The merger of Commonwealth Edison of Chicago parent Unicom Corp.and Philadelphia-based PECO Energy Co. will create a company so bigit will take two CEOs to run it, at least initially.
The companies agreed to a merger of equals creating anas-yet-unnamed holding company worth $31.8 billion ($15.2 billionin equity market value; $16.6 billion in debt and preferred stock).For the first years, the CEOs of the merging companies agreed toshare the helm.
The new holding company will be the nation’s largest electricutility based on about five million customers, and it will havetotal revenues of $12.4 billion. It will be the nation’s fourthlargest power generator, with generation exceeding 22,500 MW andwill be a leader in the growing U.S. wholesale power marketingbusiness. Based on current equity market values, the new companywould rank third in the industry with a market capitalization of$15.2 billion.
“This merger catapults the combined company into the top tier ofnational energy companies,” said PECO CEO Corbin A. McNeill Jr. “Webelieve in the competitive and strategic value of size and scopewhich will increase our future earnings growth rates, creatingvalue for shareholders. We will have a strategic portfolio oflow-cost generation assets and significant transmission anddistribution operations covering two of the top five metropolitanareas.”
PECO Energy is an electric and gas utility serving 1.5 millionelectric customers in the five-county Philadelphia region and morethan 400,000 gas customers. Its power generation group manages afleet of 72 units that can provide 5,200 MW of power using avariety of fuels. In addition, it’s nuclear unit operates twostations-the two-unit Limerick Generating Station, located 21 milesnorthwest of Philadelphia, with an output of 1,160 MW per unit, andthe two-unit Peach Bottom Atomic Power Station, located on thePennsylvania/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 andoperate nuclear plants in the U.S. PECO’s energy trading unitoperates a 24-hour trading floor with transactions in 47 states andCanada.
“The merger creates world-class generation and power marketingbusinesses,” said Unicom CEO John W. Rowe. “It creates a base fromwhich we will build a leading energy delivery business andestablish ourselves as a significant competitor in the emergingretail energy marketplace.
Chicago-based Unicom Corp. provides electric service acrossnorthern Illinois, serving 3.4 million customers or 70% of thestate’s population. ComEd has the largest nuclear fleet in thecountry, with a total capacity of 9,400 MW from 10 generating unitsat five sites. In March 1999, Unicom announced the sale of itsfossil generation operations, with a total capacity of 9,772 MW, toSouthern California Edison. The sale is expected to close thisNovember.
“Both PECO and Unicom are experienced operators of nuclear powerplants,” said Rowe. “We intend to be the premier nuclear operatorin the nation. We also intend to add more clean, low-costgeneration to our energy portfolio.”
Rowe said his first priority will be to improve ComEd’s serviceand reliability. The utility stumbled this summer when it was facedwith high demand and came under fire from the City of Chicago. InAugust, the Chicago Board of Trade had to close an hour early oneday 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 $180million by the third year. Sixty percent of these savings will comefrom regulated operations and 40% will come from unregulatedoperations. The deal is expected to be accretive in the first yearafter closing. Workforce reductions of about 5% of the combinedcompany’s 22,500 employees will occur through attrition andseparation packages.
Deutsche Banc Alex. Brown analyst Edward Tirello said he likesthe combination because it creates the biggest fleet of nucleargenerators in the country. The new company will enjoy significantcosts savings by holding 20% of the country’s nuclear generation.”ComEd already said it is keeping its 10 nukes and it already hasgotten 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 theycould run fabulously.”
Merrill Lynch analyst Steve Fleishman also said he likes thedeal because of the substantial generation position the new companywill hold in key markets. The deal also creates a “good”distribution network.
McNeill and Rowe will be co-CEOs until Dec. 31, 2003. McNeillwill oversee generation and power marketing operations, and Rowewill oversee transmission and distribution operations, as well asunregulated retail enterprises.
Tirello said the new company will be too big for one person tomanage right off the bat. “It’s a monster. It will create a bigcompany, but I think it will still have to get bigger.” Hesuggested a future acquisition of the combined company might be autility situated geographically between the merger partners’existing utilities, such as Pennsylvania’s Allegheny Power.
The combined company will be headquartered in Chicago, and thegeneration and power marketing operations will have headquarters inthe Philadelphia region. Unicom’s and PECO Energy’s electric andgas utility operations will remain separate subsidiaries. The newholding company will be incorporated in Pennsylvania.
The merger is conditioned upon shareholder and state and federalregulator approvals and is expected to be completed in 12 months.Shareholders may receive cash or stock in the new company. Thetransaction will be accounted for as a purchase. Each shareholderof PECO Energy may choose to receive for each PECO Energy shareeither one new holding company common share or $45 in cash, subjectto proration; and each shareholder of Unicom may choose to receivefor each Unicom share either 0.95 new holding company common sharesor $42.75 in cash, subject to proration. The cash prices representa premium of about 11% to PECO Energy’s and Unicom’s 10-day averagetrading 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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