Public Service Shares Fall As Exelon Abandons Acquisition Plan — Friday, September 15, 2006

By Jim Polson and Dan Lonkevich

Shares of Public Service Enterprise Group slid after a regulatory impasse in New Jersey scuttled Exelon Corp.'s plan to buy the company for $17.8 billion and create the largest U.S. utility company.

The companies faced "insurmountable gaps" with the New Jersey Board of Public Utilities, Chicago-based Exelon and Newark, New Jersey-based Public Service said late yesterday in a statement. The board was the deal's last hurdle after the companies previously gained approval from federal energy regulators and antitrust officials.

Exelon, which agreed to buy Public Service in December 2004, said on Aug. 30 that completing the transaction was no longer "more likely than not." The companies ran into delays as they tried to allay concern that the combined company might dominate power markets and inflate prices.

"Most observers did feel the odds were getting longer as it took more time," said Tom Burnett, director of research at Wall Street Access in New York and a specialist in tracking acquisitions. "The companies and the folks in the New Jersey regulatory office were just too far apart."

Public Service stock dropped below $60 in electronic trading, a decline of 9.3 percent from yesterday's close. The companies announced they were abandoning their merger after the close of U.S. exchanges. Shares of Exelon rose as much as or 3.1 percent, to $59.50, in after-hours trading.

"This could be positive for Exelon," said Daniele Seitz, an analyst for Dahlman Rose & Co. in New York who rates Exelon shares at "buy" and owns none. "People are going to say, if the deal was bad, they were courageous to walk away. The company is very well equipped to compete."

Pushing for Approval

Exelon Chief Executive Officer John W. Rowe had argued that his company would run Public Service's plants, particularly their nuclear units, more efficiently. He said that would increase the electricity supplied to New Jersey's competitive wholesale market, benefiting customers.

"For the regulators it was a bit much," Seitz said. "The deal was enormous and it scared a lot of people."

The companies had offered to sell power plants and place output from nuclear plants under long-term contracts to win approval from the U.S. Department of Justice and the Federal Energy Regulatory Commission.

Exelon on July 31 offered $600 million in cash and additional rate concessions if New Jersey would agree to approve the acquisition. New Jersey's board made an undisclosed counter proposal on Aug. 17.

New Jersey "apparently feels that the commitments we had to make to FERC and DOJ, those divestiture obligations, were not enough," Public Service Enterprise Group Chief Executive E. James Ferland said in an interview after yesterday's announcement. "We don't agree with that."

The regulators demanded further plant divestitures and constraints on sales from the generators the companies would keep, he said.

Not Enough

"We did not believe the companies offered enough direct and real rate relief," Ronald K. Chen, New Jersey Public Advocate said in a separate statement. "The companies also would not agree to measures that our experts, and the Board of Public Utilities staff, believed were necessary to ensure that the merged company could not manipulate regional energy markets."

To win federal approval for the acquisition, Exelon previously agreed to sell six power plants in Pennsylvania and New Jersey, as well as place 2,600 megawatts of nuclear-power capacity under contract for as long as 15 years.

The Justice Department on June 22 gave antitrust approval to the deal. FERC had given approval a year earlier.

Blocked Deals

Four of the nine largest U.S. utility takeovers announced in the past three years have been blocked by state officials. The largest deal pending, FPL Group Inc.'s $11 billion purchase of Constellation Energy Group Inc., stalled May 31 amid a rate dispute in Maryland that prompted a new state law on utility mergers.

Exelon, owner of utilities in Chicago and Philadelphia, withdrew an offer for Dynegy Inc.'s Illinois Power Co. in 2003 after Illinois lawmakers rejected its terms.

Oregon's Public Utility Commission blocked the $1.4 billion sale of Portland General Electric Co. in March 2005, declaring its acquisition by Texas Pacific Group from bankrupt Enron Corp. didn't benefit customers.

Kohlberg Kravis Roberts & Co., JPMorgan Chase & Co. and Wachovia Corp. in 2004 abandoned an $800 million bid for Tucson utility owner UniSource Energy Corp. after the Arizona Corporation Commission demanded the buyers put up more money, reducing the planned borrowing to finance the transaction.

By contrast, Duke Energy Corp. closed on the $9 billion acquisition of Cincinnati-based utility owner Cinergy Corp. on April 3, less than 11 months after announcing the deal. They won regulatory approval from five states and federal officials.

"If you can fly below the radar screen, you're fine," Seitz said. "Look at the Duke-Cinergy merger. It went like a letter in the mailbox. Nobody cared."

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