Philadelphia Inquirer

Exelon Ends Bid For PSEG As Threatened

Peco's parent didn't reach a deal with N.J. regulators, who were the last hurdle to the $17 billion acquisition.

The Philadelphia Inquirer — Friday, September 15, 2006

By Benjamin Y. Lowe
Inquirer Staff Writer

The parent of Peco Energy Co. yesterday unplugged its $17 billion bid to acquire Public Service Enterprise Group Inc. after failing to reach a deal with New Jersey utility regulators.

Exelon Corp. had counted on the merger to give it scale in one of the nation's largest power grids. The Chicago company, which threatened in August to pull the plug on the deal, would not comment on its plans.

"We are very disappointed that the merger cannot be completed," John W. Rowe, Exelon's chairman and chief executive officer, said in a statement released after the stock market had closed. "We wish PSEG and its team all the best."

If the movement in the after-hours trading of both companies is any indication, investors can expect to see significant trading volume in Exelon and PSEG shares today. After closing at $66.15 yesterday, PSEG fell as much as $5.91, or nearly 9 percent, to $60.01. Shares of Exelon, which closed at $57.77, rose as much as $1.73, or 3 percent, to $59.50.

The deal's $400 million breakup fee expired in June, PSEG spokesman Paul Rosengren said, leaving either company free to cancel the deal.

Regulators were not swayed by the companies' final offer of concessions, as well as Exelon's offer to base one of its divisions in Newark, N.J., where PSEG is based. Its power-generation division is based in Kennett Square, Chester County.

The two utilities announced the deal in December 2004, and it sailed through various federal and state regulatory reviews until they arrived in front of the New Jersey Board of Public Utilities. Exelon twice threatened to end the deal this summer as negotiations dragged on.

"Gaps separating the parties' respective settlement positions are insurmountable," BPU spokesman Eric Hartsfield said in a statement. "Major differences identified by the companies included rate concessions and market power mitigation."

Victor Fortkiewicz, the BPU's executive director, said negotiations between both sides continued until "recently," but he would not be specific.

The combined company would have served 7.1 million electricity customers and 2.2 million natural-gas customers in three states. More important, it would have controlled 25 percent of the capacity of a power grid, PJM Interconnection, stretching from the Mid-Atlantic to the Midwest.

"This deal would have created an energy giant large and powerful enough to dictate electric rates with the potential to cost every ratepayer in the state hundreds of dollars more a year," said Suzanne Leta, energy advocate for the New Jersey Public Interest Research Group, which opposed the deal.

Ronald K. Chen, New Jersey's public advocate, also said the deal's demise was in the "best interest" of New Jersey residents.

About three weeks ago, Exelon had signaled to investors that the acquisition was unlikely to be completed. The energy firm said it would take a charge of $55 million in the third quarter for related expenses.

PSEG and Exelon make money by selling electricity in the open market and by delivering it to retail customers. But for transmission charges, New Jersey's market is fully deregulated, while customers in Peco's service territory in the Philadelphia area have their rates capped until 2010.

Danielle M. Seitz, an electricity analyst at Dahlman Rose & Co. L.L.C. in New York, said she did not expect financial consequences for either company as a result of the deal. A bigger question, she said, was whether both would be able to succeed with regulated and deregulated business units.

"The industry is still in a transition," she said. "The vertically integrated structure may not be the best structure anymore."

PSEG yesterday reaffirmed its 2006 earnings guidance of $3.45 to $3.75 a share. It reported earnings per share of $2.71 last year.

Exelon, whose renewed interest in nuclear power plants partly drove the deal, may now look to another deal. In 1995, Peco tried a hostile takeover of PPL Corp., of Allentown. Besides a nuclear plant in Berwick, Pa., and about a dozen power plants on PJM Interconnection, PPL has a contiguous customer-service territory to Peco's.

Exelon spokeswoman Jennifer Medley said the company had no comment on its next move, whatever that might be.

"For the past 20 months, our focus has really been on closing the merger," she said. "It would be premature to speculate on what we would do now. We will continue to look at opportunities where the strategic and economic merits are compelling."

A Dead Deal

Dec. 20, 2004: Exelon agrees to buy Public Service Enterprise Group Inc.

Jan. 27, 2006:Pennsylvania regulators approve the purchase.

June 22: The U.S. Justice Department approves the deal but orders the firms to sell six power plants to resolve market-domination concerns.

July 31: Exelon threatens to pull out unless N.J. regulators approve the purchase within a week.

Yesterday: The deal is called off.

SOURCE: Inquirer research

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