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Utilities Love? More Mergers May Be Near

THE WALL STREET JOURNAL: Utilities Love? More Mergers May Be Near

Posted 16 June 2005:



Wall Street is eager to flip the switch on more big utility deals.

The surge of interest in consolidating the fragmented, highly local utilities business has been sparked by the proposed acquisition of Oregon utility company PacifiCorp by MidAmerican Energy Holdings Inc., a unit of Warren Buffett’s Berkshire Hathaway Inc., and the prospect that Congress might repeal a 70-year-old law barring oil companies, banks and other outsiders from utility ownership.

Three big utility combinations have been announced since December in the traditionally staid sector, including Berkshire’s bid two weeks ago to purchase PacifiCorp for $5.1 billion and shoulder $4.3 billion of its debt. Exelon Corp.’s proposed purchase of Public Service Enterprise Group Inc. and Duke Energy Corp.’s deal for Cinergy Corp. are moving through the regulatory-approval process.

“I think the sector will be white-hot for the next two years,” says George Bilicic, a banker at New York investment firm Lazard Freres & Co. who specializes in utility deals. “This industry is more fragmented than almost any other.”

Mergers look attractive to utility companies facing sluggish growth in their local markets, and many utility executives are eager to enlarge their territories now that they have cash to invest again after recovering from years of failed investments in unregulated enterprises outside the utility business.

Oil companies, equipment makers, engineering firms, water companies and banks also might enter the utility sector.

The landscape is likely to shift substantially if the Public Utility Holding Company Act is undone. The law restricts mergers to utilities in the same geographic region and bars companies outside the electric industry from owning utilities unless the outsiders hold less than 10% voting control. (To comply with the law, Berkshire gave up voting control of MidAmerican when it bought an 80.5% stake in that company in 1999.)

A rollback of the Depression-era law would likely mean that any company would be able to own a utility as long as the combination doesn’t damp competition in wholesale electricity markets or produce a behemoth that states couldn’t regulate. Proponents of a utility-act repeal say it could bring billions of badly needed investment dollars to the nation’s most capital-intensive industry.

There is broad support in Congress for repeal, but the rollback is part of the Bush administration’s omnibus energy plan that is more problematic. A House version passed in April, and a Senate version has cleared a key policy committee. If it passes the full Senate, a vote on a joint bill could occur as early as this summer.

Analysts predict General Electric Co. would be one of the first bidders if the law is scrapped. Its commercial-finance division already has invested $8 billion in power assets and has partnerships with plant owners, including Calpine Corp., and utility companies, such as Edison International. Alex Urquhart, president and chief executive of GE’s commercial-finance unit, says he is “interested in any changes that improve capital efficiency” but declines to say whether GE wants to buy utilities.

Oil companies would be possible players, as well, because they are looking for ways to move trapped natural gas to lucrative markets elsewhere. Chevron Corp., Exxon Mobil Corp. and Shell Oil Co. are sitting on big cash troves.

Utility companies that might look to buy competitors include Ameren Corp., Constellation Energy Group Inc., Dominion Resources Inc., DPL Inc., Entergy Corp., FPL Group Inc., National Grid PLC and TXU Corp.

Among likely targets are utilities that have stumbled and recovered their footing, as well as companies that might be too small to stay independent but are in promising markets. This list includes Allegheny Energy Inc., FirstEnergy Corp., Northeast Utilities, NSTAR, PPL Corp., Scana Corp. and Teco Energy Inc. DPL, which owns the old Dayton Power & Light utility, could be either a buyer or seller. It is sitting on cash after recently selling a $1 billion investment portfolio.

Private investors also could get more deeply invested. Microsoft Corp. founder Bill Gates’s Cascade Investment LLC, a private investment vehicle, owns nearly 9% of PNM Resources Inc., and some observers expect Mr. Gates to increase his stake in the New Mexico electric and gas utility if the act is repealed.

Investment banks, including Morgan Stanley and Goldman Sachs Group Inc., are buying up energy assets and increasing their investments in energy trading.

Even if federal restrictions loosen, other obstacles to consolidation remain. State regulators can require that buyers share expected merger savings with customers, a potential deal killer. Regulators also tend to look askance at deals that appear to put private financial interests ahead of the public interest. Regulators in Arizona and Oregon cited such concerns in blocking Kohlberg Kravis Roberts & Co.’s effort to buy UniSource Energy Corp. and Texas Pacific Group’s bid for Portland General Electric Co.

–Kathryn Kranhold contributed to this article.

Write to Rebecca Smith at [email protected]

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