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Energy analysts: Constellation-Exelon merger likely to go through

Mergers, Acquisitions and TakeoversConservationRestructuring and RecapitalizationPlant OpeningsShareholders

Despite continuing challenges to Constellation Energy Group's plans to sell itself to Exelon Corp., analysts say the $7.9 billion deal is likely to overcome major regulatory obstacles, including those in Maryland, where critics are seeking concessions to make the merger more palatable.

On Wednesday, even as the companies and merger opponents continued to spar over details of the deal, energy analysts said the merger — scheduled for a shareholder vote next month — is expected to go through. At this point, energy analyst Paul Fremont said, the two companies are "not signaling that there is an obvious deal-killer."

But the process of reaching a merger agreement acceptable to all parties is complicated.

Constellation and Exelon on Wednesday rejected some of the main conditions proposed by critics, including the state consumer advocate's proposal for a three-year rate freeze. The companies also rebuffed a recommendation by Gov. Martin O'Malley's administration that they develop more state-based renewable energy resources.

Instead, the companies made a counteroffer that they said would provide Baltimore Gas and Electric Co. a stronger voice in the bigger, combined company and address concerns that the merged company would push up prices in the mid-Atlantic electricity grid.

That offer was met with skepticism from the state.

"I'm not sure if that's going to win us over," O'Malley spokeswoman Raquel Guillory said, adding that officials with the Maryland Energy Administration were reviewing documents with a "very keen eye."

Meanwhile, EDF Group, Constellation's second-largest shareholder and a partner in its nuclear business, said Wednesday that state regulators should reject the merger unless EDF's concerns over the governance and management of their partnership were addressed. EDF is France's national utility.

Negotiations involving the companies and state, consumers and other interested parties are not unusual in energy deals requiring regulatory approval. The Maryland Public Service Commission, or PSC, which has the power to veto the merger, is scheduled to begin its review on Oct. 31. Shareholders are to vote on Nov. 17.

Fremont, an analyst at Jefferies & Co., said Wednesday that state energy regulators could approve the proposed merger if Exelon and Constellation accepted changes proposed by the PSC.

"Outright rejection seems unlikely because nobody is actually recommending that, including EDF," Fremont said.

Failure to reach agreement on rates and other issues doomed two earlier attempts by Constellation to sell itself. But the Baltimore-based energy giant did agree to measures proposed by the commission to gain approval for its deal to sell half its nuclear business to EDF in 2009.

Given its history, Maryland has been viewed as the toughest regulatory obstacle for the deal.

Morningstar analyst Travis Miller put the chance of the deal's closing at 75 percent. Miller said the companies took a "step in the right direction" this week when they reached a settlement with the independent market monitor for the PJM electricity grid, alleviating the monitor's concerns that a combined company would have too much market concentration and could push up prices.

The PJM grid serves much of the Mid-Atlantic region.

That settlement will also pave the way for an approval by the Federal Energy Regulatory Commission, Miller said.

Given the deal with PJM's market monitor, "We believe approval in [Maryland] is the next (smaller) hurdle for merger consummation," UBS Securities analyst Julien Dumoulin-Smith wrote in a research note.

Exelon and Constellation initially agreed to sell three coal-fired plants in Maryland to mitigate market power concerns. The settlement now restricts the company from selling those facilities to certain companies, among other limitations. The companies said Wednesday that they planned to ask the federal commission and the PSC to accept the deal as part of any potential decision approving the merger.

The People's Counsel, however, has asked the federal commission for a hearing on the combined company's control over electricity prices. The consumer advocate wants Exelon to sell four power plants in and around Philadelphia in addition to the three Maryland facilities — a recommendation that the companies rejected in testimony filed Wednesday with the Public Service Commission.

The Maryland people's counsel, Paula Carmody, could not be reached for comment.

In announcing the proposed merger in April, Exelon and Constellation executives offered a $250 million incentive package that included a $100 credit for each BGE customer as well as financial contributions to the state's green energy goals.

They included $4 million for Maryland's EmPower energy efficiency efforts; $10 million for the state's electric vehicle infrastructure; and more than $50 million to develop 25 megawatts of green energy in the state.

The companies also agreed to maintain Constellation's annual charitable giving of about $10 million for at least 10 years, including $7 million in Maryland.

But state officials and consumer advocates said those commitments were not enough and proposed conditions that would preserve local control of BGE, produce more clean energy and put more money in customers' pockets.

In particular, the state wants the combined company to build solar, wind or other state-based renewable energy plants that would account for one-fourth of its obligations to meet O'Malley's ambitious green-energy goals over the next decade. Under one scenario, Exelon would be required to build almost 400 megawatts of biomass and wind-farm generation.

State law requires electricity suppliers to generate 20 percent of their power from renewable sources by 2022.

Exelon's president and chief operating officer, Christopher M. Crane, said in a statement Wednesday that the 25 megawatts of green energy proposed by the companies "will add substantially to the state's generation resources, create jobs, advance the state's goal of increasing its reliance on clean renewable resources and reduce greenhouse gas emissions."

Exelon also rejected a proposal by the Maryland Energy Administration that state regulators gain the right to spin off BGE in the future if the deal failed to protect ratepayers.

Crane said a spinoff "would harm BGE customers and destroy much of the benefit of the transaction."

To address concerns over losing local management of BGE, Exelon and Constellation said the utility's chief executive, Kenneth W. DeFontes Jr., would sit on the combined company's executive committee, which would assist Exelon's chief executive with overall management. In return, Crane, who would be the combined company's chief executive, would sit on the utility's board of directors.

"BGE will remain locally managed, will have the same accountability to the PSC as it currently does, and will have a strong voice at Exelon," DeFontes said in a statement. "As part of Exelon, BGE will continue to provide safe and reliable service to its customers at just and reasonable rates."

The two companies agreed to maintain stronger measures implemented in 2009 to protect the utility from potential financial troubles at the parent company for three years. They also committed to maintain BGE's capital and operating spending for 2012 and 2013 at $1.3 billion and $1.5 billion.

Morningstar's Miller said any concession that protected BGE and its ratepayers from "adverse circumstances" would likely go over well with the commissioners.

But Miller said Exelon and Constellation also needed to address concerns raised by EDF to satisfy state regulators.

In testimony filed with state regulators Wednesday, EDF senior consultant Jeffrey Johnson said the joint nuclear-power venture that the French utility owns with Constellation would lose autonomy if Constellation were bought by Exelon. At the same time, control of the Calvert Cliffs nuclear plants in southern Maryland, described as "the jewels in the … crown" of the company, would move out of state, he said.

Moreover, EDF said, the buyout might restrict the joint venture's ability to build needed power plants in the Mid-Atlantic grid. Regulators could block its expansion, he said, because of concerns about market concentration and control over electricity prices.

EDF is pursuing efforts to build a third reactor at Calvert Cliffs, though the company faces obstacles. Constellation abandoned the project last year, which means EDF must find another U.S. partner if it is to move forward.

Exelon spokeswoman Judith Rader said that EDF would not be harmed by the merger — and that the French company's approval is not required for the merger to proceed. EDF owns 7.2 percent of Constellation.

Also on Wednesday, Exelon and Constellation scheduled separate shareholder meetings for the Nov. 17 merger vote. Constellation's meeting will take place in New York; Exelon's will be in Chicago.

Asked why the Constellation meeting was not being held in Baltimore, company spokesman Larry McDonnell said New York was a "central location for the institutional shareholder base."

hanah.cho@baltsun.com

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