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FPL, Constellation Formally Terminate $31B Merger

FPL Group Inc. and Constellation Energy officially called off their $31 billion merger Wednesday, several months after it became clear that the companies faced a protracted battle with Maryland legislators and regulators over the transaction.

In June the companies put merger integration activities on hold in response to the political turmoil over Baltimore Gas & Electric's proposed 72% rate increase, which was subsequently scaled down, and other regulatory and legislative actions (see Daily GPI, April 11). But FPL and Constellation told federal regulators that they eventually intended to complete the merger.

"As we considered the situation in Maryland, we determined the risks and uncertainties were too significant to overcome," said Constellation CEO Mayo A. Shattuck. "We have tremendous respect for our peers at FPL and believe each company's future prospects are bright. Constellation Energy has an exceptionally strong stand-alone strategy, and we look forward to executing our business plan and continuing to deliver robust returns to our shareholders."

The merger would have created a company worth about $31.2 billion (based on current market capitalization) with annual revenues of $26.5 billion and $57 billion in total assets (see Daily GPI, Dec. 20, 2005). The company would have had 5.5 million regulated electric customers at Florida Power & Light and Baltimore Gas & Electric (BGE), along with 625,000 gas customers at BGE, making it the second largest regulated gas and electric utility in the nation. The all-stock "modified merger of equals" would have granted a 15% premium to Constellation shareholders at the time the deal was announced in 2005. FPL shareholders would have owned about 60% of the company with Constellation shareholders winding up with 40%.

"While we at FPL Group certainly are disappointed that we will not complete the merger with Constellation Energy, we continue to have the utmost respect for the company and its leadership team. We remain convinced that both FPL Group and Constellation Energy are two great companies, each with excellent growth prospects," said FPL Group CEO Lew Hay.

The two companies said they will formally withdraw merger approval applications pending before the Maryland Public Service Commission, the Federal Energy Regulatory Commission and other relevant agencies, as well as legal requests filed with the state of Maryland.

Based on the termination agreement, neither company will pay a termination fee to the other. However, Constellation is barred from entering into a similar merger with another company prior to Sept. 30, 2007. In the event that it does negotiate another merger, Constellation would be required to pay FPL $425 million if the deal takes place prior to June 30, 2007, or $210 million if the merger occurs after July 1, 2007 but no later than Sept. 30. Such a fee would not apply if Constellation spins off its utility business and merges its nonregulated operations with another company, the agreement said. The fee also will not be triggered by the previously announced sale of 3,145 MW of gas-fired power plants to Tenaska (see Daily GPI, Oct. 12).

The cancellation of the FPL-Constellation merger follows a similar break-up of the Exelon-Public Service Enterprise Group merger last month. State regulators and legislators recently have become more aggressive in demanding rate concessions from energy companies because of rising energy costs. Citing "insurmountable hurdles" at the New Jersey Board of Public Utilities, Exelon and PSEG gave formal notice of termination of their merger nearly two years after the deal was first announced.

In June, the Maryland General Assembly passed legislation (SB 1) that among other things established standards of review to be applied in the FPL-Constellation merger case (9054). State regulators subsequently filed a motion to suspend the procedural schedule for the merger. Maryland Public Service Commission staff contended that the testimony previously filed in the merger case was incomplete and partially inaccurate due to the change in legal standard and topics for consideration engendered by SB 1.

On June 29, Constellation filed an amended petition, but regulators pressed for a more comprehensive refiling that addressed the stipulations made in the new state law. It became clear to the merger partners that transaction would face a much greater challenge in a second review. The FPL-Constellation deal was under regulatory review for 10 months.

Nevertheless, Merrill Lynch analyst Jonathan Arnold said he was a bit surprised that the two companies did not stick it out. "Although both companies had warned about the strong possibility of the termination, we were somewhat surprised on the timing of the announcement," said Arnold. "We believe both parties may have concluded that even with a favorable ruling...political obstacles in January may have been insurmountable."

Arnold noted that some of the reasons from the FPL-Constellation merger termination were similar to the Exelon-PSEG merger cancellation: "state opposition to mergers of integrated companies premised mainly on unregulated benefits. We believe such deals will continue to face state political and regulatory challenges." As a result, he said companies may end up focusing more on pure unregulated acquisitions to avoid regulatory scrutiny. "This also supports the idea of corporate separation of regulated and unregulated businesses as a precursor to further consolidation," said Arnold.

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