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Exelon Agrees to Purchase Pepco Holdings for $6.8 Billion

By Mark Chediak and Jim Polson
April 30, 2014 1:30 PM EDT 4 Comments
Pepco employee James Tarantella works on a power outage call in Rockville, Maryland.
Photographer: Matt McClain for The Washington Post
Pepco employee James Tarantella works on a power outage call in Rockville, Maryland.

Exelon Corp. (EXC), the largest U.S. nuclear operator, agreed to buy Pepco Holdings Inc. (POM) for $6.8 billion in cash to create the biggest electric and natural gas utility in the Mid-Atlantic region.

The deal values Pepco, operator of the utility that serves the Washington metro area, at $27.25 a share, according to a joint statement today. That represents a 20 percent premium over Pepco’s closing price yesterday.

U.S. power utilities have announced $14.9 billion of acquisitions in the past year, according to data compiled by Bloomberg, as they seek to reduce costs through greater scale. Buying Pepco will bring Chicago-based Exelon 2 million customers and help it expand in the eastern U.S., where it already owns utilities serving Philadelphia and Baltimore.

“Exelon and Pepco Holdings have a compelling strategic rationale for merging, given our geographic proximity and similar utility business models,” Exelon Chief Executive Officer Chris Crane said in today’s statement.

The combined company will serve about 10 million customers and have a rate base of about $26 billion. Crane said today on a conference call that he is confident the company will gain all the necessary regulatory approvals for the purchase. Exelon expects savings of $80 million a year, he said.

Pepco advanced 17 percent to $26.72 at 1:20 p.m. in New York. Exelon fell 4.1 percent to $34.67, paring this year’s advance to 27 percent.

Falling Sales

U.S. electricity sales have declined in four of the past five years, according to a December report from the U.S. Energy Information Administration. Gas prices, which help set the price of power in most markets, have fallen about 64 percent since a July 2008 high amid a flood of new output from U.S. shale formations, data compiled by Bloomberg show.

Crane said in November the company was considering an acquisition of a regulated utility because it wanted to shift to assets that provide steady and predictable returns. Last year, Exelon cut its quarterly dividend for the first time amid falling electricity rates for its nuclear plants that sell in the open market.

“This will mitigate Exelon’s exposure to wholesale merchant power markets,” Paul Patterson, a New-York based utility analyst for Glenrock Associates LLC, said today in a phone interview. “Regulated properties such as Pepco are attractive and there are not that many that are available.”

Likely Target

Pepco had been viewed as a likely target because its regulated utilities have earned less than their allowed return on investment, Kit Konolige, an analyst with BGC Financial LP, wrote in an April 29 research note. In addition to Washington, the company operates utilities in Delaware, Maryland and New Jersey, according to its website.

Crane will remain president and CEO of the combined company. Joseph Rigby, his counterpart at Pepco who had previously announced his planned retirement, will remain in his current roles until the deal closes. That’s expected to take place in the second or third quarter of 2015.

Exelon will pay $100 million, or $50 a customer, into a customer investment fund to be used across the areas served by Pepco. Utility regulators will decide how it will be applied, Rigby said on a conference call today.

Strategic Review

Shares of Washington-based Pepco rose 5.7 percent on April 28 after industry website Sparkspread.com reported the company had hired investment banks for a strategic review. Pepco stock had fallen 1.4 percent in the previous 12 months before the report, compared with a 5.2 percent rise in the S&P 500 Utilities Index.

Exelon, which also owns the electric utility that serves Chicago, acquired Constellation Energy for $7.36 billion in 2012. Its latest deal is supported by a $7.2 billion bridge facility with Barclays Plc (BARC) and Goldman Sachs Group Inc.

To help pay for the acquisition, Exelon will sell fossil-fuel power plants for a total of $1 billion, Chief Financial Officer Jack Thayer said on the conference call.

Barclays, Goldman and Loop Capital Markets served as financial advisers to Exelon. Lazard Ltd. was the lead financial adviser to Pepco.

To contact the reporters on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Stephen Cunningham

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