More than a decade after deregulation of the electricity sector began the process of creative destruction by ending the monopoly of power companies over customer service areas, utilities are doing their best to rebuild the full-service model for a new era.
Exelon, a Chicago-based company with a large generation portfolio but minimal exposure to the customer side of the electricity business, will pay $7.9 billion in an all-equity deal to take on floundering Constellation Energy of Baltimore. The two companies hope to close the deal in early 2012, and have written a daunting combined $1 billion worth of breakup fees into the agreement to guarantee only regulatory objections could halt their tie-up.
Constellation, for all of its repeated strategic troubles on the trading side and in aborted attempts to expand its nuclear portfolio, has a strong customer-facing business that Exelon hopes to leverage into a powerhouse tool for selling its own electricity and for gathering data on customer usage it can use to fine-tune its hedging program.
The centrality of hedging to the merger is an unexpected twist in the deal. Fully a third of the savings offered by the merger will come from the combined company’s expectation it will have to post less collateral in its trades, while another third will come from improved hedging practices stemming from the access to Constellation’s consumer usage data.
Electricity trading has grown steadily over the past decade but remains a fractured and regional marketplace rife with liquidity and regulatory issues, as well as technical problems exemplified by the inability to cheaply store large volumes of electricity. With its new enlarged service area footprint, the combined Exelon will stretch across six major electricity markets, including MISO, PJM, ERCOT, ISO-NE&NY, SERC and West.
“The combination will optimize the value of our respective generation and customer-facing businesses and enhance our platform for growth,” Exelon president and COO Christopher Crane said in announcing the deal. “The new company will be well-positioned to benefit from a changing industry environment while managing risk and positioning ourselves to benefit from power market recovery.”
Crane is set to be CEO of the new, combined firm once the transaction closes; current CEO Rowe plans to retire. Current Constellation chairman, president and CEO Mayo Shattuck will become Chairman of the combined companies, which will use the Exelon name.
Given regulatory efforts to keep the two sides of the electricity business apart, bank analysts given the opportunity to question executives following the deal’s announcement on April 28, 2011 probed the companies’ early efforts to meet regulator concerns.
Exelon and Constellation executives said they’d already approached various regulatory bodies about the deal and Rowe repeatedly said on the call that he “expects the deal to close.” The combined firm may have to sell as much as 26,000MW of power assets, largely in the PJM marketplace, to alleviate concerns about its potential market dominance, and would proceed with those sales once the deal closes.
