Exelon, Constellation Announce Definitive Merger Agreement Further Matching Generation, Load Obligations

Exelon and Constellation Energy announced this morning that they have signed a definitive merger agreement to combine the two companies in a stock-for-stock transaction.

The resulting combined retail and wholesale energy supply business will serve on an annual basis about 165 terawatt-hours electric load, 405 bcf of gas sales, and about 35,000 commercial and industrial customers and "millions of households" (when including wholesale POLR obligations) across 38 states, the District of Columbia, and the Canadian provinces of Alberta and Ontario.

The combined firm will also hold 34,401 MW of competitive generation, after planned divestitures. The combined fleet would include 18,967 MW of nuclear generation. The companies have stated that they will divest three Constellation generating stations located in PJM totaling 2,648 MW, which the companies said is the only market where there is a "material" overlap of generation owned by both companies. These three stations, Brandon Shores and H. A. Wagner in Anne Arundel County, Md., and C. P. Crane in Baltimore County, Md., include baseload coal-fired generation units plus associated gas/oil units located at the same sites.

On a combined basis, the firms will have 179.1 TWh of generation in PJM, paired with 101.5 TWh of competitive load.

The companies said that the transaction will expand their retail and wholesale supply channel in which to market the companies' respective generation, and will also enhance margins in the competitive portfolio.

The transaction will also permit the further matching of load with physical generation in key competitive markets, while also reducing collateral costs of the competitive businesses.

Such balancing of generation and load obligations is most prominent in the Midwest ISO, where Exelon has 9.1 TWh of generation, but only 0.5 TWh of load. Conversely, Constellation has 5.8 TWh in load, but zero generation in MISO.

During an analyst presentation, the companies also said that the generation will allow their supply marketing arm to offer customers "long-term" contracts.

Under the transaction, Exelon's power marketing business and Constellation's retail and wholesale supply business will be consolidated under the Constellation brand and be headquartered in Baltimore. Both companies' renewable energy businesses will also be headquartered in Baltimore. The corporate parent will retain the Exelon name and remain based in Chicago.

As part of the merger, the combined company has offered several benefits to Baltimore Gas & Electric ratepayers, in a package which is similar to the offers ultimately accepted by the PSC in the recent FirstEnergy-Allegheny Energy merger.

The companies will offer a $100 credit to each BGE residential customer within 90 days after closing (representing $110 million), and will provide $5 million to the Maryland Electric Universal Service Program (EUSP).

The companies also said that they would provide $4 million to support the objectives of the EmPower Maryland Energy Efficiency Act; however, a news release did not categorize this with other "direct" benefits to BGE customers, and it is not clear at this time if such support would, as the case at Allegheny, offset ratepayer contributions under EmPower Maryland.

The companies also said that they would invest more than $50 million to develop 25 megawatts of renewable energy in Maryland. The companies did not specify what form this investment would take.

Mayo Shattuck will serve as executive chairman of the combined company. Christopher Crane will serve as president and CEO of the combined company. Current Exelon Chairman and CEO John Rowe will retire upon closing of the transaction.

Under the merger agreement, Constellation shareholders will receive 0.930 shares of Exelon common stock in exchange for each share of Constellation common stock. Based on Exelon's closing share price on April 27, 2011, Constellation shareholders would receive a value of $38.59 per share, or $7.9 billion in total equity value. The exchange ratio represents an 18.1% premium to the 30-day average closing stock prices of Exelon and Constellation as of April 27, 2011.

Following completion of the merger, Exelon shareholders will own approximately 78% of the combined company and Constellation shareholders approximately 22% on a fully diluted basis.

The combination is anticipated to be break-even to Exelon's adjusted earnings in 2012; in 2013, it is expected to be accretive to earnings by more than 5%.