What Exelon Would Have to Do to Save Its $6.8 Billion Pepco Deal

  • Company must address concerns about residential rates rising
  • Exelon CEO Crane has said company needs decision by March 4

Last week, District of Columbia regulators proposed a set of conditions that had the potential of finally clearing Exelon Corp. to buy Pepco Holdings Inc. for $6.8 billion. At the time, analysts including Guggenheim Securities LLC described the new terms as “minor.”

They aren’t looking so trivial anymore.

On Tuesday, the city’s mayor, Muriel Bowser, People’s Counsel Sandra Mattavous-Frye and Attorney General Karl Racine said they couldn’t support the proposal. If Exelon and Pepco are still seeking approval of the deal by next week, the companies will need to find a way to regain their backing and that of five other parties, all of whom need to sign off on the plan for the city’s Public Service Commission to clear the transaction.

Pepco plunged as the opposition cast doubt on whether the takeover, almost two years in the making, will actually close. The spread between Pepco’s share price and Exelon’s offer price -- a gap traded by those betting on whether the deal will happen -- ballooned to a record in a testament to Wall Street’s doubts.

At the heart of the agencies’ concerns is the lack of a guarantee in the proposed settlement that residential customers aren’t going to see their rates rise over the next few years. Mattavous-Frye said the settlement that the Public Service Commission proposed last week changed a $25.6 million rate offset that was “the single most critical provision.”

New Terms

For the merger to move forward, Exelon needs to negotiate new terms with all of the parties and file those with the Public Service Commission by March 11, Guggenheim analyst Shahriar Pourreza said in a report late Tuesday. “While there is time to negotiate any alternative conditions, we believe there is increasing likelihood” that Exelon may walk from the deal, he said.

Even if Exelon is able to gain support from all parties, it’s unclear how open the Public Service Commission would be to passing a settlement that’s different from the one it came up with last week. The panel said Feb. 26 that all parties needed to sign off on its conditions within 14 days for it to be approved automatically.

If they come back proposing new terms instead, others who weren’t part of the agreement would have seven days to comment, based on the commission’s order last week.

In Talks

Exelon and Pepco said in e-mailed statements that the companies are in talks with the D.C. government and other settling parties about the commission’s order and new provisions.

The development is the latest twist in Exelon’s quest to form the largest U.S. utility by customer count by adding Pepco. Washington regulators have twice-rejected the merger, saying it wasn’t in the best interest of customers. Exelon Chief Executive Officer Chris Crane told investors on Feb. 3 that the company needed a decision from D.C. by March 4 or it would walk away from the deal.

Bowser, who was instrumental in reviving the deal after it was initially rejected in August, said in a statement Tuesday that the commission’s proposal gutted “much needed protection against rate increases for DC residents.” Mattavous-Frye said that, without guarantees that rates won’t be increased for residential customers through March 2019, she can’t support the deal.

"What I’m seeing is that nobody is saying, ‘Here is the path forward,’" said Kit Konolige, an analyst for Bloomberg Intelligence.

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