Exelon Denial Signals Battles Over $40 Billion in Utility Deals

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The rejection of Exelon Corp.’s $6.8 billion takeover of Pepco Holdings Inc. proved a warning for an industry trying to gain approval for $40 billion worth of deals: Be ready for an uphill battle with local regulators.

The District of Columbia’s move to block the merger on Tuesday throws in doubt Exelon’s goal of creating the biggest U.S. utility in terms of customers. Power giants NextEra Energy Inc. and Iberdrola SA are also facing opposition in proposed takeovers in Hawaii and Connecticut. Southern Co. will have to persuade regulators in five states to approve its $8 billion purchase of AGL Resources Inc., announced on Monday.

“There is a graveyard filled with corpses of failed utility mergers doomed by state regulators,” said Paul Patterson, a New York-based analyst for Glenrock Associates LLC. The rejection of Exelon’s bid “should serve as a reminder that state regulatory approvals are not to be taken for granted.”

Utilities are moving to consolidate to cope with tepid sales and rising costs. In the past two years, however, at least three utility deals have been delayed or terminated. Those include the sale of Entergy Corp. transmission lines to ITC Holdings Corp. after rejection by Mississippi regulators and UIL Holdings Corp.’s agreement to buy Philadelphia Gas Works after the city council refused to consider it.

Failed Plans

Utility regulators killing deals isn’t new. Exelon walked away from a $17 billion stock purchase of Public Service Enterprise Group Inc. in 2006 after failing to agree on terms with New Jersey regulators. NextEra Energy Inc. quit its $12.6 billion offer for Constellation Energy Group in 2006 amid a political row in Maryland over higher electricity bills.

Faced with rejection by Connecticut of its buyout of UIL Holdings, Iberdrola in July withdrew its application to the state regulator and submitted a new one. Exelon may have that option in the District of Columbia, said Hugh Wynne, a New York-based analyst for Sanford C. Bernstein.

In Hawaii, Governor David Ige and the state’s consumer advocate have come out against NextEra Energy’s proposed $2.63 billion purchase of Hawaiian Electric Industries Inc., raising concerns about local benefits. NextEra and Hawaiian Electric have both said they feel there is enough room to convince regulators of the merits of the transaction.

Better Deals

Wynne said Tuesday’s decision may embolden regulators in Hawaii. “This small commission has stood up to Exelon, which would certainly give people the courage of their convictions in Hawaii and strengthen their desire to negotiate a better deal with NextEra,” he said.

Exelon appeared so confident of final approval that it had sold $4.2 billion of senior notes in June and $1.2 billion of stock in July to pay for Pepco. Without a deal by Dec. 31, Exelon must repay $2.75 billion of debt at a premium of one cent on each dollar and would have $5 billion in surplus cash, Wynne wrote Tuesday in a note to clients.

Most utility takeovers have succeeded over the past five years, including the $18 billion purchase by Duke Energy Corp. of Progress Energy, Eversource Energy’s $5 billion merger with NStar and and Exelon’s $7.3 billion takeover of Constellation Energy Group, Wynne said. All closed in 2012.

“These are big, multi-state deals,” Wynne said. “We’re still in a period of unusually large and, as a general matter, successful utility consolidations.”

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