Chicago-based Exelon Corp.'s purchase of Pepco Holdings Inc. in Washington would extend its presence substantially in both Maryland and the Mid-Atlantic. But analysts warned that this second attempt at combining Maryland's two biggest utilties could be difficult to consummate because it requires approval from regulators in three states and D.C.
To make the deal more palatable, Exelon turned to its playbook for the successful 2012 acquisition of BGE owner Constellation Energy, Baltimore's last Fortune 500 company. Exelon said it would provide $100 million in credits or other benefits to customers of Pepco's three utilities — about $50 per customer — along with $50 million in charitable donations spread over a decade.
Pepco investors liked the news but Exelon shareholders were skeptical, driving the company's share price down more than 3 percent to $35.03 a share. Some consumer advocates, meanwhile, thought the deal would benefit investors at customers' expense.
"The ratepayers are always the sucker," said Tyson Slocum, director of the energy program at Public Citizen and a Pepco customer. "We are — because in electricity, we are captive."
Exelon CEO Christopher M. Crane said in an interview Wednesday that he expects the purchase would have no impact on BGE customers or Exelon's Maryland employees. He argued that Pepco customers would see benefits beyond the initial commitments, including access to Exelon's sister-utility workers during major outages.
"Consolidation has been an ongoing theme in the last 10 years, making more efficient and stronger entities," he said. "We have proven ourselves in Maryland, I think, … and so we're not an unknown entity."
Jobs likely would be lost in the Washington area as Exelon consolidates the headquarters and other functions, but officials said it was too early to quantify the impact.
The new deal calls for Exelon to take over Pepco's namesake utility, with territory in D.C., Montgomery and Prince George's counties; Delmarva Power, which has customers in Delaware and Maryland's Eastern Shore; and Atlantic City Electric in New Jersey.
Analysts said the purchase would add more steady payment streams to Exelon's bottom line, helping balance out its volatile power generation business.
"On paper, the deal appears to make financial sense and we continue to have a bias towards regulated earnings growth stories relative to the unregulated power markets," wrote Wells Fargo analyst Neil Kalton in a research note. "That being said, [Pepco's] regulatory environments are among the toughest in the nation, so EXC will likely have its work cut out."
Exelon gave up on its effort to purchase another New Jersey utility in 2006 after 19 months of trying, saying there were "insurmountable" gaps between what regulators wanted and it was willing to give. BGE and Pepco walked away from their planned merger at the end of 1997 after more than two years, unwilling to accept the conditions Maryland and D.C. regulators set.
This time around, joining BGE and Pepco would be more complex. It's not just that BGE is now owned by an out-of-state firm. It's also that Pepco had one utility in 1997, and now it has three in multiple states.
Exelon said it expects to take about a year to 18 months to close the deal.
In conference calls with reporters and Wall Street analysts, Crane and Pepco Holdings CEO Joseph M. Rigby called the purchase agreement a good deal for customers and investors that they're confident regulators will approve.
"We really are excited about this combination," Crane said. "It makes an enormous amount of sense."
He noted the geographic proximity and said the companies expect about $80 million in annual savings from efficiencies, including the possible job cuts.
"We would look for an equitable sharing of those benefits with our customers," Rigby said.
Exelon also said it would continue Pepco's efforts to improve reliability. Pepco was fined $1 million by Maryland regulators in 2011 for failing to properly maintain its system.