Exelon To Buy Constellation In $7.9B Deal

Exelon CEO John Rowe, the longest-serving utility CEO in the country, has long been a proponent of consolidation. He has failed three times since 2003 to acquire a smaller rival. Now the market conditions appear to be on his side.

A combination of lower power prices and rising costs tied to tightening environmental standards has been the catalyst for several recent deals, including Duke Energy Corp.'s $13.7 billion buyout of Progress Energy Inc.

Constellation shareholders will receive 0.93 shares of Exelon for each Constellation share. That's worth $38.59 a share, a 12.5 percent premium over Constellation's closing price on Wednesday.

In Constellation, Exelon would acquire a company much like itself — with one important difference. Along with a regulated utility and a wholesale power division, Constellation has among the largest retail power divisions in the country.

Analysts say Constellation's large retail arm and Exelon's large wholesale power division could work well together.

"Constellation's retail arm is a good fit, because it tends to do well when wholesale markets are bad," said David Grumhaus, a utility analyst at the Chicago hedge fund Copia Capital.

Wholesale electric providers own generating stations and sell their power to local utilities or retail power providers either through long-term contracts or through regional power pools.

Retail electric providers buy blocks of wholesale power and resell it to industrial, commercial and residential customers. Through most of the last decade, when power prices were rising steadily, retail providers struggled to sign up new customers because they couldn't offer rates lower than what customers were already getting from traditional utilities.

Lower demand for electricity in the wake of the recession and persistently low natural gas prices have lowered power prices and allowed retail providers to advertise low rates in order to attract customers. Also, new devices such as smart meters that track when power is used throughout the day have allowed retail providers to offer new rate plans based on when customers use power in order to lower overall bills.

"It's a deal that makes sense," Grumhaus said.

Constellation CEO Mayo Shattuck said in an interview Thursday that Constellation has spent years building its retail business. This has created a need for more and more power. Shattuck said the original plan was to add generating stations from time to time until its need for power matched its ability to generate power.

"This (deal) allows us to jump to the endgame," Shattuck said.

Closing is expected in early 2012. Exelon shareholders will own about 78 percent of the company and Constellation shareholders the rest.

The companies said they expect the combination will not affect Exelon's adjusted earnings in 2012 and but that it will raise earnings 5 percent in 2013.

The combined company would retain the Exelon name and be based in Chicago. The new Exelon will be the nation's second biggest residential electricity and gas distribution company, serving 6.6 million customers in Maryland, Illinois and Pennsylvania.

Rowe created Exelon with the 2000 merger of Unicom, the parent of the Illinois utility ComEd, and the Pennsylvania utility PECO. But he was later unsuccessful in his attempts to buy Illinois Power Co., Public Service Enterprise Group Inc., and NRG Energy Inc.

Constellation, which owns Baltimore Gas and Electric, also tried to link up in recent years. In 2005, it announced plans to merge with FPL Group, now called NextEra Energy, but the deal was abandoned.

Utility deals can be difficult to complete because local regulators will often insist on concessions for local ratepayers that make the deal no longer attractive to the companies.

Rowe said in an interview Thursday that Exelon has learned through previous failures how better to approach regulators. To win approval, Exelon says BGE jobs will not be affected for at least two years after the deal closes. BGE will retain headquarters in Baltimore. And BGE residential customers will be given a $100 credit when the deal closes.

This deal will be Rowe's parting shot. If the deal is completed, Rowe would retire. Exelon president Chris Crane, who is credited with rehabilitating the company's nuclear operations, would become CEO of the combined company.

Constellation's Shattuck would become chairman.

In addition to ComEd and PECO, Exelon, based in Chicago, owns a large wholesale power division anchored by the nation's largest fleet of nuclear plants. Constellation also owns power plants, including three nuclear power stations, in 13 states.

Nuclear plants don't emit mercury and other pollutants that are subject to tightening environmental regulations. So Exelon doesn't face the same costs as other utilities that rely on coal-fired generation.

But Exelon has warned recently of coming higher costs because nuclear regulators are expected to issue safety rules in the wake of the nuclear crisis in Japan.

Also, Exelon, like other wholesale power companies, has seen revenue and profit fall along with electricity prices. In much of the country, power produced with natural gas sets the price of electricity for all generators. Those prices have fallen amid increased production.

Constellation had plans for a new nuclear reactor at its Calvert Cliffs generating station in Maryland. The project was abandoned late last year in the face of low power prices. Rowe said Thursday the combined company will not try to revive the plans.

Exelon shares fell 26 cents to $41.27 in morning trading Thursday. Constellation shares rose 3.7 percent to $36.56.

In other recent utility deals, AES Corp. agreed to buy DPL for $3.5 billion earlier this month and Duke agreed to buy Progress in January. If approved by regulators, that deal would create the biggest electric utility in the nation.

 (Copyright 2011 by The Associated Press. All Rights Reserved.)