Gulf States Utilities Company

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Gulf States Utilities Company

350 Pine Street
Beaumont, Texas 77701
(409) 838-6631
Fax: (409) 839-2106

Public Company
Incorporated: 1925
Employees: 4,843
Sales: $1.7 billion
Stock Exchanges: New York Midwest Pacific

Gulf States Utilities Company (GSU) is an investor-owned public electric utility serving more than 578,000 customers in a 28,000-square-mile region stretching from 50 miles east of Austin, Texas, to Baton Rouge, Louisiana. GSU also provides wholesale service to six municipalities and three rural electrical cooperatives. Gulf States generates, transmits, and distributes electric power derived from gas, coal, and nuclear sources. The utility is a partner in Nelson Industrial Steam Company, a cogeneration facility near Lake Charles, Louisiana, and also provides steam and electricity to a large industrial customer through an agreement with a cogeneration facility in Baton Rouge.

GSU has three diverse subsidiaries. Varibus Corporation, based in Beaumont, Texas, operates gas pipelines within Louisiana and markets engineering and drafting technologies, such as computer aided design and engineering equipment and services, through Vari Tech, a Varibus division. GSG&T, a second subsidiary, owns and leases back to GSU a 520 megawatt gas-fired generating plant, Lewis Creek Station, located near Willis, Texas. GSUs third subsidiary, Prudential Oil & Gas, Inc., is a Houston-based drilling company that has been inactive since selling its oil and natural gas reserves in July of 1987.

Incorporated under Texas laws in 1925, GSU traces its history to the pre-Civil War period; when the Baton Rouge Gas Light Company, GSUs earliest ancestor, began operations. Many small utility and transportation companies were formed during the next decades in Louisiana and southeast Texas, and approximately 60 incarnations of firms link Baton Rouge Gas Light Company and the GSU of the early 1990s.

In 1882, for example, the Beaumont Ice, Light, and Refrigerating Company brought electric light to Beaumont, Texas, and offered a variety of other services as well, including management of the water system, meat storage, and ice production. The Baton Rouge Electric Light and Power Company brought electric lights to that city in 1889. Other power companies were founded in the area throughout the 1890s, such as Navasota (Texas) Ice, Light, and Water Company (1891) and Lake Charless J. A. Landry and Company in Louisiana (1892).

Further company formations, mergers, and reorganizations occurred in the twentieth century. An engineering firm based in BostonStone & Websteracquired several companies and eventually established a holding company called Eastern Texas Electric. This holding company led to the creation of Gulf States Utilities, which was incorporated on August 25, 1925, after a series of mergers involving ice, water, gas, and transportation properties.

GSU continued to expand throughout the 1920s. Less than a week after its incorporation, the new company purchased the Orange Ice, Light, and Water Company. Also acquiring other municipal and independent utilities, including the 1926 purchase of Louisiana Electric Company, GSU expanded significantly in 1929 with the addition of Western Public Service, which established a western division for the utility in Texas. Another sign of GSUs growth was the construction of Neches Station, a gas-fired power plant in Beaumont, the location of GSU headquarters.

Unlike many other firms, GSU survived the stock market crash of 1929 and the subsequent Great Depression. The utility, in fact, even managed to grow during the 1930s. The expanding regional economy, which included petroleum-related industries, farm products, and transportation systems, meant an increasing market for electrical energy.

World War II brought even more expansion for GSU. Power demands decreased after the war, however, as production for defense was reduced. Since business conditions in the area remained favorable, GSU was able to extend service to new customers, promoting, for example, an active program of rural electrification.

Because of government restrictions on construction during World War II and economic growth in the area during the postwar period, GSU was not able to maintain normal reserves in its generating or transmission facilities in the years immediately following the war. As a result, the company pursued an aggressive construction effort, expanding existing plants and building new ones during the late 1940s and 1950s. The number of GSUs electric customers more than doubled during the 1940s, to approximately 200,000 in 1950. Total electric revenues nearly tripled during the same period, reaching more than $25 million in 1950.

Following the successes of the post-World War II period, GSU was forced to adapt to new conditions during the 1960s and 1970s. As a result of diminishing supplies of natural gas and oil, the utility explored other sources of energy. Coal and nuclear energy became increasingly important as GSU diversified its fuel mix.

