The Times, Trenton

Exelon Openly Doubtful About PSEG Deal

Stock down as talks with state board remain at an impasse

The Times of Trenton — Thursday, August 31, 2006

Letter To The Editor

After months of private negotiations with state officials, Exelon went public yesterday with its view that it is no longer sure it will acquire Public Service Enterprise Group.

In a filing with the Securities and Exchange Commission, the Chicago company said it remains committed to efforts to complete the acquisition. But it said the probability of completing the deal is no longer "more likely than not," based on the status of discussions with the New Jersey Board of Public Utilities.

On Wall Street, investors dumped shares of Newark's PSEG, pushing the price down as much 5.8 percent in early trading, before closing 3.3 percent lower.

With the talks at an apparent impasse, analysts said the filing may have been a last ditch effort by Exelon to goad the BPU and Governor's Office, which has been deeply involved in the negotiations, to bend on its stance and, even more so, prod PSEG to consider repricing the deal.

"It could be either or both," said Paul Fremont, an analyst with Jeffries & Co., which follows both companies. "I'm sure they want concessions from the board and parallel concessions from the company."

Exelon and PSEG spokesmen declined to comment beyond the filings.

Ivette Mendez, a spokeswoman for Gov. Jon Corzine, said "The Governor's office is aware of the events. We remain in contact with all the principal parties."

The collapse of the $18 billion deal could be a huge setback for PSEG, a company used to getting its way in the corridors of the Statehouse and in the Newark offices of the BPU.

It has lost hundreds of employees since the deal was announced in December 2004, including executives and many managers who used to run the company's nuclear power plants in South Jersey. If Exelon were to abandon the deal, analysts said PSEG shares could fall to the low $60s and the company would likely have to seek for another corporate suitor.

Few anticipated the company would be still trying to win approval from the state at this point. When the deal was announced in late 2004, executives said they hoped to complete the deal by the first quarter of 2006.

The deal has won all of the necessary regulatory approvals except from New Jersey where the merger has met fierce opposition from consumer groups, the Public Advocate, industry competitors and manufacturing interests. They fear the combined company, which would become the biggest power supplier in the country, would be able to manipulate power prices in the region, leading to higher energy bills for consumers and businesses.

That issue remains a stumbling block in the talks between the state and companies.

Neither side seems willing to budge much from their last counterproposals where major disputes prevailing about how much rate relief should go to customers, whether other pending electric and gas rate cases will be immediately settled, and precisely how the companies will sell power from the generation stations that they will own.

Exelon's most recent proposal upped its original $600 million in benefits to the state for rate relief, economic development projects and other uses to the $820 million sought by the state. However, the companies' offer also included settlement of a pending electric rate increase request for $50 million annually and a pending gas case for $80 million.

The state's offer didn't include any settlement of those two requests, requiring the company to seek approval for the rate cases through normal proceedings before the BPU. The state also wants the company to sell off two more power plants in addition to the six it already agreed to divest under a deal with the U.S. Department of Justice.

The rate requests are a critical issue for the companies because the state wants them to stay out from seeking other increases in rates for up to five years. In Illinois earlier this year, Commonwealth Edison received only $8 million of a $317 million increase in electric rates it was seeking. Exelon said yesterday it would record a $741 million charge in the third quarter because of the adverse rate ruling.

Whether Exelon's filing results in any shift in the state's position or that of PSEG remains to be seen, analysts said. Exelon said it will record a $55 million charge – or $35 million after tax – in the third quarter related to the decreased probability that it will complete the PSEG deal.

"We're not able to perceive any benefit or leverage in their proposal," Fremont said. "The question is do they improve their chances by putting it in a public document or does it work better in private discussions?"

Analysts also said it is unlikely Public Service would be willing to reprice the terms of the deal to salvage the transaction. "It is certainly unusual in this industry to have deals repriced," said Neil Kalton, an analyst for A.G. Edwards.

Despite the differences, the fact that Exelon didn't terminate the deal and remains committed to completing the merger was viewed as one positive by some. "They have had plenty of chances to walk away from this deal and they have not elected to do so," Kalton said.

But Ev Liebman, program director for New Jersey Citizen Action, which opposes the deal, said she doubts whether the company can reach a satisfactory settlement. "They didn't completely shut the door, but I think it's on life support," she said.

Top Top | NJCA Homepage | NJCA in the News