Public Service Enterprise Group (PSEG) and Exelon Corp. last week said that Exelon has given PSEG formal notice of termination of the merger agreement announced Dec. 20, 2004, and the companies have agreed to withdraw their application for merger approval, which had been pending before the New Jersey Board of Public Utilities (NJBPU) for more than 19 months.

The announcement follows a number of discussions with state officials and other interested parties to better understand their respective positions on the proposed merger. “The discussions made clear that gaps separating the parties’ respective settlement positions are insurmountable. Major differences included, among other things, issues relating to rate concessions and market power mitigation,” the companies said.

E. James Ferland, the chairman of PSEG, said that while he was disappointed the plan to merge with Exelon would not be completed, the business outlook for his company is strong.

“The merger would have provided strategic benefits for PSEG and real benefits for New Jersey,” said Ferland. “It is unfortunate that our intense effort to reach a comprehensive settlement with the state’s Board of Public Utilities was not successful. We simply could not achieve agreement on issues ranging from market power mitigation to electric and gas rate concessions.”

Ferland emphasized, however, that PSEG’s current stand-alone business outlook is one of the most positive in the company’s history, given the favorable pricing in energy markets and improvements in the performance of the company’s Salem and Hope Creek nuclear plants.

“In addition, the company took strong steps over the last two years to improve our financial stability and reduce our international exposure,” he said.

Ferland reaffirmed 2006 earnings guidance for his company of $3.45 to $3.75 per share and projected double-digit growth in the next several years. He provided preliminary earnings guidance for 2007 of $4.60 to $5.00 per share.

He said the company would provide more details on this guidance in an investor/media teleconference scheduled for Sept. 20. He added the company is also planning an investor/media conference for later in the year to provide a comprehensive strategic and earnings update for 2007 and beyond. Details about both events will be announced at a later time.

Ferland said the improvements in PSEG’s nuclear facilities reflect the success of the nuclear operating services agreement with Exelon that was implemented in January 2005. “Both Salem and Hope Creek are showing gains in the areas of safety and reliability while producing significantly more electricity,” he said. “The operating agreement with Exelon has already reaped tremendous results, and we intend to keep the positive momentum going.”

The nuclear operating services agreement with Exelon remains in effect through Jan. 17, 2007. PSEG has options to renew the agreement for up to three years. “We plan to keep the Exelon team in place while we evaluate our strategic options for our nuclear facilities in the future,” Ferland added.

Ferland said Public Service Electric and Gas Co., the utility business, would continue seeking rate relief in its gas and electric delivery base rate cases currently pending before the NJBPU.

Prior to last week’s news, the companies had met with NJBPU staff to discuss the status of their proposed merger and the companies’ settlement offer valued at $1.46 billion. NJBPU staff subsequently submitted a counterproposal to Exelon and PSEG.

Exelon recently said its management determined that the probability of completing its planned takeover of PSEG is no longer “more likely than not” based on the status of settlement discussions with the NJBPU.

The merger had successfully vaulted over every regulatory hurdle, except for the NJBPU. FERC signed off on the deal last year.

Prior to the merger’s termination, Exelon and PSEG had returned to FERC seeking authorization to amend the interim fossil unit mitigation that they previously committed to provide in connection with the deal.

This summer, Exelon and PSEG reached a comprehensive agreement with the antitrust division of the U.S. Department of Justice (DOJ) that Exelon said would resolve all competition issues reviewed by the DOJ in connection with the proposed merger of Exelon and PSEG (see NGI, June 26).

Under the terms of the DOJ agreement, Exelon and PSEG had agreed to divest six fossil-fuel fired electric generating stations with a total capacity of 5,600 MW.

The now-scuttled merger was first announced in late 2004 (see NGI, Dec. 27, 2004).

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