2 Utilities Announce Acquisition Plans

Two big utilities announced plans Monday to buy neighboring power companies, speeding the consolidation of an industry that has found itself fighting for customers.

Philadelphia-based Peco Energy Co. is threatening a $3.8-billion hostile takeover of PP&L; Resources Inc. of Allentown, Pa. And, in a friendly deal, Union Electric Co. of St. Louis said it has an agreement to buy Central Illinois Public Service Co. of Springfield, Ill., for $1.2 billion.

Looser federal and state regulations are allowing big industrial users to shop around for electricity, and new competition has forced utilities to cut costs to keep big customers. For an increasing number of utilities, the answer has been to buy a nearby utility and take a knife to expenses.

“With large customers being given choice . . . utilities have to get costs down to stay competitive,” said Doug Kimmelman, a Goldman, Sachs & Co. investment banker advising Union Electric. For the big customers, “it’s getting like choosing between MCI, Sprint or AT&T.;”

Some states, most notably California, have been debating the possibility of allowing residential consumers to choose among electric companies.

Peco Chairman Joseph F. Paquette Jr. proposed buying PP&L; for $24 per share but said that if the utility’s board would not negotiate a buyout, he would consider taking the offer directly to shareholders. The acquisition would make Peco the nation’s third-largest investor-owned electric and gas utility.

Hostile takeovers are rare in the once-cozy utility business, and such attempts have a poor record of completion. Analysts note, however, that PP&L; is due to seek a rate increase from state regulators and that its dividend has been thought to be in jeopardy. Both circumstances could pressure PP&L; to consider Peco’s offer as a way to cut its costs.

“Competition has accelerated in our industry, and utilities throughout the country are preparing for an even more competitive future,” Paquette said. “I believe that consolidation is inevitable in this environment.”

Peco stock fell $1 to close at $26.75 on Monday, and PP&L; jumped $2.625 to $21.50 on the New York Stock Exchange.

The merger would create a company serving almost 3 million customers in an area covering most of eastern Pennsylvania.

According to Peco, the deal would lead to a savings of $2 billion and to rate reductions of $860 million over 10 years through the elimination of duplicate services and 1,100 jobs. A rate freeze would be in effect for at least five years, Peco said. PP&L; said it will consider Peco’s proposal but that it is concerned about how a combination would affect shareholders, customers and employees.

The Union Electric-Cipsco entity would serve a combined 1.4 million customers across 44,000 square miles in Missouri and Illinois. It is expected to save $570 million over 10 years through the elimination of overlapping administrative functions and greater purchasing power. About a third of the total savings would come through cutting about 300 jobs, mainly through attrition.

Union Electric stock fell 62.5 cents to close at $34.75, and Cipsco jumped $2.875 to $32.50 in NYSE trading.

The merger would result in a new St. Louis-based holding company that would be the parent of Union Electric and Cipsco. Each of the two subsidiaries would retain its identity and corporate headquarters.