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Merger with Constellation offers 'valuable channel': Exelon

1:34 PM, Jun 2, 2011   |    comments
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Electric Power Daily (02-Jun-11)

Constellation Energy Group offers a "valuable channel" for Exelon to market its generation, Exelon said in a presentation related to the proposed merger between the companies that was outlined in a filing made at the Securities and Exchange Commission on Wednesday.

The addition of Constellation's competitive retail and wholesale customers will transform Exelon to a company with about 165 million MWh of energy sales annually, up from the 59 million MWh/year it has now, the filing said.

The presentation will be used during a series of meetings with investors regarding the proposed merger of the two companies, Exelon said.

Exelon proposed the $7.9 billion merger in an all-stock transaction on April 28. The combined company will be the nation's largest energy supplier with customers in 44 states, the District of Columbia and Canada. Exelon owns 26,339 MW, 17,047 MW of which is nuclear. Constellation owns 11,430 MW, including 1,921 MW of nuclear generation. The market value of the combined company would be $34 billion with an enterprise value of $52 billion, which includes net debt, the filing said.

The company gave a revised total cost to achieve the merger of $650 million and a revised synergy rate of $310 million. The revisions were due to greater accessibility and availability of data since the merger announcement, the company said.

"We continue to think is a good deal for both companies," Paul Fremont, an analyst with Jefferies, said Wednesday in an interview. There are tangible savings and strategic benefits and Constellation's customers will be better off with a likely stronger company post-merger, he said.

Constellation also adds a mix of clean generation to Exelon's generation portfolio and increases the geographic diversity of its generation load, Exelon said.

For Constellation, the merger helps match physical generation with load in key competitive markets, Exelon said in the presentation. The merger also creates a balance sheet strong enough to pursue its strategy of growing its competitive retail business, the SEC filing said.

"The strategic rationale for this merger is that we love our strategy. We think it is going to take decades to evolve this customers business, but it's also important that we have financial strength and the physical power to back up the sales of our front end sales business," Constellation CEO Mayo Shattuck said during a shareholder meeting held last Friday.

Constellation is close to reaching its goal for the year of having 1 million customers, Shattuck said.

The companies have made all the necessary filings for approval of the merger except for shareholders. They plan to mail proxy materials to shareholders in June and hope to have shareholder approvals during the third quarter.

The companies expect to close the transaction during the first quarter of 2012.

Exelon said in its filing for approval of the transaction at the Maryland Public Service Commission that it is committed to invest about $250 million in the state. It will make Baltimore the headquarters for the combined company's competitive energy businesses.

Exelon's wholesale and retail energy supply operations will be integrated into Constellation's wholesale, retail and energy solutions business to be a competitive supplier of power, natural gas, demand response and energy efficiency. "It will be a growth engine for the combined company," Exelon said in the state application filed last week.

Exelon also committed to develop or assist in the development of at least 25 MW of new "Tier 1" renewable energy projects in Maryland. It also will provide $10 million to add electric vehicles and charging stations to fleets owned by state, county and local governments in Baltimore Gas & Electric's territory. BGE is the regulated utility owned by Constellation Energy.

Exelon also proposed a $100 rebate to all BGE customers for a cost of $112 million. The credits will be made within 90 days after the merger is consummated.

The combined company's renewable energy and demand response initiatives will be guided by the principles underlying Exelon's climate change response program which aims to reduce Exelon's 2001 carbon footprint by 15.7 million metric tons of greenhouse gases, the application said.

Governor Martin O'Malley said last week in an "Ask the Governor" segment on Maryland Public Television that he worries that the combined company will create an even larger company in the state to fight against renewable energy proposals. He called the lobbying effort by Constellation and other utilities against legislation promoting offshore wind development as "fierce."

Exelon has committed to fund $4 million to offset costs already incurred by BGE to reduce usage by customers. "BGE shall maintain its commitments to supporting and implementing energy efficiency programs, including EmPower Maryland," the filing said.

The company also will spend between $95 million and $120 million to build or renovate a building in Baltimore to serve as headquarters for the competitive business and renewable energy development business.

Under the terms of the merger, Constellation stockholders will receive 0.93 shares of Exelon common stock for each share of Constellation stock. Following the merger, Constellation stockholders will own about 22% of Exelon common stock and Exelon shareholders will own the remaining 78%.

The PSC will hold a prehearing conference on the proposed merger on June 28.

Mary Powers

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