By Dow Jones Business News,
April 30, 2014, 07:05:00 AM EDT
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
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
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
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
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.
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