Conectiv Inc. and Pepco close merger

$2.2 billion deal creates largest power-delivery company in mid-Atlantic

`It makes us a bigger player'

Combined businesses have 1.8 million customers

August 02, 2002|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Potomac Electric Power Co. and Conectiv Inc. completed a $2.2 billion deal yesterday, creating the largest electricity-delivery company in the mid-Atlantic region with 1.8 million customers in four states and the District of Columbia.

The merger, which took about 15 months to complete, creates an energy powerhouse that boasts almost $12 billion in assets and more than $8 billion in revenue. In comparison, Hagerstown-based Allegheny Energy Inc. has 1.5 million customers in Maryland and four other states, and Constellation Energy Group Inc. has 1.1 million electric customers and 500,000 gas customers in the Baltimore region.

Both delivery businesses, Washington-based Pepco and Delaware-based Conectiv, will retain their brand names and become subsidiaries under a parent company called Pepco Holdings Inc. with headquarters in the nation's capital.

Pepco acquired Conectiv for a combination of cash and stock.

"A lot of hard work went into this, so we're pleased that we've finally gotten here," said Pepco's chairman and chief executive, John M. Derrick Jr., who will hold the same positions in the new holding company. "The principal thing this does is that it makes us a bigger player. Size is important.

"For our customers, we're not changing the branding or the position of either of the two serving utilities," Derrick said. "They'll be dealing with the same company, the same people. But over time, it will allow us to deliver lower cost electricity to those customers than they would otherwise have. If we do our job well, this merger will be very transparent to customers."

Three other nonregulated business units will be under the umbrella of the holding company: Conectiv Energy, which owns "mid-merit" power plants that can start and stop quickly in response to energy needs, and also sells electricity to the wholesale market; Pepco Energy Services, which sells energy services, natural gas and electricity to retail and wholesale markets; and Potomac Capital Investment Corp., a company that invests in energy-related financial and operating businesses.

Conectiv Chairman and CEO Howard E. Cosgrove retired with the close of the transaction yesterday.

Shares of Pepco gained 17 cents yesterday to close at $20.10 on the New York Stock Exchange. Conectiv's stock, which ceased trading at 4 p.m. yesterday, rose 17 cents to close at $25.40.

Starting today, the stock will trade under the Pepco Holdings name.

Pepco shareholders received a one-for-one exchange for shares of the new holding company. As of Wednesday, holders of about 37.6 million shares of Conectiv common stock elected to receive $25 cash in exchange for each of their Conectiv shares. Holders of about 31.5 million shares of common stock chose to receive Pepco Holdings stock, which was exchanged at 1.28205 shares of Pepco Holdings for each share of Conectiv stock.

Final results on the stock election will be announced Aug. 16.

Pepco also reduced its annual dividend to $1 a share from $1.66 in June of last year to make its payout ratio comparable to that of other delivery companies and provide funds for growth.

Pepco and Conectiv executives believe that the merger will achieve $45 million in gross savings over the next five years.

Most of the cost reductions, Derrick said, will come from back-office operations that include computer systems, legal, finance and human resource departments. Some staffing cutbacks will occur, but most will be done by attrition, he said.

"We do not anticipate any reductions in the forces on the ground serving customers," Derrick added.

The completion of the merger fulfills a long-standing desire by Pepco to expand its reach.

Five years ago, merger negotiations between Pepco and Baltimore Gas and Electric Co. fell apart after Maryland and Washington public service commissions demanded rate reductions and other protections for consumers that neither company was willing to accept.

The Pepco-Conectiv deal won approval from the Maryland Public Service Commission on April 11 after the companies agreed to a settlement that froze distribution rate caps for residential customers until December 2006, a two-year extension. The agreement also involves the new holding company donating $1 million to the Maryland Energy Administration to fund energy efficiency programs for residential customers.

The rate caps apply only to the price that Pepco and Conectiv charge residential customers to deliver electricity to each household. It does not extend the rate cap on standard offer service, or electricity supply, which ends June 30, 2004, in both company territories.

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