Pepco Eyes Conectiv, WSJ Reports

Officials at Potomac Electric Power Co. (Pepco) would not confirm nor deny a report in The Wall Street Journal last week that Pepco has made an offer to buy Delaware-based Conectiv Inc. for $2 billion in cash and stock. A spokesman said it might be a good idea to check back with the Washington, D.C.-based utility this week. The Journal reported the deal would be announced within a few days.

Conectiv apparently has been out secretly shopping itself for some time. Suffering from undervalued stock and competitive pressures due to deregulation, the Wilmington, DE-based utility company would make a smart addition to its regional neighbor, Pepco, which is undergoing some of the same pressures and has a similar business strategy.

Pepco is expected to make an offer, half cash and half stock, that would value each Conectiv share at $25, a 19% premium as of the close of trading yesterday. Pepco also is expected to assume $3 billion in Conectiv debt. Conectiv shares rose nearly 10% yesterday to $20.99, while Pepco shares fell 4% to $20.59.

Conectiv is the parent of Delmarva Power & Light Co. and Atlantic Energy Inc., serving more than 1.1 million customers in Delaware, Maryland, New Jersey, Pennsylvania, and Virginia. Pepco delivers electricity to 1.9 million people in Washington, D.C., and major portions of Prince George's and Montgomery counties in suburban Maryland. Last year Pepco's revenue rose 6% to $2.62 billion and its net income rose 45% to $346.5 million. Conectiv reported 2000 earnings of $2.10/share before nonrecurring charges and gains, which was an increase of 11% over 1999 earnings.

Pepco attempted expansion before in late 1997, but it aborted a proposed $3 billion merger with Baltimore Gas & Electric, now part of Constellation Energy. Pepco sold its power generation assets last year to Mirant Corp., formerly Southern Energy Inc.

Pepco and Conectiv have developed similar strategies, including start-up telecommunications businesses, energy services and retail marketing, but both seek improved financial support for expansion. The trend among deregulating electric companies is to merge and form larger transmission units, which would be particularly attractive in the Mid-Atlantic where there is rapid demand growth.

In addition, Conectiv, which was formed three years ago by the merger of Atlantic Energy and Delmarva Power, has suffered from poor stock valuations and has had limited success pursuing its diversification strategy. It currently is pursuing merchant generating plant development in its region and is in the process of selling plants that don't fit its "midmerit" strategy of moderate operating costs while adding 4,000 MW of new generation in the region.

Rocco Canonica

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