Michael T. Burr
Utilities fall into two general categories when positioning for the industry`s restructuring: Those who embrace change and those who don`t. Conectiv of Wilmington, Del., is among the former.
Conectiv, the result of a merger completed in March 1998 between Atlantic Energy and Delmarva Power, revealed plans in mid-May intended to restructure the company to perform in a deregulated environment. The announcement detailed the fourth step in what Chairman, President & CEO Howard Cosgrove called the “transformation of Conectiv from a regulated to a highly competitive enterprise.”
Specifically, the fourth step involves four major areas, the most dramatic being the planned auction of interests in 2,200 MW of nuclear and fossil plants-fully half of Conectiv`s generating assets. The company expects to raise $1 billion through the sale, which is being handled by Reed Consulting and Credit Suisse First Boston.
Scheduled to begin by the end of May and consummating in mid-2000, the auction process could sell the assets either together or separately. “We`ll do whatever creates the most value for Conectiv,” Cosgrove said. The company will auction its interests in the Peach Bottom, Hope Creek and Salem nuclear facilities. Fossil plants include Keystone, Conemaugh, BL England and Indian River. Only the last two are wholly owned.
Conectiv is keeping generating capacity that provides the greatest value for its wholesale strategy-namely, marketing merchant power in the corridor from Washington, D.C. to New York City. This translates into Conectiv keeping a portfolio of intermediate and peak load facilities for operation as merchant plants. Cosgrove expects to move these plants out of rate base and into an unregulated subsidiary within one year. This subsidiary, in turn, might acquire or build new assets as needed.
Another part of Conectiv`s restructuring plan is a cost-reduction program, which will save $25 million over 12 to 18 months, mostly by eliminating about 250 jobs and taking Conectiv out of non-core business areas such as real estate. Also, Conectiv plans a share repurchase of 14 percent of outstanding common stock (about $350 million) through a Dutch auction, to be funded by short-term debt and medium-term notes; and a reduction of dividend payment to between 40 percent and 60 percent of earnings, or from $1.54 to 88 cents. These steps are intended to improve Conectiv`s financial strength by recapitalizing its balance sheet.
“This is more consistent with companies operating in a competitive environment, and transitions Conectiv away from the traditionally higher payout ratios typical of the regulated utility industry,” said John van Roden, CFO. Conversely, he said the steps should result in a higher overall return on capital, increasing from the company`s current 9 percent return to between 10 percent and 12 percent.
Cosgrove said he expects 50 percent of Conectiv`s earnings to come from unregulated businesses in three to five years. Much of the company`s short-term growth is expected to come from the telecommunications sector. “Our number one opportunity is telecom,” he said. “We have 50,000 access lines now. We expect to double that by the end of the year, and to add another 100,000 lines a year for the next four to five years.”
The next growth area is the energy business, Cosgrove said. Conectiv plans to build its portfolio of energy assets to “complement our position as a BTU seller.” Already the company sells electricity, natural gas and heating and cooling products, in addition to telecommunications and plumbing. The strategy is to be a provider of what the company calls “vital services” in the Mid-Atlantic region.
“We must concentrate on becoming a provider of multiple vital services under a common brand,” Cosgrove said,” rather than use our generation resources to compete in the commodity wholesale business.” The repositioning is intended to allow Conectiv to concentrate on deepening customer relationships within the Mid-Atlantic region.
Cosgrove sees distributed generation in Conectiv`s future. Through a venture capital firm, Conectiv owns a minority position in microturbine manufacturer Capstone Turbine. “But we won`t make money on that business for at least one to three years. Distributed generation is a longer-term play,” he said.
Such forward-thinking investments, along with an increasingly aggressive position in deregulated energy markets, bodes well for Conectiv`s prospects as a strong regional player in the deregulated utility industry.
How shareholders will react to the change in structure remains to be seen, however. Standard & Poor`s called the move credit-neutral, citing a higher risk strategy offset by cost control and greater financial flexibility. If Conectiv can make good on its plans to focus on serving customers with a variety of services under a single brand, the company`s competition-embracing strategy will likely pay dividends.
The 784 MW, coal- and oil-fired Indian River plant is among 2,343.5 MW of generating assets Conectiv has placed on the auction block.