W. Donham Crawford, who joined GSU as chairman and chief executive officer in 1978, centralized operations in Beaumont and streamlined production and processes. He focused on timeliness of construction projects, overseeing the adoption of the Nuclear Construction Stabilization Agreement for the construction of the $4.2 billion River Bend nuclear facility north of Baton Rouge. The agreement prohibited construction employee strikes. The Sabine 5 oil/gas unit was finished so quickly that it saved GSU customers $60 million in fuel costs. Crawford also moved GSU toward the purchase of Prudential Oil & Gas, Inc., to expand company resources.

Respected in the energy industry, Crawford was the first person ever to simultaneously chair the United States National Committee of the World Energy Conference and National Committee of CIGRE, an international technical engineering organization. Unfortunately, he was forced to resign his positions at GSU for medical reasons in 1982 and died two years later.

The early and mid-1980s were difficult for GSU for several reasons in addition to the loss of Crawford. A severe downturn in the energy industries crippled the regions economy. This situation hit GSU particularly hard because 60 percent of its customer base was concentrated in industrial and commercial areasprimarily in the petrochemical arenawhile only 33 percent was made up of residential users. By 1986 the company was teetering on the brink of bankruptcy. Louisiana Attorney General William J. Guste, Jr., commented in Business Week, Bankruptcy probably would be a good thing for both GSU and its customers.

The utility avoided bankruptcy, but not some financially grim years. In 1986 and 1987, for example, stock prices dropped to a meager $4.75 a share and GSU faced a possible $1.4 billion write-off in construction costs for its River Bend nuclear plant. Business Week writers James R. Norman and Allen S. Roberts speculated at the time that insolvency would have literally left customers in the dark and ruined some GSU shareholders.

GSU officials argued in 1986 for a 17 percent rate increase from the Public Utility Commission of Texas and were stunned when they were slapped with a 10 percent decrease instead. Part of the costs no longer allowed were for purchases from Southern Company.

The River Bend plant, intended to serve booming petrochemical companies, went on line in 1986, but regulatory commissions in Texas and Louisiana refused GSUs request for total costs to be reflected in its rate base. Specifically, the commissions cited $1.4 billion as cost overrun.

Coupled with a sudden downturn in the oil and gas markets, the ban on raising its rates left GSU with unexpected excess capacity and a write-off that threatened to wipe out its $1.8 billion in common equity. Bonds sold as far back as 1983 to help pay dividends came back to haunt the company in the form of lawsuits from six irate investors and a B+ rating from Standard & Poors.

Also in 1986, GSU tried to renegotiate its contract with Southern Company, which had supplied coal-generated power to GSU during River Bend construction. Southern officials, however, refused to renegotiate. When GSU sued, Southern countersued. A November 7, 1991 settlement ended the five-year dispute and resulted in an award for Southern of $75 million in cash, six million new GSU common shares, and $160 million in promissory notes, which together amounted to $300 million.

Simultaneous to the Southern lawsuit, but in a separate action, GSU appealed the $1.4 billion exclusion of the River Bend construction from both the Texas and Louisiana regulatory commissions. The Louisiana appeal resulted in the Louisiana Public Service Commission eventually creating a deregulated asset plan to lessen the impact of the disallowance. Under it, GSU could try to recoup a portion of its $1.4 billion investment by selling power outside its system or back to its own customers at a predetermined cost. The Louisiana Public Service Commission spelled out guidelines for such transactions; revenue would be divided between shareholders and customers and monitored by the commission.

The Public Utility Commission of Texas, which delayed its ruling on the $1.4 billion, set the sum aside in 1988 and agreed to let GSU present evidence at a later date in greater detail. But lawsuits from municipalities and consumer groups, pursued all the way to the Texas Supreme Court, blocked that plan. GSU appealed the Public Utility Commission of Texas initial decision and, as of mid-1992, the issue was still unresolved.

Despite the litigation and the slow economic recovery affecting its industrial customers, GSU narrowly managed to avoid shutting down. GSUs president and chief executive officer, E. Linn Draper, and the chief financial officer, Joseph L. Donnelly, worked together to streamline company operations. The plan included debt refinancing, such technological innovations as computer aided engineering, a workforce reduction, and an aggressive campaign to pare expenses. GSU also put in a state-of-the-art computerized energy control center that keeps GSU in touch with other utilities and helps insure that customers have access to the most cost-efficient power available.

