Exelon to Buy Pepco in $6.8 Billion Deal

By Dow Jones Business News, 
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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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This article appears in: Energy

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