Two new powerhouses have emerged in the electric utility industry. On August 7, Akron, Ohio-based FirstEnergy Corp. and Morristown, New Jerseybased GPU Inc. announced they would combine to form a single electric utility, the nation’s sixth largest in terms of customer base. That came on the heels of a $16.4 billion merger between Juno Beach, Florida-based Florida Power & Light (FPL) and New Orleans based Entergy Corp., whose combined 6.3 million customers and more than 48,000 megawatts of generating capacity would make it number one. “This is the first real superpower in the industry,” proclaims Entergy CEO Wayne Leonard, who will head the combined entity.
It surely won’t be the last. With more than 100 investor- owned utilities and many more private and cooperative organizations still serving up electricity around the United States, consolidation should continue for at least the next decade. “There were a lot more companies in our 13-state region a few years ago,” says FirstEnergy CFO Richard Marsh, “and there will be fewer down the road.” According to analysts, future candidates for acquisition in eastern regional power pools include Duquesne Light Co., in Pennsylvania, Potomac Electric Power Co., in Washington, D.C., and New York State Electric & Gas Corp.
One reason for the recent surge in deal activity is a sudden recovery in utility stock prices. Last year, utility stocks were Old Economy and out of favor with investors. This year, they have become a high- yielding haven from the stormy technology sector. The Standard & Poor’s utilities index is up an electrifying 48 percent this year– compared with 2 percent for the S&P 500 and 2 percent for the Nasdaq composite, as of press time. And the pleasant Wall Street trend has had utility executives thinking merger again.
Going Separate Ways
The more fundamental reason for the mergers is, of course, competition. With the industry deregulating at different paces in the various states, many vertically integrated utilities have broken apart and reassembled themselves to focus their business strategies. Some–such as GPU, which has sold off all its power- generation assets–are concentrating on the regulated retail distribution side of the business. They hope to leverage their growing networks by selling new unregulated services such as facilities management and telecommunications. Others emphasize such deregulated lines as power generation and wholesale energy trading. The combined FPL and Entergy entity plans to fire up as many as 65 new General Electric Co. generating turbines during the next several years, growing to as much as 30,000 megawatts of electric capacity in the United States and Western Europe.
“Companies are deciding whether they want to be a wires company or a trading outfit,” says senior analyst Richard Baxter of Boston-based Yankee Group. And investors are trying to figure out how to value the resulting corporate structures. While the unregulated businesses are riskier than simple electricity distribution, they also offer greater opportunities for growth. The stars of this most volatile commodity market–companies such as Enron Corp., Dynegy Inc., and Southern Co.–trade at price-earnings multiples far higher than those of retail-oriented utilities.