Knowing the responsiveness of huge, monopolistic organizations, it should be heartwarming news as we approach the cold winter months that Chicago-based Exelon (NYSE:EXC) plans to buy Newark, N.J.-based Public Service Enterprise Group (NYSE:PEG) to create the country's largest utility, serving some 18 million customers stretching across Illinois, Pennsylvania, and New Jersey.
Exelon is the country's largest operator of nuclear power plants, with 17 reactors at 10 sites; Public Service operates four. When run properly, nuclear plants are a low-cost producer of electricity. That's been the result of Exelon's operations since it was created out of the merger of Unicom and Peco Energy in 1999. Public Service's operations, however, have been a source of contention.
New Jersey is home to four nuclear plants in the southern part of the state. The Oyster Creek plant faces license expiration in 2009, and environmentalists want the plant shuttered then. Exelon executives say they have no plans to do that. The three plants that operate on Artificial Island in Salem send the electricity they generate to a regional pool instead of directly to businesses and consumers. Exelon wants to make the operations more efficient.
Critics wonder whether there will be any real benefits realized since Exelon already partially owns and operates three of the four plants as it is. A subsidiary of Exelon owns the Oyster Creek plant, while the Salem I and II plants are jointly owned by Exelon and Public Service. Only Hope Creek, the third Salem plant, is owned by Public Service, but it has been shut down since October when a pipe burst.
Nuclear power won't be the only power source. The new company would also service 9 million electric customers and supply approximately 2 million customers with natural gas. The combined company, to be renamed Exelon Electric & Gas, would have a combined domestic generation capacity of 52,000 megawatts, the largest power generator in the country.
The $12 billion deal calls for each common share of Public Service to be converted into 1.225 shares of Exelon stock. That will result in Public Service shareholders owning about 32% of the new company and Exelon shareholders owning 68% of it. Collectively, the new company will have $79 billion in assets, $27 billion in revenues, and $3.2 billion in annual profits. Some 1,400 jobs will be cut, though, or about 5% of the combined 28,500 work force.
There's no guarantee the merger will go through. There are state commissions, such as the Board of Public Utilities in New Jersey and the Illinois Commerce Commission, that must be appeased. Also, a variety of other entities, including the Nuclear Regulatory Commission, the SEC, the Federal Energy Regulation Commission, the Department of Justice, and the Federal Trade Commission, might want a say in the merger. Each will want assurance that a megawatt merger creating such significant market power will not harm consumers.
Exelon has indicated that it may have to divest itself of some of its operations over the next 12 to 15 months before approval will be given, and it has said it is willing to do so. It may also have to share cost savings with rate payers, but the companies were quick to point out only 30% of the savings will come from the regulated market.
Like the wave of consolidation that swept the banking industry and made wags wonder whether we were approaching the time of a single national bank, the consolidation occurring in the utility industry, while welcome by some as a means to takeover troubled operators, has others questioning whether there will be a single national utility, too.
We can ponder that possibility as we fend off the chill and await the arrival of the utility repairman this winter.
Fool contributor Rich Duprey fends off the winter chill with a six-pack of Coors Light. He does not own any of the stocks mentioned in this article.
