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Mergers: Driven by Dividends?
The movement to introduce competition in the electricity industry comes at a time when many utilities are already ailing or underperforming. In fact, since 1990, half of U.S. investor-owned utilities (IOUs) have failed to consistently grow their dividends, or have cut or eliminated them altogether. According to a new study by Resource Data International, U.S. Electric Utility Industry Merger and Acquisitions, 1996, the current trend toward mergers and acquisitions is fueled by a desire to improve shareholder returns.
Out of roughly 100 electric IOUs examined for the period 1991 through 1995, approximately 50 percent increased their dividend every year (see table). Approximately 16 of the companies grew their dividends, but reported no increase in 1994 or 1995. A slightly higher number showed flat dividends, or only one or two annual dividend increases. Thirteen companies took the drastic step of cutting their dividend, including several of the industry's major players: SCEcorp (now Edison International), FPL Group, PacifiCorp, and Unicom (Commonwealth Edison). Four of the IOUs currently pay no dividends.
Electric Utility Dividends, 1991-95
Category Number of Companies
Consistently Growing Dividends 50
Omitted '94 or '95 Increase 16
Flat or 1-2 Annual Increases 18
Cut Dividends 13
No Dividend 4
Well over half the mergers announced since 1992 involve companies that have consistently failed to increase their dividend: IES Industries, Interstate Power, Iowa-Illinois Gas & Electric, Midwest Resources, Public Service Co. of Colorado, Potomac Electric Power Co., Puget Sound Power & Light Co., Sierra Pacific Resources, Southwestern Public Service, and Washington Water Power. The most recent merger announcement, Texas Utilities with Enserch Corp., is no exception to the pattern of flat dividends. Texas Utilities has not increased dividends since 1993.
Competition, which usually forces prices and profits down, may well exacerbate existing financial difficulties. Total revenues are unlikely to significantly increase, enhancing the appeal of mergers and cost savings as means to increase net income and, thus, dividends. While the proposed savings from a merger represent only a small proportion of revenues, their potential contribution to profits looms large.
The proposed Northern States Power/Wisconsin Energy merger, for example, projects merger savings of $2 billion over 10 years. On an annual basis, these savings represent 4.7 percent of combined 1994 revenues, but 25 percent of combined operating income. Even though the combined firm plans to give up some of these savings through rate reductions, the remainder still raises income far beyond what the companies could have achieved alone.
Mergers may enable companies to increase dividends and provide additional shareholder returns or to offset competition's squeeze on profits. Thus, the pressure to improve shareholder returns may indicate which companies would be willing to participate in a merger. t
Chris Neil is a senior consultant and Albert Pearson a senior associate at Resource Data International, Inc., an energy industry information and consulting firm specializing in market and competitor analysis.
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