News Column

Exelon Buys Constellation Energy for $7.9 Billion

April 27, 2011

Andrew Maykuth

Energy Sector

Exelon Corp., the Chicago utility giant that owns Peco Energy Co., on Thursday said it has agreed to buy Constellation Energy Group Inc. of Baltimore for $7.9 billion, creating one of the nation's largest electric power companies.

Constellation is the parent of Baltimore Gas and Electric, which serves 1.2 million electric customers and 630,000 gas customers.

Along with Peco, which has 1.6 million electric customers in the Philadelphia area, and Commonwealth Edison in Illinois, the merged companies would serve 6.6 million customers. That would make it the nation's second largest residential distribution company behind North Carolina's Duke Energy.

The enlarged Exelon would also be the nation's biggest competitive power generator, with more than 34 gigawatts of output, as well as the nation's largest nuclear energy producer. Exelon has 17 reactors and Constellation has five.

The merger would join two companies that have tried and failed to form other marriages in recent years to cope with the energy sector's increasing competition and tightening margins.

"I have always said more scale would be good," John W. Rowe, Exelon's chairman and chief executive, told analysts on Thursday. Rowe said he plans to retire once the merger is completed early next year.

Exelon President Christopher M. Crane, who will become chief executive after Rowe retires, said in an interview that some Exelon jobs in Pennsylvania will shift to Baltimore, but there will be no net change in the company's workforce here. Exelon employs 6,200 people in Pennsylvania at Peco and its power-generation facilities, including five reactors.

One of the merger's main attractions is the combination of Exelon's big fleet of power plants with Constellation's growing business selling and trading power to large industrial and commercial customers, said Mayo A. Shattuck III, Constellation's chief executive.

"This really allows us to leap to the end game, matching this sort of customer arm with this tremendous clean fleet of Exelon's," said Shattuck, who will become executive chairman of Exelon after the merger. "So it really is the perfect marriage from that standpoint."

Analysts said the combination seemed like a good fit, considering both company's unsuccessful attempts with previous merger partners.

"I don't think the transaction is all that surprising," said Paul Patterson, an analyst with Glenrock Associates L.L.C. in New York.

Constellation shareholders will receive 0.93 shares of Exelon for each Constellation share.

The offer values Constellation at $38.59 a share -- 12.5 percent above its Wednesday closing price of $34.30, or an 18.1 premium based on the 30-day average share price.

Following the deal, Exelon shareholders will own about 78 percent of the company and Constellation shareholders the rest.

The combined companies would have $72.2 billion in assets and revenue of $32.9 billion.

About half the merged company's pretax earnings would be derived from its regulated utilities in Philadelphia, Baltimore and Chicago. While the utilities produce steady though unspectacular earnings, the power generation and trading businesses have greater growth potential.

Crane said the trading and retail enterprise would remain in Baltimore and operate under the Constellation name. Exelon's current trading group, based at the company's Kennett Square complex, would move to Baltimore.

Exelon's renewable energy group would also be consolidated in Baltimore.

But Crane said the Chester County job losses would be offset by increases in Exelon's power generation and nuclear units, also based in Kennett Square.

Exelon will relocate the headquarters of its nuclear subsidiary, now in Illinois, to Kennett Square. And Exelon Generation, the company's non-nuclear subsidiary in Chester County, would absorb Constellation's power-generation staff.

"So it's jobs neutral, and still a very very strong presence in Pennsylvania, not to erode at all," said Crane. Exelon's corporate headquarters will remain in Chicago.

The two companies will divest 2,650 megawatts of power-generation capacity in the region to allay concerns that it dominates the market.

Rowe, who created Exelon with the 2000 merger of Peco Energy and ComEd parent company Unicom, has tried three times in recent years to buy smaller rivals: Illinois Power Co., Public Service Enterprise Group Inc., and NRG Energy Inc.

But Row said Exelon may have better luck with the Constellation merger.

Exelon officials said they fashioned their offer for Constellation based upon the terms that the Maryland Public Service Commission recently accepted in the merger of FirstEnergy and Allegheny Power.

Exelon will give each BGE customer a $100 credit after the merger, and promised not to reduce the Baltimore utility's workforce for two years.

Unlike the FirstEnergy merger, which required approvals in several states including Pennsylvania, Exelon's acquisition of Constellation will require primarily approval by Maryland and federal regulators, Exelon said. More on the merger:

Source: Copyright (c) 2011, The Philadelphia Inquirer.

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