Black & Veatch forecasts a new paradigm in utility mergers

Washington, D.C., June 26, 2006 — Distinctive business models, not geographic proximity, will drive the emergence of nationally scaled electric and natural gas utilities in the United States, according to a Black & Veatch merger and acquisition consulting expert.

Bill Kemp, managing director for the utility mergers and acquisitions practice of Black & Veatch’s Enterprise Management Solutions division, presented the results of recent research on June 18 during a Strategic Issues Forum at the annual meeting of the Edison Electric Institute (EEI) in Washington, D.C.

“Past utility mergers have been predominantly between neighboring firms,” said Kemp. “However, the trend is increasingly toward transactions between geographically separated utilities whose combination creates a business model that can be extended across widespread geographies.” He cited as examples the recent deals between MidAmerican Energy and PacifiCorp, Duke Energy and Cinergy, and FPL Group and Constellation Energy.

“The economics of mergers are changing as the industry evolves,” stated Kemp. “It certainly is true that merging neighboring transmission and distribution operations can yield significant transaction-related cost savings. The average reduction in distribution operations and maintenance costs actually achieved with mergers of adjoining utilities was significantly higher than with mergers of separated utilities.”

Black & Veatch’s research shows that this factor favoring proximate transactions can be dwarfed by larger synergies that are available from combining areas of utility operations that are more information based. Kemp stated that the average level of realized merger-related savings in customer operations — such as call centers and billing — was significantly higher for separated pairs of firms, and reductions in back office costs — including finance, procurement and human resources — did not differ appreciably between adjoining and separated pairs of firms.

“Metering data, customer data and back office data are all portable. You don’t have to be next to each other to take advantage of the savings from combining the systems and processes that use that information,” Kemp explained. “The separated pairs of firms appear to have executed more aggressively in the areas of synergy that were accessible to them. They created enough benefits to make the deals work. Good management can compensate for lack of geographic good fortune.”

Kemp noted that the recent repeal of the Public Utility Holding Company Act further reduces the barriers to regulatory mergers of noncontiguous utilities, and that emerging technologies across the breadth of utility operations will reinforce economies of scale in the industry.

“What all this really means is that the super-regional utilities with national ambitions can hone their business models and extend them without as much concern for geographic proximity,” stated Kemp. “They might aim to be the best at nuclear operations, at coal generation, at energy delivery, or at environmentally friendly energy, and will look widely for the deals that offer the best fit. The drivers of industry consolidation have moved up to the next level.”

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