ALLENTOWN, Pa.---The PP&L Resources Inc. (NYSE: PPL) board of directors Wednesday (11/1) voted unanimously to reject the Oct. 23 acquisition proposal from PECO Energy Company.
William F. Hecht, chairman, president and chief executive officer of PP&L Resources, said the board reached its decision after carefully considering the PECO proposal and determining that it was not in the best interests of PP&L Resources, its shareowners, customers, employees or the communities it serves. PP&L Resources is the parent company of Pennsylvania Power & Light Co.
Hecht sent the following letter to PECO Chairman Joseph F. Paquette Jr. Wednesday.
Mr. Joseph F. Paquette, Jr.
Chairman of the Board
PECO Energy Company
2301 Market Street
Post Office Box 8699
Philadelphia, Pennsylvania 19101-8699
Dear Joe:
The Board of Directors of PP&L Resources, Inc. has reviewed the revised proposal of PECO Energy Company to acquire PP&L Resources as described in your letter to me dated October 23, 1995. After a comprehensive analysis of PECO's revised proposal, the Board has unanimously voted to reject it. The Board has concluded that PECO's revised proposal is not in the best interests of PP&L Resources and its shareowners, customers, employees or the communities it serves.
In making its determination, the Board considered a number of factors, including those discussed below. At the outset, I want to emphasize that our Board already has addressed many elements of PECO's revised proposal, since these are essentially the same as, or very similar to, elements of PECO's August 14 acquisition proposal.
Inadequate from a Financial Perspective
In reaching its conclusion, the Board considered the opinion of its financial advisor, Morgan Stanley & Co. Incorporated, that the revised PECO proposal, as set forth in your October 23 letter, is inadequate from a financial point of view.
Further, the PECO proposal, as revised, still represents an implied 4% (7 cents per share) annual dividend reduction for PP&L Resources' shareowners. We note PECO's implied promise of a dividend increase in 1996, but we must be guided by the facts as they exist today.
In addition to the above, we continue to have serious reservations about the risks our shareowners would bear as holders of PECO common stock if the transaction contemplated by the revised PECO proposal were to be consummated. Electric utilities today face more competition than they have ever experienced. Consistent with the views of many industry analysts, experts, other utility companies and some Pennsylvania PUC Commissioners, we believe that competition in our industry will inevitably expand.
In light of this, we are pursuing strategies that will better position PP&L Resources to succeed in such an environment. In our view, a PECO takeover of PP&L Resources would do exactly the opposite. A PECO acquisition of PP&L Resources could as much as double our shareowners' exposure to costs which may be unrecoverable in a competitive environment. In our view, your proposal does not justify our shareowners having to bear this level of risk.
The PP&L Resources Board remains committed to enhancing shareowner value over the long term. To this end, we have been pursuing a number of strategic initiatives to further enhance financial performance. Most recently, these initiatives have included, among other things, (i) reductions in operation and maintenance expenses, capital expenditures and financing needs, and (ii) continued aggressive implementation of our marketing and economic development programs. These initiatives will even better position PP&L Resources to succeed in a competitive environment. In addition, we continue to be free to consider all of our strategic alternatives in the future in light of the best interests of PP&L Resources and its shareowners and other constituencies.
As discussed below, we believe the PECO proposal will adversely affect PP&L Resources' other key constituencies to the detriment of its shareowners.
Customer Rates
A competitive rate structure is essential to success in the emerging business environment; competitive rates also are important to a sound regional economy. Our customers -- residential, commercial and industrial -- continue to enjoy rates which are among the lowest in the region and are significantly lower than PECO's rates. By way of example, PECO's average residential rates are still about 50% higher than PP&L's, even after our recent increase in base rates, the first such increase in 10 years. Our rate structure enables the businesses we serve to stay competitive and the families we serve to use greater portions of their incomes for other purposes.
