Rumors last week about a potential marriage between Mid-Atlanticutilities Potomac Electric Power and Conectiv turned out to be onthe money. The two companies announced yesterday that Pepco willbuy Conectiv for a combination of cash and stock valued at $2.2billion or $25/CIV share, a 19% premium compared to Friday’s close.

It creates the largest electricity delivery company in theMid-Atlantic, serving more than 1.8 million customers in Delaware,the District of Columbia, Maryland, New Jersey and Virginia. Pepcosaid the deal would be immediately accretive to its earnings andwould lead to savings over time that would be returned to customersfollowing the current rate freezes that are in place.

The companies expect to complete the deal in a year. Bothcompanies will become subsidiaries of a new holding company to benamed at a later date.

“This transaction elevates us to the leading position amongMid-Atlantic electricity delivery companies,” said Pepco CEO JohnM. Derrick Jr., who will be chairman and CEO of the new holdingcompany. “In addition to more than doubling our customer base andexpanding our service territory by nine times, this combinationwill allow us to achieve operating efficiencies that will benefitour shareholders, customers and employees alike.”

Conectiv CEO Howard E. Cosgrove, who plans to retire after themerger is completed, said the combination provides benefits tostakeholders that are “not achievable on a stand-alone basis.”Conectiv initiated a search for alternatives to improve shareholdervalue late last year and this merger is the end result of thatprocess, Cosgrove said. The company needed greater scale to competeeffectively in the distribution and merchant power market. “Thiswas a good opportunity with a good company.”

The companies said the merger is not expected to result insignificant workforce reductions. However, Derrick said the newholding company will have a total of about 6,000 employees, whichis about 2,500 more than the current totals of the two companiescombined.

The board of directors of the holding company will have 12directors, including at least two from the current Conectiv board.It will be based in Washington, D.C., but will maintain Conectiv’sheadquarters in Wilmington, DE, and significant operations in NewJersey and the Delmarva Peninsula.

According to the terms of the deal, Pepco stockholders willreceive one share of the holding company’s stock on a tax-freebasis for each share of Pepco common stock they hold. Conectivstockholders will have the option to receive either $25 in cash orholding company shares, subject to proration, such that the totalto all Conectiv stockholders will be 50% cash and 50% stock.

A significant portion of the acquisition will be financedthrough cash on hand including proceeds from Pepco’s recentlycompleted sale of generating assets, as well as external financing.

Pepco also said it will reduce its annual dividend to $1 pershare from $1.66 per share, effective with the June 2001 dividendto make its dividend payout ratio comparable to other deliverycompanies and to provide for continued investment in the growth ofthe company. Pepco also has authorized a share repurchase programof up to $450 million. The new company expects to adopt Pepco’s newdividend policy so Conectiv stockholders who elect to receive stockcan expect a higher dividend than they currently receive.

Pepco is an investor-owned utility that delivers electricity inWashington, D.C. and its Maryland suburbs to more than 700,000customers. Through its family of subsidiaries, Pepco also operatesin the mid-Atlantic region in the competitive arenas of diversifiedenergy products and services, telecommunications and Internetprocurement marketing. Conectiv is focused on two core energybusinesses: power delivery and merchant power generation andmarketing. Conectiv Power Delivery delivers power to more than onemillion customers in New Jersey, Delaware, Maryland, and Virginia.Conectiv Energy uses a sophisticated power-trading unit to optimizethe value of a growing portfolio of “mid-merit” power plants thatcan start and stop quickly in response to changes in the demand forpower within the PJM (Pennsylvania-New Jersey- Maryland) powerpool.

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