It would surprise most Wisconsin residents to wake up one morning later this year and hear that Wisconsin Energy Corp. has been acquired by a larger utility company. However, such an announcement would not surprise Ken Silverstein at all. "It is a robust M&A market out there, and everyone is fair game," said Silverstein, editor-in-chief of EnergyBiz Insider, an online utility industry news column by Energy Central.
"Wisconsin Energy – would it be an attractive acquisition? If its regional brethren would see it as a (return on investment), it might be."
Merger and acquisition activity is heating up across the board in the economy in the second half of the year.
Silverstein, who has covered the utility industry for years and is based in Charleston, W.V., notes the proposed mergers between Chicago-based Exelon Corp. and Public Service Enterprise Group (PSEG) and Duke Energy and Cinergy Corp. are indicative of a trend that is likely to continue.
Utility companies are eyeing each other up for courtship because after years of flat financial performances, they have been outperforming the stock market, Silverstein said.
The Dow Jones Utilities Index grew 23 percent in 2003 and 25 percent in 2004. So far this year, it’s climbed 16 percent.
"The market, in fact, is putting pressure once again on utilities to grow their earnings and dividends. And one way is through acquisitions that can create economies of scale and potential cost savings," Silverstein said.
Silverstein quoted James Halloran, a Wall Street analyst with National City Bank in Cleveland, as saying, "Utilities are looking around and saying the only way they can get over and above those typical returns is to acquire other integrated utilities."
In the case of the proposed Exelon-PSEG merger, the companies are projecting $500 million in cost savings over two years.
"For Wisconsin Energy and midcaps, generally speaking, the trend is to either combine as equals with another madcap, or it might be acquired by a big-brethren neighbor, such as Exelon, which is on the prowl," Silverstein told SBT.
Silverstein said utility executives typically have private, secret discussions and announce they have reached a merger agreement, rather than float the notion that they are considering all of their options going forward in a Securities & Exchange document, which is how some companies handle such transactions.
"A utility would be very unwise to disclose publicly that it would even have a conversation about these things," Silverstein said. "We generally don’t know about these things until the CEOs join hands and announce it jointly."
The Wisconsin public utility market is primarily a three-legged stool: (1) Wisconsin Energy and its We Energies subsidiary provide power to southeastern Wisconsin; (2) Alliant Energy Corp. of Madison serves the western part of the state; and (3) WPS Resources Corp. of Green Bay serves the northern part of the state and Michigan’s Upper Peninsula.
Silverstein said he wouldn’t be surprised to see one of the Wisconsin utility companies make a move to acquire another and increase their market share and their economies of scale. Such a transaction would be subject to the approval of the Public Service Commission of (PSC) Wisconsin.
However, the PSC has not provided much resistance to utility companies’ wishes in recent years. The agency was even accused by detractors of not providing enough oversight of We Energies’ Power the Future Plan, which is expanding the company’s coal-burning plant in Oak Creek.
"Market forces may be too strong for opposition groups to prevent those kinds of deals. Regulators are likely to let such dynamics play out, but in a controlled fashion," Silverstein said. "But many utility analysts are certain that the era of the mega-merger will reappear."
That means Wisconsin Energy will receive pressure to maximize shareholder value by acquiring other companies or being acquired by larger utilities.
"Companies are looking for acquisitions, and along those lines, every company is a target," Silverstein said.
What would make Wisconsin Energy an attractive investment? Consider its most recent quarterly results. The company reported second quarter net income of $62 million, up from $39 million in the same period a year ago. The company’s net income from continuing operations increased to 48 cents per share from 18 cents per share.
The company attributed the increased profits to warmer-than-normal summer weather, lower debt levels and continued cost controls.
"In addition to strong financial results, we continued to deliver world-class reliability, and our focus remains on generating high levels of customer satisfaction," said Gale Klappa, chairman, president and chief executive officer of Wisconsin Energy, in prepared statements with the company’s quarterly report. "We also began construction of our new units at Oak Creek. The units are targeted to go into service in 2009 and 2010, and once they’re completed, we expect them to provide our customers with affordable energy for years to come."
While investors are enjoying remarkable returns, Wisconsin Energy’s electricity customers are absorbing traumatic rate increases.
We Energies has increased its electric rates by $174 million so far this year and is requesting permission from the PSC to raise its electricity rates by another $143.5 million. The newest rate increase would help cover the company’s expenses for expanding its coal-fired power plant in Oak Creek.
By early next year, the company’s electric rates could be 17 percent higher than they were at the beginning of this year. The Citizens Utility Board (CUB) of Wisconsin is vowing to fight We Energies’ latest rate increase request.
"This utility just doesn’t understand how hard it’s making it for families and businesses to pay their energy bills," said Charlie Higley, executive director of the CUB. "Despite We Energies’ claim that it’s limiting its request for cost recovery, we’re still being hit with Chicago-style rates at a time when families are struggling to make ends meet."
August 5, 2005, Small Business Times, Milwaukee, WI
