A Peek Inside A Utility's Mechanical Subsidiary

Exelon Services is not your father's mechanical contracting company.
It doesn't even resemble most of today's.

First thing I noticed was a reception area unadorned by industry-related paraphernalia. No recognition certificates and plaques, no trade association logos, no doodads shaped of pipe, no historical memorabilia, no PMs or any other trade magazines laying on a coffee table. Maybe it's because Exelon Services shares the Westchester, Ill., office with other business units of Exelon Enterprises. Maybe it's also because few paraphernalia are available bearing the Exelon name, which came into being only a few months ago. Whatever the reasons, a feeling came about that this organization is unlike any of the scores of mechanical contracting firms I've visited over the years.

I had never heard of Exelon until a few weeks before my visit, when I decided to pursue a story about its former entity, Unicom Mechanical Services. Last October the Unicom name was put to pasture with the merger of electric utility giants PECO Energy Co. and Unicom Corp. The resulting entity is Exelon Corp., a holding company with five million customers, annual revenues of $12 billion and three major business segments: 1. Exelon Generation and Power Marketing, 2. Exelon Energy Delivery and 3. Exelon Enterprises. The first sells electrons and gas molecules. The second transmits them. The latter houses six unregulated business units, including the mechanical services subsidiary, Exelon Services, the subject of this article.

Unicom/Exelon came later to the mechanical services business than many of its rivals such as First Energy, PP&L, KeySpan, et al, but has been making up ground at a dizzying pace. It started in the summer of 1999 with the acquisition of Midwest Mechanical, a highly regarded $45 million Chicago area firm that had been around since 1974. Its founder, Ken Beard, a former Trane employee with an engineering degree and MBA, stayed on as president and CEO of the Unicom/Exelon mechanical services unit. Since then he has presided over subsequent acquisitions that have boosted Exelon Services' annual pro forma revenues skyward of $400 million. Those acquisitions include:

V.A. Smith (mechanical contracting), Wheeling, Ill.
Hoekstra Automation/Access Systems, Inc. (ASI), Homewood, Ill., (indoor environmental services, temperature control, lighting, security services);
Metropolitan Mechanical, Eden Prairie, Minn.;
Reliance Mechanical Corp., Cleveland, Ohio;
Rieck Mechanical Electrical Services, Dayton, Ohio;
Bumler Heating and Specialties, Inc., Warren, Mich.;
Building Automated Systems and Services (BASS), Warren, Mich.;
Shortly before press time, Exelon Services closed an acquisition of The Wenninger Co. of Milwaukee, Wis.

At present these companies continue to operate under their old names. The Exelon name will be phased in as time passes, although there is no specific timetable for doing so.

In addition, Exelon Services took over a business unit known as Exelon Distributed Energy (EDE). EDE's business revolves around a 75-kilowatt on-site microturbine electrical power generation system that operates on natural gas or a variety of other fuels. It connects to the utility grid, but also can operate as a standalone power generator to provide outage protection and reduce energy costs during peak hours when electricity rates are most expensive. The Parallon75T generator, made by Honeywell, is aimed at a variety of small- to mid-sized commercial customers ranging from office buildings to retail stores to institutional markets. EDE also is preparing to incorporate fuel cells into its repertoire.

EDE stands as a prime example of what distinguishes Exelon Services from your father's mechanical contracting company, as well as most others in the here and now. "We aim to create a technology-driven organization that is truly different from any other company that exists today," said Beard.

Symbiosis

As I sat down to begin my interview, I found myself staring at a framed MBA on the wall, belonging to Lou Maltezos, vice president of business development for Exelon Services. It hung below an engineering degree from the University of Illinois. I can't recall being exposed to another mechanical contracting firm so attuned to treating mechanical contracting as a business, as opposed to an extension of the pipe trades.

Maltezos is in charge of marketing for Exelon Services. He's not extremely talkative about his overall game plan but revealed enough to make me understand that their view of the mechanical contracting business has as much to do with traditional bid-and-spec work as today's NBA has with the two-handed set shot. "We seek to leverage our expertise in mechanical systems with a variety of customized programs aimed at reducing energy cost, risk, uncertainty and distraction for facilities owners," said Maltezos. "This allows them to focus their attention, resources and capital on their core business activities that they do best."

The package they offer is an energy source, along with delivery and all associated construction, installation, service, maintenance, energy audits and management. Packages may also be devised in conjunction with other Exelon Enterprises units, including:

The picture that emerges is that of single-source supplier of everything related to energy and more. Keep in mind that all of these businesses now operate in an unregulated environment. Exelon's regulated (for now) electrical provider, ComEd, did not come up for discussion in my interview until I brought it up.