In contrast, PECO's rates are the highest in Pennsylvania and among the highest in the nation. Moreover, with respect to residential rates, PECO's rate of increase has been more than three times PP&L's over the last 10 years.
PECO proposes a rate reduction and a freeze. We again note that your rate freeze proposal is limited to base rates; the total prices that former PP&L customers would pay for their electricity could still increase through the energy charge mechanism. Our analysis reveals that the recent performance of the Salem nuclear plant will create a significant increase in PECO's energy costs which will have to be absorbed by either shareowners or ratepayers.
Moreover, there are serious flaws in PECO's proposal that its "rate plan" be made binding through a merger agreement filed with the PUC. We question whether the PUC would approve a rate plan that locks in high rates for PECO's customers (albeit reduced somewhat from current levels) and flows the rest of the merger savings to shareowners. We also doubt that any rate plan that locks in PECO's high rates will be enforced by this or future PUCs in an increasingly competitive environment.
In addition, we continue to believe that PECO's proposal to maintain two vastly different rate structures in adjoining territories is highly unrealistic. Current PECO customers most certainly would object to paying rates significantly higher than their neighbors served by the same utility company. At the very least, we believe the result will be that the customer portion of any savings would tend to flow to current PECO customers, and not current PP&L customers, in view of PECO's high rates. And in the end, the pressure to equalize rates will result in current PP&L customers paying rates higher than they otherwise would pay.
Customer Service
We at PP&L are very proud of our record on customer service. During the past months, hundreds of our customers have spontaneously written with positive comments on PP&L's record on and commitment to customer service. Conversely, PECO's record on customer service continues to need improvement.
We at PP&L consider customer service a top priority. Our outstanding record on customer service has been built on decades of hard work and positive attitudes of our employees. Together with competitive rates, quality service is vital to our ability to succeed in an increasingly competitive environment. We believe that it would be inappropriate to risk compromising the quality of service delivered to our customers by combining with PECO.
Employees
In implementing an element of its strategic initiatives, PP&L is in the process of downsizing its workforce in a coordinated, orderly effort. We believe that significant additional decreases would damage the combined company's ability to provide quality service to our customers.
In spite of your October 23 letter, we continue to believe that much of the workforce reduction inherent in your acquisition proposal would fall disproportionately on PP&L employees, particularly those based in Allentown. In this connection, we note that while you state that PP&L's headquarters in Allentown would remain open, clearly the primary administrative functions would be consolidated in Philadelphia. Moreover, we do not believe that as a practical matter PECO's proposal concerning joint decision-making with respect to employee reductions can be effectively implemented to protect PP&L employees. We again note the continued vociferous opposition of our union (which represents almost two-thirds of our employees) to a PECO acquisition of PP&L Resources.
Communities
You are now aware of our record on community involvement. This record was the backbone that generated the outpouring of support PP&L has received over the past months: Our communities have spoken loudly and clearly against a PECO takeover of PP&L Resources. We are proud of our communities and our communities are proud of us. To conclude that PP&L, as a "unit" of PECO, could continue to reach to its communities with the same force and effect as an independent company, is unrealistic. Our judgment is that PECO has a truly different level of commitment to economic development and community support than does PP&L.
* * * * *
Joe, in your tenure as Chairman of PECO, you have done much to improve your company. We respect that. We concur with you that the "competitive nature of our industry is here to stay." And that is why we have rejected PECO's acquisition of PP&L Resources: it would make PP&L Resources less competitive precisely when this company must be more competitive. Some consolidations in the industry may be inevitable and may make sense; a PECO acquisition of PP&L Resources simply is not one of them.
Much has been said and written about the nature of events over the past several months. We at PP&L Resources are committed to putting all that behind us and moving into the future in a way that best serves our constituencies. We ask that PECO do the same. Prior to these events, PP&L and PECO had worked constructively together as neighbors. We intend to build upon this working relationship that has been created over decades.
Sincerely,
William F. Hecht