The landmark changes Utah Power & Light Co. experienced in 1987 didn't happen by chance, but were calculated efforts to prepare the 75-year-old utility for a new competitive industry, shareholders were told Monday.
"Something fundamental happened . . . . We came face to face with the future," UP&L president and chief executive Frank N. Davis said."There's one word to describe what we saw: Competition. Maybe two words: fierce competition."
Competition forced UP&L to mark its 75th year by cutting costs, improving coal mining operations and signing a $1.8 billion merger agreement with PacifiCorp, Davis told about 2,000 shareholders at the utility's annual meeting in the Salt Palace.
UP&L's austerity program, trimming $31 million in operating costs, increasing coal production and completing refinancing of about $442 million in high interest securities, resulted in record earnings during a year when annual revenues dropped $2 million from the year before.
Earnings available for common stockholders in 1987 were $140 million, or $2.39 per share, on total revenues of $983 million. A 97 percent payout ratio meant $136 million in earnings went to shareholders.
But the major move taken to position UP&L for the future was agreeing to merge with PacifiCorp - the Portland, Ore.-based parent company of Pacific Power & Light. The merger, the largest in the industry in more than 50 years, would create a utility with $8 billion in assets serving more an one million customers in seven states.
For shareholders, the merger would appreciate the market value of their UP&L stock and make them part of a financially strong and more competitive company, UP&L chairman John A. Lindquist said. If the merger goes through, each share of UP&L stock will be exchanged for .909 to .957 of a share of PacifiCorp, giving the stock swap a total value between $1.8 billion to $2 billion.
PacifiCorp's 1987 earnings were $249 million, or $3.60 per share, on revenues of $2.2 billion. Lindquist said the diversified northwest energy concern expects to maintain its recently revised $2.64 annual dividend.
As shareholders listened to speeches and ate the traditional free lunch, attorneys continued arguing to pros and cons of the merger before Utah's Public Service Commission. Utah is one of eight regulatory bodies that must approve the marriage by mid-summer.
Lindquist said seeking approval is a monumental but worthwhile task.
"Many people in both companies have worked very hard on this historic event," he said. "Not only have thousand of hours been devoted to the merger, but the paperwork associated with it has been astronomical."
Lindquist told shareholders that the 30 million sheets of paper filed with regulators and others interested in the merger could stretch from Los Angeles to Washington, D.C.
"With the approval process progressing well, the companies have begun the actual work of merging by establishing transition teams to handle major issues," he said.
Under the agreement, UP&L would become a division of PacifiCorp, operating under its own name and with a separate board of directors. The utilities' transmission systems would be interconnected allowing them to swap power during alternating peak periods and sell excess power to wholesale markets in the southwest.
UP&L has promised the merger would lower power rates 5-10 percent in the next five years from efficiencies and revenues realized by merging the two power systems.
Competition in a changing industry forced UP&L to cut costs - which involved several hundred layoffs and early retirements - and seek a merger partner, Davis explained.
He said competitors in the electric utility industry range from co-generating facilities and municipal power systems to other investor-owned utilities and energy sources. Davis noted that UP&L's drop in revenues reflects industrial and municipal customers leaving the system for cheaper alternatives.
The price of the product - reliable electricity - is key to keeping and nurturing a customer base, he said.
"We can no longer afford to raise our rates. Each rate increase makes it easier for a competitor to step in. We must not risk pricing ourselves out of business."