Independent mechanical contractors widely view utility subsidiaries as unfair competitors. They accuse the power generation parents of capitalizing on their name recognition and monopoly status by illegally cross-subsidizing their mechanical contracting entities. I addressed this issue with Maltezos.

"Our regulated and unregulated activities are completely separated," he said. "There's nobody in this office that has any connection to ComEd. As a matter of fact, ComEd has a reputation for extreme conservatism in its dealings with the Public Utilities Commission, almost an anti-marketing posture." Maltezos noted that Exelon Services competes with other contractors for Com Ed jobs - "we win some, but not all of the work." He also notes that ComEd is only in Chicago and PECO only in Philadelphia, so the electrical providers have no bearing on Exelon Services in other markets.

Buying Spree

The game plan devised by Beard and his colleagues for Exelon Services is similar to that of many other utility subsidiaries that are buying up mechanical contractors. They are seeking to build dominant regional companies, which may eventually expand into new areas around the country. Maltezos indicated they would be interested in companies doing business in nation's top 26 metropolitan markets.

Their plan calls them to almost double in size, mainly via acquisitions, to $700 million in annual revenues by the end of 2001. "We are acquiring and integrating construction, service and technology companies into a single enterprise dedicated to selling and delivering innovative new products and services to the commercial and industrial market," said Beard.

Exelon Services will remain focused on the commercial-industrial marketplace, with no intent to enter the residential sector. Targeted acquisitions need to have a service business base. Beard indicated they would not be interested in any mechanical contracting company that solely does construction work. So far they have purchased only union companies, but Beard would not rule out acquiring nonunion entities in markets where top companies meeting Exelon's acquisition criteria do not have union agreements. The company's operating units continue to belong and participate in trade associations such as MCAA and SMACNA, and there are no plans to do away with that.

According to Beard, $20 million in revenues is around the low end in terms of acquisition targets. Anything below that size just doesn't have the reach and management infrastructure required to function within the Exelon Services network.

Like all other industry consolidators, Exelon Services is looking for companies whose top management is willing to stay on and continue running the company after acquisition - and who share Exelon Services' strategic vision. "We're bringing together companies that have the right people in the right positions, with a serious commitment to customers, quality and innovation," is the way Beard put it.

Last year's major purchases found all of the previous owners staying aboard with Exelon Services or one of its units. Louis Hoekstra became vice president and general manager of Exelon Solutions, a performance contracting business, while Doug Anderson took over as vice president and general manager of Hoekstra Building Automation, with Dale Hoekstra as vice president of operations. Nathan Bouma stayed on as vice president of Hoekstra's ASI subsidiary. The purchase of Cleveland's Reliance Mechanical saw Bill Neiheiser continuing as president of the unit, as did Harold Rieck, Jr., with Rieck Mechanical; Randy Pagel continued as president at Bumler and Rick Suarez as president of BASS.

At the Wenninger Co., former owner Dick Wenninger stays on as chairman during a transition period. Former vp of operations Dale Cox, will become president of the company.

Mechanical contractors are as entrepreneurial as they come in the business world. Beard himself epitomizes this breed of no-nonsense, straight-shooting personality. I asked him how he was able to adapt to a large corporate environment, and having a boss.

"It's been different," he replied with a grin. "It helps that I report to a person who shares the same goals and visions" - and one who obviously gives him a free hand, and whatever resources are needed, to run Exelon Services pretty much as he sees fit. Beard told me that he has no management contract. I asked how long he planned to stay aboard, and he said he was taking things "one year at a time."

Strategic Vision

Beard gives every indication that he still gets a kick out of running the business even as an employee. He told me Exelon Services is ahead of plan financially, and the companies absorbed continue to operate much the same as they did as independent companies. He points with pride to one of the modern harbingers of excellence in mechanical contracting - an Experience Modification Rating of 0.75 for Exelon Services, which rates it in the top 15% of contractors nationally.

Exelon Services has structured itself around a strategic vision based on the following assumptions:

Its commercial-industrial clientele will use more technology, creating greater demand for reliable building infrastructure.
Businesses will increase their focus on core activities, leading to rising demand for outsourcing and vendor consolidation.
Businesses, especially "new economy" businesses, will require faster execution of their construction, renovation and retrofit needs. This will lead to increased demand for single-source providers that can guarantee turnkey, integrated solutions on a quick turnaround.
Continued technological advances in networking, building automation and software control will result in a convergence of mechanical, electrical, fire protection, teledata and security systems towards a common architecture.

The organization being built by Exelon Services aims to position itself to capitalize on these trends. "All of Exelon Services' offerings are built on the cornerstone of our demonstrated capabilities in the mechanical systems industry," said Beard.

I asked him where independent mechanical contractors may fit into this scene. Beard brushed off any suggestion that they will disappear anytime soon. "This is a huge marketplace, incredibly large," said Beard. "There's a lot of business out there for big and small companies alike."