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Exelon/PSEG to Divest Plants Under DOJ Pact Tied to Merger

Exelon Corp. and Public Service Enterprise Group (PSEG) have reached a comprehensive agreement with the antitrust division of the U.S Department of Justice (DOJ) that Exelon said will resolve all competition issues reviewed by the DOJ in connection with the proposed merger of Exelon and PSEG.

Under the terms of the DOJ agreement, Exelon and PSEG will divest six fossil-fuel fired electric generating stations with a total capacity of approximately 5,600 MW. Exelon noted that the divestiture would be the largest required in an energy company merger, involving 26 generating units located at the six plants.

The agreement with DOJ requires Exelon Electric & Gas (the merged company) to enter into agreements within 150 days after the merger closes to sell the following power plants and would give DOJ approval rights over the buyers to assure a competitive market after the divestiture:

Exelon and PSEG expect to begin the asset sale process shortly in order to execute sales promptly following the close of the merger.

"We believe these assets are in attractive power markets, are valuable intermediate and mid-merit assets and we have already experienced a lot of interest from buyers," John Young, Exelon's chief financial officer, said on Thursday in a conference call related to the news.

The divestiture process "will begin immediately and will take the form of an auction," Young added. "We plan to issue an investment overview and confidentiality agreement to prospective bidders shortly," he said.

Young said that the size of the divestiture required by the DOJ "will put some additional pressure on the merger economics. Specifically, assuming we sell the assets at fair market value, as we expect, the aggregate divestiture required by DOJ and the FERC results in an estimated $500 [million] to $600 million of value erosion." The erosion primarily relates to negative tax effects and the impact of the divestiture "on our load serving ability in PJM East."

Young said that "we are pursuing vehicles to mitigate the negative tax effects and developing strategies to effectively manage our existing load obligations in light of this agreement."

The impacts have been factored into "our updates provided to our respective boards and will be further refined and updated in subsequent reviews with the boards." After the boards have reviewed a final settlement in New Jersey related to the merger, "and we have created a combined long-range plan, we will refine the assumptions surrounding financial impacts and use of proceeds from the divestiture," the Exelon executive said. A full update on these plans "along with our overall financial projections and strategies" will be offered at a Dec. 12 annual investor conference in Chicago.

No divestiture of nuclear capacity or nuclear plants would be required by DOJ, as the increased fossil divestiture will resolve all competition issues, Exelon said. "The fossil divestiture required by the settlement with DOJ will satisfy the requirements imposed by the Federal Energy Regulatory Commission (FERC) to divest fossil generation," the utility added.

The virtual nuclear divestiture approved by FERC in 2005 continues to be a FERC requirement even though it is not required by DOJ. The divestitures will be required only if the merger closes.

During the conference call, Exelon's Betsy Moler noted that the companies "are still required under the terms of the July 1 [2005] FERC order, to continue" a nuclear virtual divestiture..

The companies had previously committed to divest 4,000 MW of intermediate and peaking generation facilities located primarily in eastern PJM Interconnection, and to sell energy from 2,600 MW of nuclear capacity, which they characterized as a "virtual divestiture."

"We believe that by putting 5,600 megawatts of fossil, and mid-merit fossil at that," up for sale, "it will suffice for the 4,000 megawatt requirement in the FERC order. So we don't intend to go back to FERC," Moler said. Moler, a former FERC chairman, said that "in the way the Appendix A analysis that FERC uses works, you can substitute mid-merit plants for peakers and still comply with the Appendix A analysis."

In addition, Moler doesn't "think that the change in composition of the Commission will impact this one way or another. The Appendix A analysis and their merger guidelines have been in place for many, many years, and I don't expect it to change."

The Senate Energy and Natural Resources Committee recently approved the nominations of Philip Moeller and Jon Wellinghoff to become members of FERC. The Senate panel on Wednesday will hold a hearing to consider the nomination of Arizona regulator Marc Spitzer to a five-year term at FERC. He will replace outgoing Commissioner Nora Mead Brownell.

"Our agreement with DOJ is a major milestone, and we are moving ahead to get our last remaining regulatory approval from the New Jersey Board of Public Utilities," said John Rowe, chairman of Exelon. "The DOJ's comprehensive investigation and analysis encompassed millions of pages of documents, including testimony and other evidence presented by the staff of the New Jersey Board of Public Utilities, the New Jersey Ratepayer Advocate, and many other parties in the New Jersey proceedings. We are hopeful that the DOJ resolution will provide positive momentum that will enable us to complete our discussions in New Jersey as soon as possible."

On Thursday, the DOJ's antitrust division filed a civil lawsuit in U.S. District Court in Washington, DC, to block the proposed transaction. The complaint said that the merger would create one of the largest electricity companies in the U.S. and combine the assets of two of the largest competitors in the mid-Atlantic region.

"Together, the companies would own nearly half of the electricity generating capacity in the densely populated area encompassing eastern Pennsylvania, New Jersey, the District of Columbia, and parts of Maryland and Virginia," DOJ said. "The combination of their assets would enhance the incentive and ability of the merged firm to raise wholesale electric prices."

At the same time, the department filed a proposed consent decree that, if approved by the court, would resolve the DOJ's competitive concerns and the lawsuit. The consent decree was filed with the U.S. District Court for the District of Columbia.

Exelon said that the consent decree resolves all competition issues found by DOJ after an exhaustive evaluation over 15 months involving a review of approximately nine million pages of documents, scores of interviews and depositions, and extensive analysis of the competitive effects of the proposed merger. DOJ's analysis included the energy and capacity markets in PJM, the vertical market concentration issues associated with combination of the electric and gas assets of the two companies and the New Jersey Basic Generation Service auction.

DOJ noted that the merged company will be required to obtain the prior approval of the DOJ before acquiring or obtaining control of any existing electricity plants in the mid-Atlantic region in the future.

The proposed settlement and the DOJ's competitive impact statement will be published in the Federal Register. Any person may submit written comments concerning the proposed settlement during a 60-day comment period to Donna N. Kooperstein, Chief, Transportation, Energy, and Agriculture Section, Antitrust Division, United States Department of Justice, 325 Seventh St. NW, Suite 500, Washington, D.C. 20530, (202) 307-3278.

At the conclusion of the 60-day comment period, the U.S. District Court for the District of Columbia may enter the proposed consent decree upon finding that it is in the public interest.

At the start of last week, Exelon and PSEG said that even though either could walk away without penalty from their proposed merger beginning June 20, they would both stick it out and work to get the regulatory approvals needed to complete the deal.

Under the companies' merger agreement, either party has the option to terminate the transaction without penalty at any time after June 20. However, they said they would both continue to seek merger approvals.

The Exelon-PSEG merger still needs to be approved by the New Jersey Board of Public Utilities (NJBPU). Tom O'Flynn, CFO at PSEG, noted on the call that settlement discussions are continuing in the Garden state.

"We still have a substantial number of issues to work out, but this decree clearly now provides excellent momentum towards a conclusion of our settlement discussions," O'Flynn noted. "We have put forth a proposal that we believe offers significant benefits to New Jersey." He said that "our enhanced proposal to New Jersey offers rate credits to customers immediately upon closing."

Last Thursday, Exelon said that the final decision on whether to proceed with the merger will rest with the boards of both Exelon and PSEG after the terms and conditions of regulatory requirements are known. Closing is anticipated in the third quarter upon completion of all required regulatory actions.

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