Exelon Corp. (EXC), which has had two multibillion-dollar takeovers blocked by state officials, is offering Maryland utility customers $100 each to ease regulatory approval for its $7.9 billion purchase of Constellation Energy Group Inc. (CEG)
Exelon has tried unsuccessfully three times to buy other power companies and Constellation has been the target of three failed bids. Maryland officials have twice blocked takeovers of Baltimore-based Constellation, in one instance halting a 2006 bid by NextEra Energy Inc. amid rising power prices. The Exelon bid also requires approval from federal regulators and an antitrust review.
“Maryland is going to be the biggest challenge here and they all know that,” said Greg Phelps, who manages about $4 billion at Manulife Asset Management U.S. LLC in Boston, including Constellation preferred stock.
This time is different, Constellation Chief Executive Officer Mayo Shattuck III said today in an interview. The deal would transform power marketing, Constellation’s biggest business, and sale of electricity from Exelon’s nuclear power plants, Exelon President Chris Crane said in the interview.
“This is a long-term strategic move that will make a lot of sense if it goes through without too many pounds of flesh being demanded by the regulators,” said Phelps.
Approval is needed from the Maryland Public Service Commission, as well as utility regulators in New York and Texas, and shareholders, the companies said today in a statement. The deal is expected to close early next year.
“Those are very smart moves that will defang some of the antagonistic Maryland Public Service Commission positions,” Phelps said.
The companies are prepared for seven months of negotiations in Maryland, Shattuck said.
“You just have to assume lessons learned, they’re going to approach this carefully and thoughtfully,” said Nora Mead Brownell, a former member of the Federal Energy Regulatory Commission, and founding partner at Alexandria, Virginia-based ESPY Energy Solutions LLC.
The combined company will spend $10 million for electric vehicle infrastructure and $50 million on renewable energy, probably wind, in Maryland.
The commission has new members since state officials, facing customer anger over a 72 percent power-rate increase, blocked the $14.8 billion NextEra deal, Shattuck said. The state this year approved a settlement clearing the way for FirstEnergy Corp.’s $8.4 billion acquisition of Allegheny Energy Inc.
The commission declined to comment because the utilities haven’t submitted their application, agency executive secretary Terry Romine said.
Exelon also promised to sell three Maryland power plants that burn coal or oil to reduce the combined company’s share of the electricity market. The plants will be sold by early next year.
Maryland Governor Martin O’Malley said today in a statement his office will “participate actively” in regulatory proceedings, adding “this announcement follows yesterday’s news that BG&E rates will be falling even further in June.”
Exelon estimated annual benefits of the consolidation at $260 million, enough to raise yearly profit by at least 5 percent.
Included in the estimate are higher power prices for Exelon’s nuclear power, which is currently sold at discounts to spot-market prices for terms of several years. Constellation’s trading unit would reduce collateral costs, because sales would be backed by contracts with plants, rather than cash, Shattuck said.
“It’s a smart strategy to mop up some of that excess supply Exelon has,” Phelps said. “It would improve Constellation’s profitability.”
Maryland regulators prevented the NextEra bid for Constellation and a $3.04 billion offer from Pepco Holdings Inc. in 1997.
Exelon is paying a 16 percent premium based on the average closing price of both stocks over the past 20 days, below the 19 percent average of 456 U.S. power company deals over the past five years, according to data compiled by Bloomberg. Exelon is paying 6.9 times earnings before interest, taxes, depreciation and amortization, compared with an average 7.2 times.
Exelon has tried unsuccessfully three times to buy other power companies and Constellation has been the target of three failed bids. Maryland officials have twice blocked takeovers of Baltimore-based Constellation, in one instance halting a 2006 bid by NextEra Energy Inc. amid rising power prices. The Exelon bid also requires approval from federal regulators and an antitrust review.
“Maryland is going to be the biggest challenge here and they all know that,” said Greg Phelps, who manages about $4 billion at Manulife Asset Management U.S. LLC in Boston, including Constellation preferred stock.
This time is different, Constellation Chief Executive Officer Mayo Shattuck III said today in an interview. The deal would transform power marketing, Constellation’s biggest business, and sale of electricity from Exelon’s nuclear power plants, Exelon President Chris Crane said in the interview.
“This is a long-term strategic move that will make a lot of sense if it goes through without too many pounds of flesh being demanded by the regulators,” said Phelps.
Approval is needed from the Maryland Public Service Commission, as well as utility regulators in New York and Texas, and shareholders, the companies said today in a statement. The deal is expected to close early next year.
$100 Credit
Exelon, based in Chicago, is offering a $100 credit to every customer of Constellation’s Baltimore Electric & Gas unit. It’s promising not to cut jobs for at least two years at the utility and expects its power-generation and marketing unit to expand in Baltimore once the merger is complete, Shattuck said.“Those are very smart moves that will defang some of the antagonistic Maryland Public Service Commission positions,” Phelps said.
The companies are prepared for seven months of negotiations in Maryland, Shattuck said.
“You just have to assume lessons learned, they’re going to approach this carefully and thoughtfully,” said Nora Mead Brownell, a former member of the Federal Energy Regulatory Commission, and founding partner at Alexandria, Virginia-based ESPY Energy Solutions LLC.
The combined company will spend $10 million for electric vehicle infrastructure and $50 million on renewable energy, probably wind, in Maryland.
‘Additional Wind’
“Some of this you have to work out as you go,” Exelon CEO John Rowe said today in an interview. “The governor has made it clear that more generation and clean generation is important to him, so we put some additional wind into this proposal.”The commission has new members since state officials, facing customer anger over a 72 percent power-rate increase, blocked the $14.8 billion NextEra deal, Shattuck said. The state this year approved a settlement clearing the way for FirstEnergy Corp.’s $8.4 billion acquisition of Allegheny Energy Inc.
The commission declined to comment because the utilities haven’t submitted their application, agency executive secretary Terry Romine said.
Exelon also promised to sell three Maryland power plants that burn coal or oil to reduce the combined company’s share of the electricity market. The plants will be sold by early next year.
Maryland Governor Martin O’Malley said today in a statement his office will “participate actively” in regulatory proceedings, adding “this announcement follows yesterday’s news that BG&E rates will be falling even further in June.”
‘Positive Conversation’
Baltimore Mayor Stephanie Rawlings-Blake said in a statement she had a “positive conversation” with Shattuck yesterday and job gains and new construction are “important components” of the transaction.Exelon estimated annual benefits of the consolidation at $260 million, enough to raise yearly profit by at least 5 percent.
“It’s a smart strategy to mop up some of that excess supply Exelon has,” Phelps said. “It would improve Constellation’s profitability.”
Deal Premium
Exelon’s $25.9 billion bid for Public Service Enterprise Group Inc. foundered in 2004 over market-power concerns by New Jersey utility regulators.Maryland regulators prevented the NextEra bid for Constellation and a $3.04 billion offer from Pepco Holdings Inc. in 1997.
Exelon is paying a 16 percent premium based on the average closing price of both stocks over the past 20 days, below the 19 percent average of 456 U.S. power company deals over the past five years, according to data compiled by Bloomberg. Exelon is paying 6.9 times earnings before interest, taxes, depreciation and amortization, compared with an average 7.2 times.
