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Utilities flip merger switch

FPL Group's $11-billion deal to acquire Constellation Energy is seen as a precursor of further industry consolidation.

By LOUIS HAU
Published December 20, 2005

An $11-billion merger agreement unveiled Monday between the parent of Florida Power & Light of Juno Beach and Constellation Energy of Baltimore creates one of the nation's biggest power companies and could prove to be a harbinger of further consolidation in the utility industry.

Representatives for both Progress Energy Florida and TECO Energy - Tampa Bay's dominant power providers - said their companies won't rule out the possibility of merging with another company, but added that they aren't actively pursuing deals.

Neither company is large enough to repel a potential takeover by a bigger, well-capitalized suitor.

Monday's agreement is the first such deal to emerge after President Bush's signing in August of an energy bill that repeals long-standing federal regulations governing the operations of publicly traded parent companies of electric and gas utilities.

While making it easier for utility companies to merge, the loss of those rules also could have negative consequences for the financial stability and service quality of some utilities, consumer advocates warn.

On Monday, South Florida's FPL Group said it agreed to acquire Constellation for about $11-billion in stock.

Once the deal is completed, FPL shareholders will own about 60 percent of the combined company, with Constellation shareholders holding the remainder.

Constellation chairman, president and chief executive Mayo A. Shattuck III will be chairman of the new company, while FPL chairman, president and chief executive Lewis Hay III will be the new company's CEO. Combined, the company will maintain dual headquarters in Juno Beach and Baltimore and will adopt Constellation's name. However, the new company's regulated utilities, Florida Power & Light and Baltimore Gas & Electric, will retain their names.

Hay said both sides thought it was important to choose partners before industry consolidation eliminated their options.

"I think we were both vulnerable to other people taking actions that could pre-empt that," he said. Rates paid by consumers would fall over time, but not until at least 2008, Hay added.

The combined company will become the third-largest nuclear power plant operator in the United States, with 11 reactors at seven nuclear facilities.

Analysts said the merger made sense, given FPL and Constellation's complementary wholesale power operations. FPL's stock closed Monday at $42.76 a share, down 19 cents, while Constellation's stock finished at $59.10, down $2.52.

The deal is the third large power company merger announced in the past year, all creating companies with about $27-billion in annual revenues.

More mergers could come, although they probably make the most sense for companies with significant unregulated operations, said Tim Winter, a utility analyst for A.G. Edwards & Sons in St. Louis.

That's because cost savings gained from a merger of regulated utility operations could potentially be captured by state regulators and passed on to consumers, he said, rather than to shareholders.

"Companies are going to start looking around and say, "If I don't pick my partner soon, I'm not going to have someone to dance with,"' Winter said.

Because they are monopolies selling electricity to captive audiences, most regulated utilities have historically been about as stable and boring as a big business can be.

But this quiet, staid existence may change after the signing of new federal energy legislation.

Among the law's many provisions was the repeal of the Public Utility Holding Company Act of 1935, a landmark piece of Depression-era legislation that regulates the publicly traded holding, or parent, companies of electric and natural gas utilities.

After the repeal takes effect in February, it will be easier for utilities to merge with one another and for companies in unrelated industries to acquire utilities.

The repeal also will throw out many safeguards protecting utilities from being exploited for commercial gain by fellow subsidiaries of the same holding, or parent, company.

The Securities and Exchange Commission will no longer have oversight over mergers of utility holding companies. Instead, that responsibility will be shifted to state utility commissions, many of which operate under significant budgetary constraints, and the Federal Energy Regulatory Commission, which hasn't rejected a utility merger in recent memory.

In a report released in October, the research arm of the National Association of Regulatory Utility Commissioners suggested that "some state commissions might wish to consider supplementing their existing authority," noting that state rules protecting a utility from being financially exploited by a holding company or nonutility affiliate are not common.

Other observers are more skeptical of the dire impact that the repeal of utility holding company rules will have. They note that such regulations had already been weakened in recent years and offered ways for utilities to get around them.

For instance, regulations strongly encouraged holding companies to own only utilities that were contiguous to one another. But Carolina Power & Light leapfrogged a few states and acquired St. Petersburg's Florida Progress Corp. in 2000 to form Progress Energy, after it purchased a 50-megawatt transmission line that connected the two companies' service territories in North Florida and South Carolina.

--Information from Times wires was used in this report. Louis Hau can be reached at 813 226-3404 or hau@sptimes.com

[Last modified December 20, 2005, 01:50:22]