5 May 2011
If regulators give the green light to a proposed merger of US utilities Exelon and Constellation Energy, the combined company will be in a better position to finance the continued transition to cleaner energy sources, which in the US goes beyond renewables to include natural gas and clean coal.
Utilities are pursuing potential consolidations in the face of Environmental Protection Agency (EPA) regulations that will force them to consider closing or retrofitting coal-fired units, a capital-intensive effort. The Exelon-Constellation Energy proposed merger comes just months after Duke Energy and Progress Energy announced plans to form a super-utility to replace their aging coal fleet.
“I think this represents a trend that will continue in the utility industry,” said Clinton Vince, Washington-based chairman of the energy-transport-infrastructure practice at law firm SNR Denton. “I think scale matters in this day and age.”
The market capitalisation of a combined Exelon and Constellation Energy would be around $34 billion, with an enterprise value of $52 billion. Constellation’s shareholders will receive 0.930 shares of Exelon common stock in exchange for each share of Constellation common stock. Based on Exelon’s closing share price on 27 April, the value would be $38.59 per share, or $7.9 billion in total equity value.
The total power generating capacity of the combined company would be 34.4GW, with 55% derived from nuclear generation, 24% from natural gas, 13% from oil and coal facilities, and 8% from renewables and hydro.
“It maintains our focus on clean energy,” said Exelon chairman and CEO John Rowe. “We see value in clean fleets. This transaction adds more clean generation to the mix.”
Media reports have speculated that the proposed merger would revive Constellation Energy’s abandoned plans to build a nuclear unit at its Calvert Cliffs facility in Maryland. “That is simply not the case,” Rowe said. “At today’s gas prices, you can’t build a new nuclear plant in a competitive marketplace.”
Divestment and ratepayer rewards offered to satisfy regulators
The companies anticipate finalising the merger in early 2012, if they secure approval from shareholders and regulators. Several state and federal regulators must give the deal the green light, including the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission and the Maryland Public Service Commission.
“There’s nothing that leaps out as a huge problem from their filing,” Vince at SNR Denton said.
The companies believe they will be required to divest three Constellation generating stations located in the Pennsylvania-New Jersey-Maryland territory, the only market where there is a material generation overlap. The stations include baseload coal-fired generation units plus associated gas and oil units, and have a total capacity of 2,648MW.
“This is a modest portion of our combined expected 2012 generation,” said Constellation chairman, president and CEO Mayo Shattuck, who will become executive chairman of the combined company while Exelon president and COO Christopher Crane becomes president. Rowe plans to retire.
The companies have also committed to directly invest more than $250 million in Maryland, including providing a $100 credit to each customer of utility Baltimore Gas & Electricity (BGE), $5 million for a state programme to assist low-income customers, $10 million in annual charitable giving for 10 years and a pledge not to cut BGE jobs for at least two years.
“Usually state regulators want to see some benefits shared with the ratepayers,” Vince said. “It looks like the merging partners have already begun to address that so the question is will the state regulators think that’s generous enough.”
The companies seem determined to avoid the fate of Constellation Energy’s proposed acquisition by FPL Group, which collapsed in 2006 amid concerns about skyrocketing local electricity rates, a key focus for state regulators.
“It’s almost like a 50-50 type track record” for utility mergers, said Paul Fremont, managing director of investment bank Jefferies.
Gloria Gonzalez
