There is a price to pay for becoming a lean, mean fighting machine, and utilities paid the price in 1994.

A number of electric utilities saw revenues increase last year on the strength of higher sales, but the costs associated with laying off hundreds of employees and downsizing company operations took a significant bite out of earnings.

A PUBLIC UTILITIES FORTNIGHTLY survey of the nation's top 20 electric utilities shows an increase in their combined 1994 revenues to $107 billion, a healthy 3.6-percent rise over the previous year. Last year's net income for the group grew by a more modest 2.4 percent, to $10.3 billion. The average earnings per share was virtually unchanged last year at $2.20. (If we had excluded Unicom Corp. from the survey, earnings per share for 1994 actually would have fallen 3.2-percent below the 1993 average. Unicom, the holding company for Commonwealth Edison Co., took unusually large charges in 1993 to pay for comprehensive rate settlements.)

Last year will be remembered best for the shock waves resulting from California's ambitious retail wheeling proposal and the unexpected dividend

cuts taken by four or five large companies. Yet the year also saw many cost-conscious companies successfully slash their operating costs to become more competitive. Stanley T. Skinner, president of Pacific Gas and Electric Co. (PG&E), acknowledges that workforce reductions are "difficult for employees and result in special charges," but adds, "[T]hey are essential if the company is to succeed in a more competitive environment." PG&E is reducing its workforce by approximately 3,000 positions.

Industry restructuring aside, several company executives say they are not receiving much help from state regulators. William E. Davis, chairman of Niagara Mohawk Power Corp., warned that 1995 earnings are likely to fall below 1994's if the New York Public Service Commission accepts an administrative law judge's recommendation to lower electric rates for 1995. A decision is due in April. Niagara Mohawk's problems are compounded by a weak economy in upstate New York and the burden of mandatory power-purchase contracts. Niagara Mohawk paid $960 million to qualifying facilities last year, up 30 percent from 1993. Payments will rise to more than $1 billion this year, Davis says.

Detroit Edison Co. attributed its 1994 earnings decline in part to last year's order by the Michigan Public Service Commission, which reduced rates by $78 million annually and increased depreciation and operation expenses by $84 million annually.

Looking on the bright side, several companies saw significant increases in sales volumes last year, largely to wholesale customers. PECO Energy Co. set a company record in total electric sales for 1994, up 5 percent to 44.4 million megawatt-hours (Mwh). PECO also sold a record 60 billion cubic feet (Bcf) of natural gas and transported 29.8 Bcf in 1994, up 7.3 percent from the previous year.

PacifiCorp set a company record last year with 59.3 million Mwh sold, up 3 percent, generating electric revenues of $2.6 billion, up 6 percent. PacifiCorp should see earnings improve in 1995 and is rated as a long-term buy, according to Barry M. Abramson, analyst with Prudential Securities Inc.: "PacifiCorp is well positioned competitively as one of the largest utilities in the West, with excess low-cost generating capacity [hydro] that can be sold into other states."

Despite the pitfalls ahead for electric utilities, such as the potential loss of industrial customers, many analysts say industry fundamentals are sound and earnings should improve in 1995. Edward J. Tirello, Jr., analyst with NatWest Securities Corp., predicts an average growth rate of 2.3 percent for 1995, based on normal weather and savings from cost-cutting measures. Tirello sees the consolidation trend continuing. He also expects companies to continue lowering their dividend payout ratios from the current industry average of 80 percent to a more optimum 65 percent. But most will try to do it through earnings growth and not more dividend cuts, he says.

Wall Street's fears over retail wheeling have subsided somewhat since last year's California "earthquake," and it is not seen as an immediate threat

to earnings, notes Dan P. Rudakas, analyst with

Kemper Securities Inc. He believes the current environment of austerity and a reluctance to seek rate relief will result in lower earnings growth than in a less competitive market. "But we do not see severe, abrupt losses of business for most of the companies," Rudakas adds. t

W. Lynn Garner is senior writer of PUBLIC UTILITIES

FORTNIGHTLY.

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