Stalled merger raises options

Alternatives could include scrapping, restructuring BGE deal, analysts say

October 25, 2006|By Paul Adams | Paul Adams,Sun reporter

When Constellation Energy Group reports its third-quarter earnings Friday, Wall Street analysts are likely to be less interested in the company's profits than they are the future of a stalled merger with FPL Group Inc. of Florida.

In words and deeds, executives for both companies in recent weeks have expressed growing impatience with Maryland regulatory delays. That has fueled speculation that the parties might be close to scrapping the deal or restructuring it in a way that avoids regulatory pitfalls that have left it stuck in a legal and political morass.

Options could include finding a way to partner Constellation and FPL's fast-growing unregulated businesses, which lie outside the jurisdiction of Maryland regulators and are the primary motivation for the merger, some analysts said.

Either scenario probably would put an end to a deal that has become embroiled in a months-long debate over deregulation and rising electricity rates, which have emerged as a major campaign issue in this fall's elections.

"The frustrations of the day for FPL and Constellation may have executives trying to put this to a close," said Mike Bedley, a regulatory and commercial specialist with Apex Power Services Corp. in Davie, Fla.

The drumbeat of bad news surrounding the $12 billion merger is reaching a point where investors, too, no longer appear optimistic about its future. Constellation's stock closed yesterday at $62.56 per share, about 11 percent below the deal price. If investors were confident that the merger would occur, the spread would be closer to 4 percent, analysts said.

Merger integration activity between the companies has been on hold since May. And neither company has scheduled a shareholder vote on the deal with just over two months left in the year. Advertisements aimed at promoting the combination to Maryland consumers are ready and waiting, but an FPL spokeswoman said this week that they have not been scheduled to run.

A Constellation spokesman declined to comment, and an FPL official did not respond to a message yesterday.

At risk for consumers is $214 million worth of merger-related savings that Constellation has pledged to Maryland ratepayers over 10 years if the deal wins approval. Also in peril is $386 million worth of givebacks spelled out in legislation passed in June to deal with an average 72 percent rate increase for residential customers of Baltimore Gas & Electric. In regulatory filings, Constellation, BGE's corporate parent, has hinted that those credits could be vulnerable to a legal challenge if the merger falls through.

The regulatory logjam stems from provisions in the June legislation that sought to fire the members of Maryland's Public Service Commission, who lawmakers have criticized sharply for not doing enough to protect consumers. To go forward, the merger must be approved by the PSC.

The PSC's chairman successfully challenged the firings, but a ruling by the Maryland Court of Appeals left in place part of the law that barred the current commission from ruling on the merger. Lawmakers wrote the provision to ensure that a new panel of regulators would decide the merger's fate.

FPL sued the state in Baltimore circuit court in the hope that a judge would find that the current PSC has legal authority to rule on the deal. The judge overseeing the case agreed to let PSC merger proceedings continue pending the outcome of the lawsuit. Merger hearings are scheduled to begin next month, with a commission decision expected early next year.

Even if FPL prevails in the lawsuit, the Maryland Court of Appeals has hinted that lawmakers could come back next year and pass new legislation to block the sitting PSC from approving the deal. And Baltimore Mayor Martin O'Malley has suggested that he would fire the commission members if he is elected next month as governor. Either scenario could result in further delays and uncertainty.

Against this backdrop, Constellation's board of directors met Friday to declare a quarterly dividend and set a date for the company's annual meeting, which has been on hold pending progress on the merger agreement. The original plan was to postpone the meeting - usually held in May - so that a shareholder vote on the merger could coincide with the gathering.

In a regulatory filing Friday, Constellation's board declared that the meeting would be held Dec. 8. But it also said that no merger vote had been scheduled, suggesting that shareholders will not take up the matter then as originally intended.

The merger agreement with FPL will expire Dec. 31 unless the only thing remaining is to gain regulatory approval. That means shareholders of both companies must approve the deal before the end of the year in order for a six-month extension to kick in, said Paul Fremont, an analyst with Jefferies & Co. in New York.

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