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Utilities: For gas and electric, a good year is forecast
Sunday, March 25, 2001 By Frank Reeves, Post-Gazette Staff Writer
The region's electric utility and gas supply companies are predicting a good year despite the economic downturn and the Wall Street devastation of the technology sector.
The optimism is a far cry from last year, when some analysts predicted electric utility companies, in particular, were likely to suffer huge losses in the next five to 10 years.
It also was a time when Wall Street had abandoned such Old Economy stalwarts as electric utilities and gas companies.
In a letter to stockholders, Thomas E. Capps, president and chief executive officer of Richmond, Va.-based Dominion Resources Inc., appeared to relish the markets "return to sanity."
"Last year, investors in the so-called 'New Economy' stocks and dot.com darlings saw their billion-dollar investment shrink to millions," Capps said. "Renewing their interest in companies with real earnings and real cash flow, they returned to 'Old Economy' investments like those in the utility and energy sectors."
Also, unlike a year ago, the lack of cheap energy, long the Achilles' heel of the U.S. economy, has again become front-page news.
First, it was a huge increase in electricity prices in California, followed by blackouts in parts of that state. Then, it was soaring natural gas prices, on average about 70 percent higher than last winter in much of the Northeast.
And now, there are predictions that gasoline prices could rise significantly this summer, as the OPEC nations cut back production to maintain high prices despite a worldwide slump in oil demand.
On Monday, Energy Secretary Spencer Abraham warned that the country now faces the most serious energy shortages since the 1970s. The shortages threaten the decade-long economic boom, he said.
Duquesne Light
But despite volatility in the energy markets, some recent industry trends continue.
For years, electric utilities were protected monopolies whose profits were guaranteed by state regulators. Now these companies are trying to position themselves in the newly deregulated markets.
Last year, Duquesne Light, a subsidiary of DQE, sold its remaining electric generating plants to Orion Power Midwest. It was a major step, as company officials put it, in transforming DQE "from a fully integrated electric utility to a multiutility delivery and services business."
DQE, which owns propane and water-utility companies around the country, has become a major supplier in both industries. The company also completed a fiber-optic network around Pittsburgh. And DQE is an early-stage investor in technology and e-commerce companies.
Last fall, the Pennsylvania Public Utility Commission approved phase two of Duquesne Light's electric deregulation restructuring plan.
It calls for Orion to serve, until 2004, as the "provider of last resort" for Duquesne customers who don't switch to another electricity supplier.
Prior to deregulation, Duquesne Light not only transmitted and distributed electricity but also generated it. Duquesne no longer generates electricity, having sold its remaining power plants to Orion in April for $1.7 billion.
Under the PUC-approved plan, Duquesne also agreed to cap the rates it charges customers to transmit and distribute electricity through December 2003.
In addition, Orion agreed to cap rates it charges Duquesne Light customers through Dec. 31, 2004.
After the utility had undergone a major overhaul as a result of electric deregulation, DQE Chairman, President and CEO David Marshall decided it was time for the company to weigh its options.
In December, DQE announced that it had retained SG Barr and The Northbridge Group to conduct a strategic and financial review of the company's operations that could lead to the sale of the entire company.
These efforts haven't gone unnoticed. Analysts at PaineWebber praised the company for having "transformed itself from a vertically integrated utility into a diverse mix of businesses."
Allegheny Energy
Allegheny Energy Inc., based in Hagerstown, Md. and parent of the former West Penn Power, has undergone similar changes. But executives said last year's successful performance was "anchored around the stable earnings growth from its regulated energy delivery business."
In the past year, it purchased Mountaineer Gas Co., West Virginia's largest natural gas provider, and proposed incorporating its own electric transmission system into the power grid that covers much of Pennsylvania, New Jersey, Maryland, Delaware, Virginia and the District of Columbia.
The power grid, operated by the Valley Forge, Pa.-based PJM Interconnector LLC, also serves as a competitive wholesale electricity market for the region's electric utilities. By joining the PJM, Allegheny would relinquish major control, though not ownership, over the transmission lines. PJM, for example, would now set the rates electric generating companies would be charged to transmit electricity over the power lines.
The plan, which must still be approved by federal regulators, is supported by many consumer groups. They contend that until Allegheny Power, Allegheny Energy's power supply unit, and Duquesne Light are part of a competitive wholesale market for electricity, the promise of electric deregulation -- lower electric rates -- will not be realized.
Like other energy companies, Allegheny Energy is trying to increase earnings and growth by using its core businesses as a springboard for moving into other areas.
Allegheny Communications Connect, the company's telecommunications subsidiary, has expanded its fiber-optic network to more than 1,300 route-miles, Allegheny officials said. The company also has partnered with BroadbandNow Inc. to provide high-speed Internet access and multimedia content to Allegheny Energy customers.
Dominion and NiSource
There continue to be mergers and acquisitions among gas and electric companies as they strive to be in a position to tap into increasingly interrelated natural gas and electricity markets.
In January 2000, Pittsburgh-based Consolidated Natural Gas was acquired by Dominion Resources Inc. of Richmond, Va. The merged companies serve about 5 million retail gas and electric customers in five mid-Atlantic states.
In November, Columbia Energy Group, the parent of Columbia Gas of Pennsylvania, was acquired by NiSource Inc. of Merrillville, Ind.
During the last three months of 2000, net income at NiSource was down substantially from a year before -- $1.9 million compared with $32.9 million. For all of 2000, net income was $156.9 million compared with $160.4 in 1999.
But with most of the cost associated with the merger behind the company, Gary L. Neale, NiSource chairman, president and chief executive officer, predicted that the recently acquired Columbia holdings would help increase earnings in 2001.
Dominion's Thomas Capps said Dominion's acquisition of Consolidated Natural Gas had helped boost the company's closing stock price in 2000 to $67, just a fraction below the company's all-time high.
Citing government and industry analysts, Capps said he expected the nation's demand for natural gas to grow 50 percent over the next 10 years. About half of this gas will be used to generate electricity.
With its vast reserves of natural gas as well as its electricity distribution business, Dominion is poised to benefit from the increasing demand for energy.
"We'll sell gas directly when market conditions for gas sales are good. When the demand for gas slackens and prices go down, we'll burn the gas in our power plants, put it on the wires and sell the energy as electricity. Sometimes we'll use our storage system to store the gas and wait for a better day," Capps said.
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