2 More Utility Deals Highlight Industry’s Rush to Join Forces

Just look at the names: Houston Industries, NorAm Energy, Delmarva Power & Light, Atlantic Energy. It’s hard to think of utilities as sexy, particularly compared with marquee names such as Disney, Microsoft, General Electric and IBM.

But power companies are merging at a stunning pace, as fast as those in any industry. Two deals announced Monday punctuate that trend and show that utilities are thinking hard about deregulation and their future.

Electricity provider Houston Industries Inc. announced plans to buy NorAm Energy Corp., the nation’s third-largest natural gas utility, for $2.4 billion. Delmarva Power & Light Co. said it will merge with Atlantic Energy Co. in a smaller electric-utility deal that values Atlantic at about $927 million.

The combinations add to the $19.6 billion in 1996 U.S. utility mergers announced as of Sunday, according to Securities Data Co. That figure already surpasses the $17.9 billion in utility deals in 1995.

“At the end of the day, the basic concept is to capture as much of the customer’s bill as possible--that’s both electric and gas--and at the same time become as big as possible,” said Edward J. Tirello Jr., a utility analyst at NatWest Securities Corp.

The furious desire to combine has even brought some hostile deals to utilities, long seen as plodding companies where profits were largely determined by regulated rates and investors were primarily interested in receiving their dividends.

“Market and regulatory forces are changing the industry landscape to a more competitive environment,” Don Jordan, chairman and chief executive of Houston Industries, said in announcing the plan to acquire NorAm.

Both Houston Industries’ takeover and the proposed Delmarva-Atlantic merger have one thing in common: They are being driven by efforts to deregulate the electric utility industry and provide a choice of electricity suppliers for consumers, with the eventual goal of bringing down rates via competition. Those efforts are moving ahead at the state and federal levels, with some states targeting 1998 for full electric competition.

That means electricity providers must be competitive to win business, which generally means cost cutting and job reductions.

In New York Stock Exchange trading, Houston Industries lost 75 cents to close at $22.875, NorAm gained $2.875 to $14.50, Delmarva rose 37.5 cents to $21 and Atlantic added 87.5 cents to $18.

State and federal legislators are moving to end utility monopolies before the end of this century, allowing customers to choose their gas and electric suppliers just as they do their long-distance phone carriers.

Because it’s cheaper and less polluting than other fuels used to produce electricity, natural gas will be consumed in greater volume as deregulation forces companies to use the lowest-cost means of generation.

Natural gas is now used to generate 9% to 10% of total U.S. electricity, a share expected to grow to 17% or 18% in the next 10 years, said Daniele Seitz, a UBS Securities analyst.

Houston Industries said its deal will probably bring job cuts, mostly at the corporate level, but it did not provide details. Delmarva and Atlantic intend to eliminate about 400 jobs, or 10% of their combined work force.

Delmarva’s planned merger with Atlantic is more like previous combinations that have come at such a fast pace. (The $37.5 billion in mergers during 1995 and ’96 so far exceeds the total for the seven years before that, $36.7 billion.) Such mergers tended to involve electric companies combining with other electric utilities to expand their service areas and become more efficient.

“Together, we create a larger regional platform from which to launch new energy-related products and services throughout the mid-Atlantic region,” Howard E. Cosgrove, chairman and chief executive of Wilmington, Del.-based Delmarva, said in a statement. Atlantic is based in Egg Harbor Township, N.J.

In recent months, other utilities have announced they will create gas and electric companies.

Dallas-based Texas Utilities Co., one of the largest U.S. electric utilities, said in April it would buy Enserch Corp., owner of Texas’ largest gas utility, for $1.7 billion in stock and debt. Houston-based Enron Corp., the huge natural gas marketing and pipeline company, said last month that it would buy Portland General Corp., an Oregon electric utility, for $3.23 billion in stock and assumed debt.

In the brave new world of power generation and distribution, the term “critical mass” is beginning to emerge. Once deregulation hits, many analysts and executives believe that basic power and basic gas will become low-profit-margin businesses. The real money will come from ancillary services, including home security, appliance repair and alliances to provide telecommunications services.

“There is a belief that you need to reach a critical mass in order to be able to compete effectively in a lot of these new energy-services businesses. So you need a critical mass of customers,” said Barry M. Abramson, a utility analyst at Prudential Securities Inc.

The battle for customers helps explain the Houston Industries-NorAm deal, in which Houston Industries would pay $2.4 billion in cash and stock for NorAm and assume $1.4 billion of NorAm debt and preferred stock.

Both companies are based in Houston and their service areas overlap somewhat, so the combination would give them a bigger combined customer base.