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Combined Unicom and PECO Would Be 'A Monster'

September 27, 1999
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Combined Unicom and PECO Would Be 'A Monster'

The merger of Commonwealth Edison of Chicago parent Unicom Corp. and Philadelphia-based PECO Energy Co. will create a company so big it will take two CEOs to run it, at least initially.

The companies agreed to a merger of equals creating an as-yet-unnamed holding company worth $31.8 billion ($15.2 billion in equity market value; $16.6 billion in debt and preferred stock). For the first years, the CEOs of the merging companies agreed to share the helm.

The new holding company will be the nation's largest electric utility based on about five million customers, and it will have total revenues of $12.4 billion. It will be the nation's fourth largest power generator, with generation exceeding 22,500 MW and will be a leader in the growing U.S. wholesale power marketing business. Based on current equity market values, the new company would rank third in the industry with a market capitalization of $15.2 billion.

"This merger catapults the combined company into the top tier of national energy companies," said PECO CEO Corbin A. McNeill Jr. "We believe in the competitive and strategic value of size and scope which will increase our future earnings growth rates, creating value for shareholders. We will have a strategic portfolio of low-cost generation assets and significant transmission and distribution operations covering two of the top five metropolitan areas."

PECO Energy is an electric and gas utility serving 1.5 million electric customers in the five-county Philadelphia region and more than 400,000 gas customers. Its power generation group manages a fleet of 72 units that can provide 5,200 MW of power using a variety of fuels. In addition, it's nuclear unit operates two stations-the two-unit Limerick Generating Station, located 21 miles northwest of Philadelphia, with an output of 1,160 MW per unit, and the two-unit Peach Bottom Atomic Power Station, located on the Pennsylvania/Maryland border, with an output of 1,160 MW per unit. PECO also has a joint venture with British Energy, of Edinburgh, UK., called AmerGen, which was formed in 1997 to purchase and operate nuclear plants in the U.S. PECO's energy trading unit operates a 24-hour trading floor with transactions in 47 states and Canada.

"The merger creates world-class generation and power marketing businesses," said Unicom CEO John W. Rowe. "It creates a base from which we will build a leading energy delivery business and establish ourselves as a significant competitor in the emerging retail energy marketplace.

Chicago-based Unicom Corp. provides electric service across northern Illinois, serving 3.4 million customers or 70% of the state's population. ComEd has the largest nuclear fleet in the country, with a total capacity of 9,400 MW from 10 generating units at five sites. In March 1999, Unicom announced the sale of its fossil generation operations, with a total capacity of 9,772 MW, to Southern California Edison. The sale is expected to close this November.

"Both PECO and Unicom are experienced operators of nuclear power plants," said Rowe. "We intend to be the premier nuclear operator in the nation. We also intend to add more clean, low-cost generation to our energy portfolio."

Rowe said his first priority will be to improve ComEd's service and reliability. The utility stumbled this summer when it was faced with high demand and came under fire from the City of Chicago. In August, the Chicago Board of Trade had to close an hour early one day due to a power outage on the ComEd system.

The companies expect to achieve annual cost savings of about $100 million in the first year, which will grow to more than $180 million by the third year. Sixty percent of these savings will come from regulated operations and 40% will come from unregulated operations. The deal is expected to be accretive in the first year after closing. Workforce reductions of about 5% of the combined company's 22,500 employees will occur through attrition and separation packages.

Deutsche Banc Alex. Brown analyst Edward Tirello said he likes the combination because it creates the biggest fleet of nuclear generators in the country. The new company will enjoy significant costs savings by holding 20% of the country's nuclear generation. "ComEd already said it is keeping its 10 nukes and it already has gotten its capacity factor from 50% to 90% over the last two years. Now if you would put PECO's expertise on top of that I think they could run fabulously."

Merrill Lynch analyst Steve Fleishman also said he likes the deal because of the substantial generation position the new company will hold in key markets. The deal also creates a "good" distribution network.

McNeill and Rowe will be co-CEOs until Dec. 31, 2003. McNeill will oversee generation and power marketing operations, and Rowe will oversee transmission and distribution operations, as well as unregulated retail enterprises.

Tirello said the new company will be too big for one person to manage right off the bat. "It's a monster. It will create a big company, but I think it will still have to get bigger." He suggested a future acquisition of the combined company might be a utility situated geographically between the merger partners' existing utilities, such as Pennsylvania's Allegheny Power.

The combined company will be headquartered in Chicago, and the generation and power marketing operations will have headquarters in the Philadelphia region. Unicom's and PECO Energy's electric and gas utility operations will remain separate subsidiaries. The new holding company will be incorporated in Pennsylvania.

The merger is conditioned upon shareholder and state and federal regulator approvals and is expected to be completed in 12 months. Shareholders may receive cash or stock in the new company. The transaction will be accounted for as a purchase. Each shareholder of PECO Energy may choose to receive for each PECO Energy share either one new holding company common share or $45 in cash, subject to proration; and each shareholder of Unicom may choose to receive for each Unicom share either 0.95 new holding company common shares or $42.75 in cash, subject to proration. The cash prices represent a premium of about 11% to PECO Energy's and Unicom's 10-day average trading prices through Sept. 22.

On Thursday following the announcement, Unicom closed at $36.25, down 81 cents; and PECO closed at $36.44, down $1.69.

Joe Fisher, Houston

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