The Star-Ledger

State Offer Refuels Exelon-PSEG Deal

The Star-Ledger — Monday, August 21, 2006

Star-Ledger Staff

Exelon has the power to make the next move.

The Chicago company complained for weeks about the slow pace of regulatory scrutiny for its deal to acquire Public Service Enterprise Group. Then last Thursday, the utility companies received a proposal from the state Board of Public Utilities asking for $220 million more in benefits for consumers and the sale of two more electric ity-generating plants.

Wall Street reacted Friday like it is a done deal, pushing up shares of Newark-based PSEG 2 percent to close near its 52-week high. And the spread – the difference between where the stock is trading and the value of the deal – narrowed. Both are indications investors are expecting the long-debated deal will be completed, analysts said.

Neither Exelon nor PSEG executives are talking about the state offer. But some analysts said given the time, money and effort spent in trying to win approval for the $18 billion deal, the differences between the companies' so-called "last and best" offer and what the state has proposed might very well be bridged.

"In my mind, I think it's a 100-percent done deal," said Paul Fremont, an analyst with Jeffries & Co., who follows both companies. "My reading of this is that the par ties are extremely close."

The financial concessions appeared significant – $600 million offered by Exelon and PSEG compared with $820 million proposed by the state. But analysts said the difference between the two offers isn't that substantial given that the state would spread out the conces sions over five years, compared to the four years proposed by the company.

In a note to clients, Fremont said netting out various factors, the counterproposal is within $35 million of Exelon's last offer.

"Exelon seems determined to do the deal," said Neil Kalton, an analyst with A.G. Edwards. "It probably will be closed."

There are potential land mines in the state's counterproposal, however. Probably most problematic, according to several analysts, is a provision in the state offer re quiring the litigation of two pending utility rate cases involving electric and gas, and then directing the utility to refrain from seeking rate increases for the next five years.

"It's a legitimate concern," Kalton said. "They are giving up a lot of money over those years."

The five-year restraint on rate increases is particularly troubling to Exelon executives, analysts said, in the wake of a decision in July where the company's Illinois utility was granted only $8 million of a requested $300 million rate increase it was seeking from the Illinois Commerce Commission.

PSEG's Public Service Electric & Gas, the state's biggest gas utility with 1.7 million gas customers, has argued in its pending gas rate case that it is only earning about 3 percent profit, far less than the maximum allowable rate of return of 10 percent.

Despite those concerns, however, several analysts said they would be surprised if Exelon walks away from the deal.

"I would guess there will be a counterproposal from Exelon. Maybe they come back and try to meet halfway between what they have offered and what the state proposed," Kalton said.

The Exelon board of directors authorized Exelon executives two weeks ago to resume negotiations and report back by today and "reconvene the board if a satisfactory settlement is not concluded by that date."

Jennifer Medley, an Exelon spokeswoman, declined to say whether the board would be meet ing today.

Meanwhile, a union representing workers at power plants owned by PSEG came out against the settlement offer proposed by the state, primarily because it would force the company to sell an additional two power plants beyond the four it had already agreed to divest in New Jersey.

"We cannot and will not support any settlement that includes the loss of any more generating plants," said Chip Gerrity, president of International Brotherhood of Electrical Workers Local 94. More than 400 of its members are already affected by the potential sale of the four plants.

"Jeanne Fox (BPU's president) promised 'no harm' to PSEG employees as a result of the merger, but the BPU staff has painted a target on their backs," Gerrity said.

The state's settlement offer is also opposed by New Jersey Public Interest Research Group and New Jersey Citizen Action because they feel it will not prevent the combined company from forcing customers to pay higher energy bills.

Others involved in the negotiations said it is too soon to shut the door on the deal.

"We've come a long way," said Steven Goldenberg, an attorney representing large industrial and commercial energy users. "We owe it to our respective constituencies to see if a deal can be done."

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