Big Utilities Hunt for Acquisitions

Richard B. Priory, the president and chief operating officer of Duke Power Co., the huge utility covering much of North Carolina, is loaded for bear.

He is keeping the utility's balance sheet and borrowing ability strong to be ready to buy weaker and more vulnerable utilities, as the industry enters a more competitive age.

"You will see utilities that want to merge and be acquired, and we want to be one of the players," he said in an interview last week.

Utility industry analysts, like Edward Tirello Jr. of NatWest Securities, agreed on the trend. Pressure is building for a period of consolidation when the larger, stronger utilities will acquire their smaller and weaker brethren.

Every utility is adding up the numbers, Tirello said. The stronger want to see what others might fit into their systems. The weaker want to determine a fair sale price.

Some consolidation has already taken place, and it could accelerate in the next two years as some states, notably California, allow more competition among utilities. And a proposal last week by the Federal Energy Regulatory Commission to open the country's power grid to more competition could also quicken the changes.

The uncertainty has forced down the stock prices of many utilities. Investors could benefit, however, if they own utilities that become takeover targets or utilities that become stronger after an acquisition.

In addition to Duke, huge utilities that Tirello expects to be on the prowl include the Southern Co. of Atlanta, Entergy of New Orleans, Dominion Resources of Richmond, Va., and American Electric Power of Columbus, Ohio. These utilities are giants with customer bases of 1.3 million to more than 3 million, and some serve several states.

Among the utilities that he sees as possible takeover targets are Dayton (Ohio) Power and Light, Rochester (N.Y.) Gas and Electric, Idaho Power, Scana of Columbia, S.C., and Delmarva Power and Light of Wilmington, Del. These utilities are smaller, serving from 350,000 to 600,000 customers, and generally will have a tough time holding onto industrial customers unless they give them lower rates.

Even after intense cost-cutting, Tirello predicted, these utilities will still be vulnerable if their states decide to allow outside utilities to compete where they now have monopolies.

Until now, the few mergers in the utility industry have been for strategic reasons _ two strong utilities have combined to take better advantage of opportunities when states begin to allow more competition. An example of such a combination was the friendly merger last fall of PSI Energy, a utility serving a large part of Indiana, with Cincinnati Gas and Electric to form Cinergy Corp., the country's 13th-largest utility.

PSI, which had plenty of surplus cheap power, greatly broadened its customer base through the merger. Meanwhile, CG E gained a management team that had geared up to cope with the expected rapid changes in the industry.

The merger became embroiled in a rare hostile bid by a rival utility, Ipalco Enterprises of Indianapolis, which tried to acquire PSI in an attempt to prevent it from becoming more powerful. The hostile bid was beaten back.

Future takeovers will generally be friendly, Tirello said, because they are subject to approval by state regulators, who may frown on hostile bids.

The larger utilities, Priory of Duke said, will not look just at neighboring utilities _ the pattern that acquisitions have followed so far.

Some of the larger companies have invested in overseas utilities; Duke, for example, has invested in companies in Argentina. They have also built power plants in other parts of the United States in their efforts to grow beyond their traditional territories.

"We would be comfortable operating generating equipment and transmission systems just about anywhere," Priory said. That would also go for bagging a willing utility far away from its headquarters in Charlotte, N.C.

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