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Sun Q&A: Bernie Kohn on Constellation-FPL deal

Mitchell, Baltimore: Why doesn't the Florida Public Service Commission have toapprove the merger as the Maryland Public Service Commission does?

Kohn: Florida is one of only three states that do not give its regulators theauthority to approve or deny utility mergers. (The others are Michigan and Montana.)

Jo, Baltimore: Why will the FPL shareholders own 60 percent of the company even though they only get a 1 for 1 stock distribution?

Kohn: It's a matter of simple math -- FPL currently has more than twice as manyoutstanding shares as Constellation (approximately 395 million to 178 million).

Deb, Baltimore: Why will Constellation Energy shareholders get 1.4 shares of thenew company for each 1 share of CE?

Kohn: The ratio essentially establishes the price of the deal in the form of stock in the new company. The agreed-to price was in the $61 range, and with FPL stock trading at around $42, the ratio of 1.444 essentially establishes the deal's value. The risk, of course, is that the ratio wouldn't adjust if FPL's stock declines.

A reader in Melbourne, Fla.: $15 million payoffs? Isn't that the real reason for all of these "storm-related" hikes?

Kohn: Not a question that can be answered per se, but journalists at our sisternewspaper, the South Florida Sun-Sentinel, tell us that is on the minds of a lot of people in your state.

David Bryan, Baltimore: Will this merger have any effect on current retirees' pension and medical benefits? How does FPL's existing pension and medical benefits compare to CEG's, and should current retirees worry about any loss of benefits now or in the future?

Kohn: It's too early to know the impact. Constellation officials told employeesyesterday that this is one of the key issues that will be dealt with by a transition team. The companies have said the two utilities will continue to be separately managed, and the fact that Florida Power & Light workers are unionized, while BGE's are not, makes comparisons or any sort of predictions complicated.

A. Greenwald, Baltimore: Why would shares of FPL be issued to CEG shareholders rather than more shares in CEG?

Kohn: Actually, it's neither. The combined company, while still called Constellation, would be a new corporation. All shareholders, in both companies, would get new stock -- a 1-for-1 swap for FPL shareholders, and 1.44-to-1 for CEG shareholders.

Karl Neddenien, Richmond, Va.: Why do you refer to this business transaction as a "merger," when it is in fact an acquisition?

Kohn: This is an issue we've wrestled with. The companies have gone toextraordinary lengths to portray this as a merger, and have structured thedeal and made guarantees about dual headquarters for a period of time inways that give those claims some credibility. But we -- and even Constellation CEO Mayo Shattuck -- have also been clear that FPL is the acquiring company and that Lewis Hay, FPL's chief executive, is in charge.

Even before the deal was announced, we wrote a story looking at the historyof alleged "mergers of equals" and noted that they have rarely proven to beeither mergers or equal. Ultimately, it will be up to the companiesthemselves to show whether they will break that mold.

Steve Allwein, Severna Park: Is the Maryland state government able to stop the merger of Constellation Energy and FPL?

Kohn: It depends on your definition of "stop." When BGE and Pepco wanted to mergea few years ago, Maryland regulators sought conditions that the companiesconsidered so onerous that they abandoned their agreement. It's far tooearly to know how they'll view this deal.

Utilities have to be able to showthat their merger is in the public interest or, if nothing else, doesn'tharm it. States with a tradition of strong utility regulation tend to allowmergers to go through if they receive certain guarantees or concessionsabout local utility operations, such as a rate freeze for some period ofyears.

James Gilman, Baltimore: You have put a pretty positive spin on this story and theimplications of this merger for the city of Baltimore. Do you really thinkthat Baltimore is going to make out with more jobs? This company has beensold. The power and decision-making is moving to Florida. Eventually,jobs, particularly high-paying executive jobs, will be moved to Florida aswas the case with Deutsche Bank/Alex. Brown. This could be very bad forthe city.

Kohn: Certainly Constellation officials in particular have done their best toportray this as something good -- or, at least, not bad -- for Baltimore. Theyare well aware of and sensitive to the history you allude to, particularlysince Constellation's current CEO was previously a top executive ofAlex. Brown when that firm was sold and later all but dismantled. They alsoare aware that this deal must be approved by Maryland regulators.

The combined company's growth engine is not the utilities, but the merchantpower operations that are based in Baltimore. Because those sorts ofoperations depend on highly skilled professionals who aren't easilyreplaced, and often not easily moved, it's reasonable for the companies toassert that there is some job security here. But as you point out, FPL isthe acquirer. Certain promises are being made about keeping the Baltimoreoperations intact for a period of time, but ultimately, the company will berun as current FPL leaders see fit.

P. Clements, Baltimore: Is there anything in this agreement that would prevent FPL frompassing along its Florida/Gulf Region costs to Mid-Atlantic consumers?I'm thinking that FPL has been hit with four hurricanes, and consumers downSouth are near a breaking point. Maybe they bought Constellation in order tohave Mid-Atlantic consumers subsidize their losing markets. Withde-regulation due next summer, we in Baltimore will never know how much isour actual utility use and how much we are being charged to prop up otherregions.

Kohn: FPL has already received permission from Florida regulators to pass alonghurricane-related costs to Florida Power & Light consumers. BGE is andwould be separate from Florida Power & Light, regulated in Maryland and notFlorida. In your scenario, BGE would somehow have to convince regulators inMaryland that it is in the public interest of Maryland customers to pay the costs of rebuilding a Florida system that does not serve them. One cannever predict how regulators would look at anything, but the history isthat they tend to be wary of any situation that makes utility customers payfor an acquisition.

Carol, Annapolis: I am a stockholder and wonder if the merger will help or hurtme? Any thoughts?

Kohn: In the short run, you're not getting the traditional takeover premiumbecause the deal is being positioned as a merger of equals. Some analyststhought Constellation stock was worth $70 to $75 a share. It still may be.Then again, maybe it isn't. No one knows for sure. The combined companyclearly will have an impressive array of power-generating assets andConstellation's market leading position in merchant power, but it also hasto manage those assets well through the inevitable ups and downs of anenergy-related business.

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