July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Merger planning is touchy business. In a hotel crowded with utility executives gathered together to talk mergers, you notice everything: Who's there and who isn't. Who's talking to whom. Who came with his lawyers. And who's always out in the hall on the phone.
That's why I had so much fun last month at the Eighth Annual Utility M&A Symposium, sponsored by EXNET (Public Utilities Reports and The Management Exchange).
For instance, I couldn't help but notice that the person busy taking down notes in the chair next to mine, whom I know is general counsel at a major investor-owned utility (IOU), was deliberately leaning forward to shield his papers from my view every time I craned my neck to get a better look at the speaker's podium (em especially when James A. Carrigg, chairman and CEO of New York State Electric and Gas Co., who was there to speak about "Utility Mergers and Acquisitions in the New Competitive Environment," paused briefly to proclaim, "I see three kinds of utilities: aggressors, defenders, and bait."
Credit the audience for a bit of sophistication; Carrigg's comment failed to cause much of a stir. Most had heard such talk before. But eyes brightened when the audience was asked to participate in an impromptu electronic poll. Each attendee was given a small electronic keypad. The poll asked a simple question: "How many of you are involved in merger discussions now?" The audience gasped as the tally came up on the big projection screen at the front of the room. Of the 100 who voted, 64 said "No," but 36 said "Yes."
t t t t
Several ideas emerged from the conference: 1) Will electric cooperatives enter the picture? 2) Why haven't we seen many mergers among natural gas distributors? and 3) Will Congress finally repeal the Public Utility Holding Company Act of 1935 (PUHCA)?
I enjoyed listening to Gilbert Friesen, chief financial officer at Tri-State G&T Association, which is considering a takeover of Deseret G&T. Friesen explained why he thought mergers between IOUs and rural cooperatives wouldn't be worth the trouble.
Above all, says Friesen, cooperatives are populist. The Tri-State system, he notes, includes 34 member distribution co-ops. Each of these sends a director to the G&T board, and each comes equipped with its own board of eight to 10 directors. So you're talking about at least 300 individual directors in the G&T system who are going to have a say in any merger discussions. Imagine what it would take to put a deal together. Not only that, there's no such thing as traditional equity. The key is the annual earnings share. If a member co-op is entitled to receive 20 percent of system generating capacity, that member receives 20 percent of the earnings. And most power-supply deals take the form of all-requirements contracts. They're difficult to break or transfer.
When asked to speculate on why we haven't witnessed the same degree of merger activity among natural gas local distribution companies (LDCs) as among retail electric utilities, most of the group answered that gas mergers offer