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BGE parent company to acquire D.C.-based Pepco

Mergers, Acquisitions and TakeoversPepco Holdings IncorporatedChristopher M. CraneBaltimore Gas and Electric Co.Nuclear PowerAtlantic City Electric Company

Baltimore Gas and Electric Co.'s parent struck a $6.9 billion deal Wednesday to acquire Pepco Holdings Inc., 16 years after BGE walked away from a protracted effort to buy its southern neighbor.

Chicago-based Exelon Corp.'s purchase of Pepco Holdings Inc. in Washington would extend its presence substantially in both Maryland and the Mid-Atlantic. But analysts warned that this second attempt at combining Maryland's two biggest utilties could be difficult to consummate because it requires approval from regulators in three states and D.C.

To make the deal more palatable, Exelon turned to its playbook for the successful 2012 acquisition of BGE owner Constellation Energy, Baltimore's last Fortune 500 company. Exelon said it would provide $100 million in credits or other benefits to customers of Pepco's three utilities — about $50 per customer — along with $50 million in charitable donations spread over a decade.

Pepco investors liked the news but Exelon shareholders were skeptical, driving the company's share price down more than 3 percent to $35.03 a share. Some consumer advocates, meanwhile, thought the deal would benefit investors at customers' expense.

"The ratepayers are always the sucker," said Tyson Slocum, director of the energy program at Public Citizen and a Pepco customer. "We are — because in electricity, we are captive."

Exelon CEO Christopher M. Crane said in an interview Wednesday that he expects the purchase would have no impact on BGE customers or Exelon's Maryland employees. He argued that Pepco customers would see benefits beyond the initial commitments, including access to Exelon's sister-utility workers during major outages.

"Consolidation has been an ongoing theme in the last 10 years, making more efficient and stronger entities," he said. "We have proven ourselves in Maryland, I think, … and so we're not an unknown entity."

Jobs likely would be lost in the Washington area as Exelon consolidates the headquarters and other functions, but officials said it was too early to quantify the impact.

The new deal calls for Exelon to take over Pepco's namesake utility, with territory in D.C., Montgomery and Prince George's counties; Delmarva Power, which has customers in Delaware and Maryland's Eastern Shore; and Atlantic City Electric in New Jersey.

If it goes through, Pepco's 2 million utility customers would swell Exelon's base to nearly 10 million. That would top Duke Energy for the U.S. company with the most ratepayers, Wells Fargo said.

Analysts said the purchase would add more steady payment streams to Exelon's bottom line, helping balance out its volatile power generation business.

"On paper, the deal appears to make financial sense and we continue to have a bias towards regulated earnings growth stories relative to the unregulated power markets," wrote Wells Fargo analyst Neil Kalton in a research note. "That being said, [Pepco's] regulatory environments are among the toughest in the nation, so EXC will likely have its work cut out."

Exelon gave up on its effort to purchase another New Jersey utility in 2006 after 19 months of trying, saying there were "insurmountable" gaps between what regulators wanted and it was willing to give. BGE and Pepco walked away from their planned merger at the end of 1997 after more than two years, unwilling to accept the conditions Maryland and D.C. regulators set.

This time around, joining BGE and Pepco would be more complex. It's not just that BGE is now owned by an out-of-state firm. It's also that Pepco had one utility in 1997, and now it has three in multiple states.

Exelon said it expects to take about a year to 18 months to close the deal.

In conference calls with reporters and Wall Street analysts, Crane and Pepco Holdings CEO Joseph M. Rigby called the purchase agreement a good deal for customers and investors that they're confident regulators will approve.

"We really are excited about this combination," Crane said. "It makes an enormous amount of sense."

He noted the geographic proximity and said the companies expect about $80 million in annual savings from efficiencies, including the possible job cuts.

"We would look for an equitable sharing of those benefits with our customers," Rigby said.

Exelon also said it would continue Pepco's efforts to improve reliability. Pepco was fined $1 million by Maryland regulators in 2011 for failing to properly maintain its system.

"Pepco's had terrible problems with reliability, and in the last year or two, they've tried to do better," said state Sen. James C. Rosapepe, who represents Anne Arundel and Prince George's counties.

If state regulators hold Exelon to stringent reliability standards as part of the deal review, Rosepepe said, "that will be a plus."

Maryland utilities are supposed to be reimbursed for all their infrastructure costs, so long as they benefit customers. In that sense, Public Citizen's Slocum said, it doesn't matter who owns a utility — bigger players wouldn't spend more money than smaller ones.

Rosapepe said a change of ownership could make a difference because he attributes Pepco's problems to bad management. But he's not thrilled at the thought of three of Maryland's largest utilities under the same umbrella.

"It's good when you have multiple distributors because then it's not one guy in Chicago making all the decisions," he said. "Concentration of economic power is always a concern."

Paul Patterson, a utility analyst for Glenrock Associates in New York, said the logic of the deal for Exelon is that regulated utilities are a steadier business than power generation. Exelon has struggled to profit off its nuclear power plants amid competition from natural gas.

"The purchase of Pepco, all things being equal, would lower the overall business risk profile," Patterson said.

Utilities have been good to Exelon, particularly as the company wins rate increases. Exelon reported Wednesday that BGE's net income in the first three months of the year was $85 million, up 10 percent from a year earlier.

Exelon's Crane said he pursued Pepco after the company announced in late January that its CEO was set to retire next year. With the integration work on the Constellation merger over, he said, "we thought it was a good opportunity."

Exelon agreed to pay $27.25 per share for Pepco, up about 25 percent from the company's Friday closing price. Pepco's stock price shot up 17 percent on the news, closing at $26.76 a share Wednesday.

Paula Carmody, head of the Maryland Office of People's Counsel, which represents residential utility consumers, said many states require that utility mergers do no harm to customers. Maryland has a higher standard — companies also must show how customers gain from the deal.

"There's a benefit to shareholders," she said, pointing to revenue from ratepayers. "At this point, there is a question mark as to what real benefit customers would get from this acquisition. And that's what we intend to explore."

Baltimore Sun researcher Paul McCardell contributed to this article.

jhopkins@baltsun.com

twitter.com/jsmithhopkins

Exelon, Pepco

Exelon Corp.'s proposed acquisition of Pepco Holdings Inc. would add three Mid-Atlantic utilities to a portfolio that already includes the nearby Baltimore Gas and Electric Co. and PECO in Pennsylvania.

Revenues: $24.9 billion (Exelon); $4.7 billion (Pepco Holdings)

Employees: 25,829 (Exelon); 5,025 (Pepco Holdings)

Utilities: Exelon owns BGE, PECO in Pennsylvania and ComEd in Chicago, with a total of 7.8 million customers; Pepco Holdings owns Pepco in the Washington area, Delmarva in Delaware and Maryland's Eastern Shore, and Atlantic City Electric in New Jersey, with a combined 2 million customers

Source: Company filings. Revenue is for 2013. Employee count is as of Dec. 31.

Copyright © 2014, The Baltimore Sun
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Mergers, Acquisitions and TakeoversPepco Holdings IncorporatedChristopher M. CraneBaltimore Gas and Electric Co.Nuclear PowerAtlantic City Electric Company
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