[BETA] Fortnightly

Over the past two and a half years, 10 large mergers have been announced, involving 21 investor-owned electric and gas utilities. Only the MidAmerican Energy merger has been completed, but the estimated market value of the pending mergers is an astounding $40.5 billion. Clearly, this recent wave of merger and acquisition (M&A) activity signals that electric utilities are positioning themselves for future competitive energy markets.

Results from Resource Data International's (RDI's) recent study, U.S. Electric Utility Industry Mergers & Acquisitions, indicate that the trend will continue (em but at a slower pace. If the pending mergers go through, the current total of 101 publicly traded investor-owned utilities (IOUs) will fall to 93. By the year 2000, RDI expects mergers and acquisitions to reduce that number to 80 (em or even 70.

These findings are based on RDI's Merger Attractiveness Ranking. The results are derived from analysis of more than 25 ranking matrices, which assess such issues as a company's strategic position, cost-competitiveness, financial performance, management experience, and potential cost savings.

Of RDI's top 25 ranked IOUs, 8 are currently involved in pending mergers; one is considered too large to merge or acquire domestically. The remaining 16 front runners vary in size and operations: Madison Gas & Electric, Duke Power, Montana Power, Allegheny Power Systems, OGE Energy, KU Energy, Florida Progress, Minnesota Power, WPS Resources, SIGCORP, St. Joseph Light & Power, Central Hudson Gas & Electric, Otter Tail Power, Western Resources, and Idaho Power. These companies share some combination of competitive rates, strong profiles in management and finance, and potential for cost savings.

RDI's study also provides a framework for identifying unique synergies between potential candidates based on strengths and weaknesses in various business units. For example, Company A has a very large industrial load (62 percent), purchases significant bulk power (2,488 gigawatt-hours in 1995), and ranks high for financial strength among utilities in its region. The company could benefit from merging with a low-cost system that enjoys surplus capacity and whose current load is more diverse. The

resulting merger would lessen the companies' risk of losing key industrial customers in a more competitive retail market.

We do not believe large IOUs will consolidate to fewer than 70 companies for a number of reasons, chiefly the opportunity to strengthen competitive position without merging. For instance, a few companies have initiated cost-saving partnerships or alliances with companies that possess strong marketing or operations experience (em e.g., Big Rivers Electric, Oglethorpe Power, Puget Sound Power & Light, and the Los Angeles Department of Water & Power. These companies expect strategic alliances to increase revenues and cut costs. Cutting costs or expanding the marketing reach of a utility through strategic alliances will dampen the need to merge to solidify market position.

In addition to outsourcing for services, large IOUs are exploring opportunities and investing at a high rate in overseas businesses. The surge in overseas investment is driven by a more favorable regulatory climate, perceived higher earnings potential, and a desire to gain experience in deregulated

electricity markets. Some of the companies heavily investing in foreign