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Exelon CEO Sees U.S. Entering Era of 'Difficult' Mergers

The U.S. is entering "an era when mergers are going to be more difficult again" and will "only be easy in places where there's a very troubled utility," Exelon Corp. CEO John Rowe said last Thursday in remarks made at the Sanford C. Bernstein & Co. strategic decisions conference in New York City.

"So you may see less matings of the healthy and more sort of rescue-based mergers," Rowe said. The country may "be coming into an age when it's only the generation business that's merging across the country. And that creates another set of dynamics."

Atlanta-based generator Mirant Corp. last week made an unsolicited bid to buy NRG Energy. But NRG has given the offer a frosty response and Mirant has sued NRG for rejecting what is being described as an $8 billion takeover bid (see related story).

Meanwhile, Exelon and Public Service Enterprise Group (PSEG) are continuing with their efforts to close a pending merger deal, which was first unveiled in 2004.

An analyst at the conference asked Rowe whether the complexities of the PSEG merger make it less likely that Exelon would embark on another acquisition in the future.

"I don't think it makes it less likely, but it may change the shape," the Exelon official responded. "Assuming we get this transaction done, we're going to have to take some serious time to evaluate what we've done and to get it accomplished and to deliver the synergies and deliver the results we've promised everybody here."

When the companies "do that, we're also going to have to look around. Completing that merger will make Exelon 40 to 50% bigger in most respects than any other utility in the country," Rowe said.

"You have to look around and say, 'OK, are other mergers happening, like Duke-Cinergy...' You have to say, 'Are we reaching the point...where people are more hostile to mergers or less.'"

Constellation Energy Group CEO Mayo Shattuck recently told employees that Constellation has, for the time being, ceased FPL Group merger integration activities (see related story).

Shattuck said that while "we still believe strongly in the proposed merits of our merger, we are disappointed in the ongoing political controversy in Maryland. While we remain hopeful that our merger with FPL can move forward, we think the prudent thing to do is put our integration efforts temporarily on hold while the political issues are being resolved."

The Exelon-PSEG merger has cleared a number of regulatory hurdles, but still needs clearances from the U.S. Department of Justice (DOJ) and the New Jersey Board of Public Utilities (BPU).

If "reasonable settlements" can be reached with the DOJ and the BPU related to the pending merger between Exelon and PSEG, Rowe continues "to believe that the merger can be economically attractive for our investors and can create real value for our investors."

Progress is being made with the DOJ and "serious negotiations" are underway in New Jersey, Rowe said. "It was extremely frustrating that we were not successful in getting a really live negotiation until we had finished all the legal proceedings," he said. The Exelon official said that "I think we're much closer to a resolution with DOJ, than we are with BPU..."

Meanwhile, in the wake of "some objection to the merger from the financial community, we have not only begun and substantially, although not entirely, completed our financial analyses, we have also retained Lazard to be an advisor to our board, which does not get a fee on the transaction," Rowe said.

"While the changing market conditions affect our models and our analyses, we believe that the relative value of the two companies remains about the same -- that is, that the value of each has increased roughly proportionally," Rowe said.

"We believe that the strategic value of putting together a larger generation fleet and a larger nuclear fleet, the strategic value of having delivery companies in three states, instead of two, the value of having a major generation presence in four states, instead of two, continues to be unchanged," Rowe told the conference.

He said that the "ultimate decision" on the deal rests with the utility's board. "It will make an assessment before it waives any of the rights that may accrue to it on the twentieth of June, and it will do so based upon its own analysis, upon the analysis management presents it, and upon the independent views presented to it by Lazard."

According to an S-4 filing made at the Securities and Exchange Commission in early 2005 related to the deal, the merger agreement can be terminated at any time prior to completion of the deal in any of several ways. Among other things, the merger pact can be terminated by either Exelon or PSEG if the transaction is not completed by June 20.

Rowe told the conference that "our deal with PSEG has, of course, taken much longer than we originally thought," adding that market prices "have increased significantly in both PJM East and PJM West."

The regulatory response "to rising prices has been predictable, whether you look at Illinois, Pennsylvania or New Jersey itself. And that is, as prices rise, to look for more and more ways to claim or reclaim pieces of that increase."

Nuclear Regulatory Commission staff last week approved the transfer of operating licenses for the Salem, Hope Creek and Peach Bottom nuclear power plants from Public Service Enterprise Group Nuclear LLC to Exelon Generation Company LLC, due to the pending merger of the licensees' parent companies. The NRC staff's approval of the license transfers became effective on May 30, contingent on the transfer of decommissioning funds and adequate proof of insurance.

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