GSUs aggressive cost-cutting route eliminated about $70 million in expenditures for 1986. The company also negotiated interim emergency rate hikes in both states. Perhaps the most significant move, however, was the cessation of dividends on common stock in August of 1986 and on preferred stock in February of the following year. The preferred dividends would not be reinstated until the third quarter of 1991.

Draper left GSU for American Electric Power Company in January of 1992. By this time, though, GSU was beginning to experience some financial improvements. After posting a $44 million net loss in 1990, GSU showed a positive balance of $102 million in 1991. Draper was replaced by Donnelly, who explored various options for continued recovery and guided GSU through the process that ultimately led to a merger agreement.

On June 8, 1992, a merger was announced between GSU and New Orleans-based Entergy Corporation, which had been founded in 1926 and was previously known as Middle South Utilities, Inc. The agreement permitted GSU to retain its identity as well as its Beaumont, Texas, headquarters. Upon completion of the merger, GSU will join one of the largest utility holding companies in the United States and will nearly double Entergys coverage of Louisiana.

The merger is expected to be finalized in the latter part of 1993, pending approval by GSU and Entergy common shareholders, the Federal Energy Regulatory Commission, the Securities and Exchange Commission, and Nuclear Regulatory Commission, as well as the Public Utility Commission of Texas and the Louisiana Public Service Commission. Terms of the agreement included a provision stating that those exchanging or selling GSU common stock would receive $20 per share.

Both GSU and Entergy cited substantial benefits to be gained as a result of the merger. Some of these include saving money on fuel purchasesan expected $790 million in the first 10 years after finalizing the dealand a five-year cap on base rates for GSU customers. In addition, the companies would be able to capitalize on the design similarities between GSUs River Bend and Entergys Grand Gulf nuclear power plants to improve, among other things, safety practices. The agreement will put five of the nations 112 operating nuclear power plants under one corporate umbrella and will add incentives for both GSU and Entergy to stay tuned to political and environmental concerns about nuclear energy. The merger also provides an opportunity to strengthen GSUs Team City program, which promotes the expansion of local companies and the relocation of new companies into the service area. In 1991 the program helped 61 separate businesses to locate or expand within the GSU service area. With Entergy as its parent company, GSU hopes to link its clients to economic programs that will open doors to markets in Asia, Europe, and Central and South America.

Company officials expected modification costs to be lower than usual since the two companies were already interconnected at various locations, primarily throughout Louisiana. GSU considered Entergys 1991 earnings of $4 billion a plus, too, especially since the companys recovery wasnt yet complete, although an investment-grade bond rating had been regained.

Not everyone was satisfied, however. GSUs reliance on heavily discounted rates for industrial customers drew criticism from industry analyst Alfred Mazzorana, of Furman Selz Co. In a Wall Street Journal article examining speculation on merger possibilities, Mazzorana said it would be a negative net for whoever takes them over. Entergy Chairman and Chief Executive Officer Edwin Lupberger remained optimistic about the joint venture, however. Entergy doesnt have instant solutions to the problems of the region, but it does have strength and aggressiveness to help achieve greater prosperity, he said.

Both companies faced a number of issues as they entered business together, though solidifying the companys tentative recovery was the next big hurdle for GSU. Among the issues were meeting strict 1990 Clean Air Act requirements, planning for new capacity, and the peril that looms over all public utilitiescompetition from private energy suppliers. The 1978 Public Utility Regulatory Policies Act opened the market for independent electricity producers to move from selling solely to utility companies into direct retail sales. The possibility also exists that public power companies, such as GSU and Entergy, would be forced by the Federal Energy Regulatory Commission to allow these competitors to use already established transmission systems to deliver a cheaper product.

That possibility, and other lingering and potential problems, may continue to confound GSU executives. In the meantime, however, GSU appears to be moving toward achieving the best of both worldsthe safety of a large holding company along with the agility of an independent public electric supplier.

Principal Subsidiaries

Varibus Corporation; Prudential Oil and Gas, Inc.; GSG&T, Inc.

Further Reading

Time May Be Running Out for Gulf States Utilities, Business Week, November 17, 1986; Speaking of Dividends, Barrons, July 15, 1991; Wolf in Sheeps Clothing, Forbes, December 23, 1991; Payback Day Forbes, February 17, 1992; Nearby Utility Might Acquire Gulf States, Wall Street Journal, March, 27, 1992; Concern to Make Payments Owed on Preference Stock, Wall Street Journal, April 27, 1992.

Peg McNichol and Michelle McClellan

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Gulf States Utilities Company

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