By Rebecca Smith
Chicago-based power company Exelon Corp. agreed to pay $6.8
billion to buy Pepco Holdings Inc., the utility serving the areas
around Washington, D.C., as Exelon tries to combat sluggish
customer growth by expanding into new markets.
The deal comes as electric utilities are adjusting to mostly
lethargic sales, when adjusted for normal weather. Adding Pepco
customers will boost Exelon's base by two million meters to 10
million accounts in five states and the District of Columbia
Exelon Chief Executive Chris Crane said the company would reap
60% to 65% of its profit from regulated companies once the merger
is complete.Exelon plans to raise $1 billion to help fund the Pepco
transaction by selling some fossil-fuel power plants.
Analysts appeared unenthusiastic about the all-cash deal in a
morning conference call, questioning Mr. Crane about paying $27.25
for each Pepco share, almost a 28% premium to Friday's closing
price. Exelon recently cut its dividend amid poor prices for
electricity sold into deregulated markets, though power prices have
been climbing this year.
Exelon owns a large fleet of power plants and big utilities that
serve Chicago, Philadelphia and Baltimore. The Pepco acquisition
would add utilities with customers in Washington, D.C., Maryland,
Delaware and New Jersey, but no new power plants.
Utility-industry consolidation has been predicted for years, but
has never really taken off, in large part, because many state
regulators are reluctant to approve mergers that appear to favor
companies over consumers. Power-company mergers have also
languished as executives tried to keep their jobs.
Pepco CEO Joe Rigby intends to retire when Exelon takes over, he
said, leaving Exelon's Mr. Crane in charge of the combined
company.
Exelon plans to take advantage of cheap debt financing to boost
its earnings from stable, regulated utilities, while also improving
Pepco operations to go after money that the company has been
leaving on the table. In recent years, Pepco hasn't earned the
maximum amount permitted by state regulators.Pepco's utilities
earned an average 7% rate of return last year, although they were
authorized to earn as much as 9.6%. If Exelon can reduce Pepco's
expenses, it could boost profit without having to touch customer
rates.
Mr. Rigby said in a call with analysts that operational
efficiencies made possible by merging the neighboring utility
companies should improve shareholder returns.
Mr. Crane said the use of inexpensive borrowed money to finance
the deal gives Exelon the flexibility to look for other power
assets to buy, especially since there are early signs of higher
prices in the market. Exelon wants to diversify its fleet of power
plants that mostly sell electricity in the mid-Atlantic and
Midwest.
Some analysts think Exelon is a logical bidder for assets in
Texas, especially if Energy Future Holdings Corp., which declared
bankruptcy this week, puts some power plants up for sale.
"We believe in the Texas market. It's a strong market," said
Bill Von Hoene, Exelon's chief strategy officer. The company is
interested in opportunities in Texas, he said, but he declined to
speculate on what form those might take.
UBS analyst Julien Dumoulin-Smith predicted a protracted period
of getting the necessary approvals from federal regulators and
utilities commissions in the Washington, Delaware, New Jersey and
Maryland, where Pepco has customers and assets, and in Virginia,
where it owns property but has no customers.
"This is not likely to be an easy execution and integration
story," he said.
Write to Rebecca Smith at rebecca.smith@wsj.com
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