POWER June 2011 - 46

MERGERS & ACQUISITIONS
In an interview, Peter Fox-Penner of The
Brattle Group agreed there was a nuclear
aspect to the deal. " There is no question, a
bigger balance sheet is better " for companies
that see a future in new nukes, he said.
" That's clearly a major part of it. "
A well-run utility in two states with conventional
cost-of-service state regulation,
Progress was clearly an attractive target
for a takeover. John Rowe, the aggressive
CEO of Chicago-based Exelon Corp., acknowledged
after the Duke announcement
that he had considered a play for Progress.
But Rowe said his number crunchers
couldn't make the deal work out.
Rowe's Exelon lost a major merger move
five years ago when its plan to take over New
Jersey's PSEG Corp. faltered because the New
Jersey Board of Public Utilities nixed the deal.
That merger would have created the largest U.S.
IOU. Rowe made it clear he was still looking
to grow through acquisitions, and on Apr. 28,
Exelon announed a $7.9 billion deal to acquire
Constellation Energy. If the deal is approved by
regulators, it will make Exelon the country's
largest operator of nuclear plants.
FirstEnergy Deal Closes
As Duke and Progress were unveiling their
merger-the start of at least a year-long
journey-Cleveland-based FirstEnergy and
Allegheny Energy, headquartered outside
Pittsburgh, were wrapping up their $8.5 billion
combo. Announced in February 2010,
the FirstEnergy-Allegheny deal got the final
seal of approval from the Pennsylvania Public
Utilities Commission almost exactly a
year later, on Feb. 25, 2011. The new, beefier
FirstEnergy will have some $16 billion in annual
revenues and six million customers in
Pennsylvania, Ohio, Maryland, New Jersey,
New York, Virginia, and West Virginia.
FirstEnergy was the result of merger mania
that escalated in the 1980s and peaked in
the 1990s. That episode was largely driven by
structural changes in the electricity business
that resulted in the creation of competitive
wholesale and retail markets serving about
half of the states, plus the unique need to deal
with troubled, high-cost nuclear plants. Akron,
Ohio-based FirstEnergy was born of the
1986 merger of Cleveland Electric Illuminating
and Toledo Edison, two troubled neighbors
who joined to create Centerior Energy
Corp. Toledo owned the Davis-Besse nuclear
plant, which has had a checkered history (Figure
2). Centerior became FirstEnergy in 1997
by merging with Ohio Edison. FirstEnergy
acquired GPU Corp. in 2001, which owned
Three Mile Island (TMI) Unit 2, which was
shut down in 1979 and never reopened. Exelon
Nuclear owns and operates TMI Unit 1.
2. Buy rather than build. FirstEnergy Nuclear Operating Co., a subsidiary of FirstEnergy
Corp., owns the single-unit 879-MW Davis-Besse Nuclear Power Station. The plant was originally
owned by Centerior Energy Corp.-created by the merger of Cleveland Electric Illuminating
and Toledo Edison-and was acquired by FirstEnergy in 1997. In August 2010, FirstEnergy
submitted a license renewal application for Davis-Besse (which is licensed to operate through
2017) to the NRC, a process that is sure to be extremely contentious given the plant's uneven
operating history. Source: NRC
Merchant Mergers
Mergers on the merchant side of the business
are also picking up speed. The most recent
example is the newly minted GenOn Energy
Inc., a mixture of Mirant Corp. and RRI
Energy Inc. When that deal closed in early
December 2010, the combined 23,600-MW
merchant operator instantly became one of
the largest independent power producers in
the U.S. Edward R. Muller, chairman and
CEO of GenOn, said the merger " will create
significant near-term stockholder value driven
by $150 million of annual cost savings. "
Is This a Trend?
Are the Duke-Progress, FirstEnergy-Allegheny,
and Exelon-Constellation Energy deals
evidence of a revitalized trend of electric company
mergers? Opinions are mixed. According
to Thomson Reuters Deals Intelligence,
" Merger activity in the energy and power sector
is off to its fastest ever start in a year, with
nearly $94 billion in deals so far in 2011, " up
40% over last year. That assessment came in
February, after the Duke announcement and
just as the FirstEnergy deal was closing. The
figures include foreign merger and acquisition
(M&A) activity, such as BP's $7 billion
hookup with India's Reliance Industries. According
to Thomson Reuters, " Cross-border
energy & power deals have accounted for
$58.1 billion of the activity this year, or 63
percent of worldwide mergers in the sector.
U.S. targeted deals have accounted for roughly
half of the volume. "
Berenson & Co. electric analyst Ed Tirello
is bullish about electric company mergers. But
then, he would be. Tirello is famous for his
1987 " 50 in five " prediction: He predicted that
only 50 investor-owned electric utilities would
be around in 1992. He missed. According to
the Energy Information Administration, in
2000 there were 240 IOUs in the U.S.
Tirello chuckles at his missed prognostication.
" It's taken a bit longer, " he says
with good humor, " but the premise doesn't
go away. Look at the industry as a whole. It
doesn't matter what the generating fleet looks
like today, it is all going to have to be turned
over in this country in the next 20 years.
Years ago, we did five, 10, 20-year advanced
plans. Deregulation messed that up and we
stopped doing it. And we are back to doing
that planning again.
" [The Environmental Protection Agency]
is putting pressure on generation. Plants are
getting old. Rules change and fuels change,
and you must get the money somewhere to
keep the lights on. " So, in Tirello's mind,
the way to find the resources is to bulk up.
" When you look at mergers so far, " says Tirello,
" each one had a particular reason. But the
overall theme is still there: fewer and larger.
46
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