Exelon COO: Annual Synergies From Constellation Deal Will Be $250 Million

Top executives at Exelon Corp. (EXC) said the power producer will further diversify its generation portfolio, expand its retail footprint and cut costs by acquiring Constellation Energy.

However, Exelon will not pursue any new nuclear development in the near-term because of poor economics, executives said in an interview.

Earlier Thursday, the Chicago-based company announced intentions to purchase Constellation in a $7.9 billion all-stock transaction. The news sent Constellation shares 4.5% higher to $35.85 and Exelon's stock has edged up 0.3% to $41.60 a share.

Exelon first approached Constellation last November because their business models are similar, said Chris Crane, chief operating officer of Exelon, who will become chief executive after the deal closes.

The company chose Constellation after carefully reviewing regulatory issues around the country. The regulatory environment has improved in Maryland after FirstEnergy Corp. (FE) was able to receive approval to acquire Allegheny Energy recently, Crane said.

"We have looked closely at the most recently approved transaction ... and we have scaled our offer off of that," Crane said.

The deal is expected to close later this year.

Both companies have merchant businesses, nuclear plants and utility operations. Exelon will increase its nuclear power capacity through the deal, but the company will not pursue projects to build new nuclear reactors, executives said.

"In the near-term new nuclear plants are simply not economic" with natural gas prices between $4-$5 per million British thermal units, said Exelon Chief Executive John Rowe, who will retire after the deal closes. Gas is a fuel used to generate electricity and low natural gas prices have driven the price for wholesale electricity down in recent years.

Electricite de France SA (EDF.FR) currently has a stake in Constellation's existing nuclear fleet, and that partnership will not be affected by the deal. Late last year, Constellation pulled out of a separate partnership with the French utility to build new generation in the U.S. because of poor economic conditions. Constellation also ended its bid to build a third reactor at an existing nuclear facility in Calvert Cliffs, Md., after seeing unfavorable terms from a Department of Energy loan guarantee. EDF continues to pursue the project.

"We won't be involved in it; that is an EDF venture," Crane said.

Nuclear power will represent 55% of the combined company's total power-generation fleet of 34,401 megawatts.

Meanwhile, by streamlining operations through the Constellation acquisition, savings will be about $250 million annually, Crane said.

"We are not ready to predict actual headcount reductions, computer savings, technology advances or liquidity costs savings," he said. However, by having a greater retail footprint, the combined companies will be able to reduce collateral needed for merchant-power transactions to $3 billion to $4 billion from the current total of $10.3 billion.

To close the deal, the companies may need to divest about 2,600 megawatts of generation in the mid-Atlantic electricity market operated by PJM Interconnection LLC, executives said during a conference call.

-By Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

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