Utilities Merger in Jeopardy (EXC, CEG, ETR, AEP)

When Exelon Corp. (NYSE: EXC) and Constellation Energy Group, Inc. (NYSE: CEG) agreed in April to an $8 billion dollar merger, the companies promised the state of Maryland, home to Constellation, that there would be no job cuts at Constellation subsidiary Baltimore Gas & Electric for at least two years. That promise may not be enough to get the deal through Maryland regulators however.

The merger would create the country’s largest wholesaler of market-priced electric power, and that’s the rub, according to The Wall Street Journal.  The combined companies will have the capacity to generate some 35,000 megawatts of electricity and Maryland officials, including the state’s governor, are worried that the combined companies would have sufficient market power to drive wholesale electricity higher.

A study conducted for the state indicates that the merger could increase wholesale electricity costs up by 12%-37% for parts of the market that the new company serves. According to an Exelon official, the study assumes that the combined company would sell large amounts of electricity into the market managed by PJM Interconnection LLC, when, in fact, the company sells a large part of its capacity directly through utilities and other resellers and would have little impact on the daily auctions the PJM conducts.

Utility stocks have been getting more interest as the US and global economies have gotten weaker. We have suggested that utilities are replacing certificates of deposit and bonds as preferred retirement investments.

Exelon’s annual dividend is $2.10 and its dividend yield is 5.20%. Constellation pays a $0.96 annual dividend and its dividend yield is 2.60%. At Entergy Corp. (NYSE: ETR), the dividend yield is also 5.20%, and American Electric Power Co. (NYSE: AEP) pays a yield of 5%.

In contrast 5- and 7-year US Treasuries currently pay a negative yield and 10-year Treasuries pay just 0.7%. An average CD pays less than 1.5%. For income investors, utilities are safe, high-dividend investments.

Whether a combined Exelon-Constellation would yield to investors than the two companies separately is certainly arguable, but assuming that Exelon’s yield doesn’t fall, Constellation shareholders have got to love the proposed merger. Now it’s up to Exelon to make state regulators at least like the deal.

Paul Ausick