hostile bid for Kansas City Power & Light, said a critical mass for them was 5 million to 7 million customers. Delmarva and Atlantic are comparatively small -- and they haven't even begun to lose customers to competitive pressure.

Kurt E. Yeager

President and chief executive, Electric Power Research Institute

I don't know that a particular size of company represents a plateau that if a company doesn't achieve it, they can't compete effectively. I don't believe the industry as a whole has shaken out to that extent yet.

Companies that can manage communication with customers effectively will succeed. That, I believe, will become much more important than simply size.

That said, companies are trying to align themselves to make the greatest value out of the assets they have, and in terms of merging to prevent hostile takeovers, a bigger company is, of course, harder to digest than a smaller one.

But all companies entering into merger agreements today consider the strategy from both an offensive and a defensive perspective -- and utilities are no exception.

Edward J. Tirello

Utilities analyst, NatWest Securities Corp.

In determining whether a utility is or will be of a particularly attractive size in the future, I look at customer base, and I believe that a utility with a base of only 1 million customers will simply be too small.

The latest speculation is that utility companies will need a minimum of 2 million customers. These two companies will probably have to merge with another, larger utility, such as Constellation Energy.

The way the industry is going, future profit will come not from power sales but from ancillary services -- home security, energy, etc. To do that, however, you need critical mass and the manpower to service it. And these guys know that. So they're trying to hook up before someone decides to hook them up.

Of course the Delmarva and Atlantic Energy merger is a defensive maneuver. They can call it whatever they like, but it's really defensive.

Joe Sannicandro

Associate director, Cambridge Energy Research Associates

One of the key issues going forward will be cost competitiveness for utilities, and a lot of that depends on the size of generating assets. The ability to defend one's turf, if you will, will be important when and if retail choice ever occurs.

Smaller utilities can prosper if they are able to control costs and customers, vs. a larger utility that may have higher generation costs. That will be important, too.

In general, the statement that bigger is necessarily better is not accurate. In fact, some utilities are looking now toward diversifying assets, linking natural gas with electricity, and the benefits that come with that rather than toward adding service territory.

Pub Date: 8/18/96

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