Exelon Corp.'s (EXC) bid to purchase Constellation Energy Group Inc. (CEG) will allow the company to expand its nuclear power footprint, something it has worked to do for years, while also boosting its retail footprint.

The $7.9 billion all-stock deal announced Thursday to acquire Constellation would create the second largest electric and natural gas distributor with 6.6 million customers, after Duke Energy Corp. (DUK) once Duke completes its acquisition of Progress Energy Corp. (PGN).

Exelon, the largest nuclear power plant owner in the U.S., has been interested in buying more plants for years, but attempts to buy Public Service Enterprise Group Inc. (PEG) and NRG Energy Inc. (NRG) were thwarted by regulatory hurdles.

The Chicago company chose Constellation after carefully reviewing regulatory issues in several states. The regulatory environment has improved in Maryland after FirstEnergy Corp. (FE) was able to receive approval to acquire Allegheny Energy recently, said Christopher Crane, chief operating officer of Exelon, who will become chief executive after the deal closes. "We have looked closely at the most recently approved transaction...and we have scaled our offer off of that," he said.

Exelon and Constellation have promised not to cut utility jobs for two years and to invest in renewable projects in Maryland. Executives are confident their deal will close in early 2012.

By acquiring Constellation, Exelon will increase its nuclear power generating capacity relatively cheaply, by 11% to 18,968 megawatts, and get a bigger foothold in the mid-Atlantic electricity market. This electricity market is the single largest one in the U.S. and also has some of the highest electricity prices. The combined company's profits will be split between utility operations and selling power in competitively.

But the "marriage is perfect" between Exelon's substantial generation portfolio and the ability to sell power to consumers directly through Constellation's branded retail business, said Mayo Shattuck, chief executive of Constellation, who will become executive chairman of the combined company.

More customers are shopping around for low-cost power in markets like Maryland, New Jersey and Illinois. "It's going to be more and more important for generators to have this front," to go after those consumers, Shattuck said.

Having a bigger retail outlet for power plants that sell power in competitive markets, which represents half of Exelon's profits, will help cut costs and improve margins in this merchant power business, executives said.

Exelon started pursuing Constellation specifically about six months ago because their business models are similar, Crane said. Both companies have merchant businesses, nuclear plants and utility operations.

Constellation represents a relatively cheap option for getting new nuclear power because weak power prices have made it uneconomical to build new reactors in competitive markets where costs are not covered by utility customers.

Exelon executives said they aren't interested in building a new nuclear plant.

"In the long run, of course, we are interested, but in the near-term, new nuclear plants are simply not economic" with natural gas prices between $4 and $5 per million British thermal units, said Exelon Chief Executive John Rowe, who will retire after the deal closes. Gas plants are cheaper to build and operate.

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 about 55% of Exelon's total generating capacity of 34,401 megawatts after the deal closes. This represents a smaller portion of the company's power capacity because Constellation will also owns gas and coal plants.

Meanwhile, the merger is expected to generate at least $250 million in cost savings annually, but Crane said "we are not ready to predict actual headcount reductions, computer savings, technology advances or liquidity costs savings."

The combined companies will be able to reduce the amount of collateral needed for selling power in competitive markets, Crane said. Post merger, Exelon would be deemed less risky because the amount of power sold through retail operations would more closely match power-generating capacity. Credit lines totaling about $10.3 billion at both companies could be reduced by 30% to 40%.

Constellation shares were recently up 5.5% to $36.19 and Exelon rose 1.5% at $42.10.

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