Three sets of utility mergers have been delayed by state and federal regulators. Exelon (EXC) plans to acquire Constellation Energy Group (CEG), Northeast Utilities System (NU) plans to acquire NSTAR (NST), and Duke Energy (DUK) plans to acquire Progress Energy (PGN). All three merger deals appear to be heading toward success, but all three may be delayed, and valuations may change as regulators seek their pound of flesh.
If Exelon successfully acquires Constellation, this merger could help both companies. Over the last three years, Exelon's market capitalization dropped more than 50%; the company never recovered from the crash of 2008. Constellation also was snared in the 2008 debacle, it became tangled with the Lehman Brothers collapse, came close to bankruptcy and has been bailed out twice; first by Berkshire Hathaway (BRK.A, BRK.B) and later by Electricite de France. But Maryland's governor opposes the merger.
According to The Baltimore Sun, when the companies announced their merger plans in April, "Exelon and Constellation offered a $250 million incentive package that included a $100 credit for each BGE customer as well as financial contributions to the state's green energy goals. They included $4 million for Maryland's EmPower energy efficiency efforts; $10 million for the state's electric vehicle infrastructure; and more than $50 million to develop 25 megawatts of green energy in the state. The two companies also agreed to maintain Constellation's annual charitable giving of about $10 million for at least 10 years. But the state says those commitments are not enough."
A similar story is playing out in New England. The region needs a strong utility backbone, and if Northeast Utilities' plans to acquire NSTAR are successful, the combined utility may be what the region needs. After the New England states restructured their utilities and removed most of their power plants from their rate bases, New England utilities started selling their stripped-down distribution systems to foreign interests. The latest was Central Vermont Public Service (CV), which is selling itself to Gaz Metro, a Canadian company that also owns Vermont's other utility, Green Mountain Power.
As in Maryland, Massachusetts Governor Deval Patrick and Lieutenant Governor Tim Murray want more concessions. According to Renew Grid, the Department of Energy Resources (DOER) filed a brief last week to renew its motion to stay the proceeding. DOER is requesting details about how the merger would meet the Department of Public Utilities' (DPU) "net benefit" standard regarding the state's greenhouse gas emissions and clean energy goals. The brief states that any merger should include new investments that would significantly advance the Patrick-Murray administration's goals of renewable energy and energy efficiency. It urges the DPU to require NSTAR and Northeast Utilities to "demonstrate concrete, verifiable and enforceable reductions in their reasonably foreseeable climate impact."
The situation in the Carolinas is slightly different. Duke's plan to acquire Progress Energy would likely create the nation's largest investor-owned utility. The combined company would also become the owner of the nation's largest fleet of rate-based nuclear power plants. Combined, they would own 12 nuclear power plants, and all 12 assets are in the rate base. Further, the combined utility has long-term plans to build six more nuclear power plants (AP1000) and is currently pursuing licenses and permits from the Nuclear Regulatory Commission.
Last Friday, the Federal Energy Regulatory Commission (FERC) raised objections to the merger. According to the Associated Press, the FERC issued an order that conditionally approved the merger, but it told the companies to propose solutions to protect wholesale power competition in the Carolinas. "The agency said remedies could include selling off power plants, building new transmission lines, or joining a regional transmission authority. Regulators also said critics get 30 days to comment on the utilities' proposals -- a timeline that could delay completion of the buyout beyond the end-of-the-year target the companies sought."
About the same time FERC issued its order, optionMONSTER reported that a big option trade hit the screens; it was 7 times Duke's daily average. Put and call volume were even, and the big trade of the day was in the November 20 calls and puts. "The trade can profit if DUK moves sharply in either direction or if the realized volatility is greater than that implied by the options." Apparently, somebody is expecting news from Duke, soon.
These stories provide investors with an important lesson: Mergers between utilities are never certain until they are done. The state of Maryland nixed two previous attempts to merge Constellation. New England has a tendency to view its utilities as an extension of state governments. But it is rare for the federal government to delay a merger because of transmission line issues, particularly in non-congested regions.