Baltimore Gas and Electric Co. and Potomac Electric Power Co. killed plans for their $3 billion merger yesterday, citing regulatory constraints that would have limited shareholders' ability to profit from the alliance.
The decision by BGE and Pepco comes after more than two years of battling a series of daunting obstacles -- including utility regulators' conditions and an organized labor court challenge of the merger's benefit to the public -- and more than $100 million in merger-related costs.
"We found that the merger was in the public interest, and at the same time the public interest required the imposition of certain conditions," said H. Russell Frisby Jr., chairman of the Maryland Public Service Commission. "We thought the conditions we imposed were reasonable."
In approving the merger this year, utility regulators in Maryland and Washington ordered the planned Constellation Energy Corp. to slash customers' electric rates by nearly $250 million over the next four years and relinquish nearly $200 million more in power costs currently passed on to consumers, conditions that BGE and Pepco considered too onerous.
"We have tried unsuccessfully to obtain reconsideration of these conditions, but now conclude that a favorable outcome cannot be expected within a reasonable period, if at all," said BGE Chairman and Chief Executive Christian H. Poindexter and Pepco President and Chief Executive John M. Derrick Jr. in a joint statement.
"To sacrifice shareholders' interests by proceeding with the merger under detrimental financial terms and conditions would represent a major breach of faith."
As proposed in September 1995, Constellation Energy would have been the nation's ninth-largest power concern, with nearly 2 million customers and $15 billion in assets. BGE and Pepco claimed that the corporate marriage would save $1.3 billion through 2007, savings that they hoped to split evenly between customers and shareholders. Regulators, however, ordered BGE and Pepco to give customers 75 percent of the savings.
Industry restructuring ahead
The decision to terminate the merger comes as state utility regulators are working to restructure the existing, monopolistic electric system and offer customers choices of power suppliers by 2000, historic changes that are expected to promote competition and ultimately lower prices.
Until then, however, analysts predict electric rates in Maryland could rise slightly as a result of the BGE/Pepco decision to abandon the merger. Pepco recently won approval from the Maryland Public Service Commission to raise electric rates for residents in Montgomery and Prince George's counties, and BGE is working to obtain a natural gas rate increase in the Baltimore area. BGE has no plans to seek an electric rate increase at this time, a company spokesman said.
"I feel bad for Maryland ratepayers," said Edward J. Tirello, a utility industry analyst at Nat- West Markets. "This was a great way to have guaranteed lower rates. This way, rates may actually rise."
Both BGE and Pepco said they intend to focus on the state's proposed deregulation plan, because "it is imperative that Maryland gets electric industry restructuring right the first time," Poindexter and Derrick said.
The decision to kill the merger wasn't without its supporters. Both the union that represents Pepco employees and a state agency charged with protecting residential customers applauded the move as a sound one.
"Christmas for us came a couple of days early this year," said Jim Hunter, president of the International Brotherhood of Electrical Workers Local 1900, which sued BGE and Pepco in Baltimore County Circuit Court in an effort to block or derail the merger. "It's a win for us, but only in that the true public interest was protected."
"Ultimately, we believe that customers and residents will be better off with two competing utilities rather than one big one," said Michael J. Travieso, head of the Maryland People's Counsel, which represents state residents before the PSC. "We were opposed to the merger from the beginning, because we felt the risks outweighed the benefits."
But undoing the merger now also may present both BGE and Pepco with thorny, long-term competitive problems that will force each company to unite with other, out-of-state partners, analysts predict.
'Merge to survive'
"BGE needs to start looking around," Tirello said. "They are way too small a company, and when Maryland opens itself up to competition, the big utility companies are going to kill them. They have to merge to survive, and they can't go it alone."
Arthur J. Slusark, a BGE spokesman, declined to comment on whether the utility would seek another merger partner. Pepco has reportedly been holding informal talks with Duke Energy Corp. of North Carolina regarding a possible alliance, although company officials have declined to comment on the nature of the discussions.
BGE and Pepco aren't the only utilities hoping to stave off competition through size.
Nationwide, utilities are partnering through billion-dollar stock deals in an attempt to broaden their customer and asset bases and eradicate potential hostile takeovers. The most recent manifestation of the trend occurred yesterday, when Columbus, Ohio-based American Electric Power Co. announced plans to spend $6.45 billion to acquire Dallas-based Central & South West Corp., creating a utility giant with customers in 11 states.
To erase their merger and absorb costs associated with it, BGE and Pepco said they will split the $100 million in costs evenly and take a charge in the fourth quarter. For BGE investors, the charge is expected to lower earnings per share by 18 cents. By comparison, BGE earned 33 cents per share in the final quarter of 1996, before special charges related to its Calvert Cliffs nuclear power plant.
BGE's common stock closed yesterday up 69 cents per share, to $32.94, while Pepco's stock slipped 31 cents to close at $23.13 per share.
Pub Date: 12/23/97