updated 12/20/2004 1:17:12 PM ET 2004-12-20T18:17:12

Exelon Corp. has agreed to acquire Public Service Enterprise Group Inc. for more than $12 billion in stock in a transaction that would create the nation’s largest power generation company, the companies said on Monday.

Shares of both companies rose on the news, though some analysts were concerned that the deal could run into regulatory hurdles on the state and the federal level.

The combined company would serve some seven million electric users and two million natural gas customers in Illinois, New Jersey and Pennsylvania.

Under the definitive agreement, each Public Service share will be converted into 1.225 shares of Exelon. The offer values Public Service at $51.28 a share, an 8.5 percent premium to its closing price of $47.27 Friday.

Company officials planned to discuss the merger Monday afternoon in Newark. Chicago-based Exelon and Newark-based PSEG said both of their boards have given unanimous approval to the merger.

The new company would have $79 billion in assets, with $27 billion in annual revenues and $3.2 billion in annual profit, the companies said.

The deal is expected to close in 12 to 15 months, pending approvals from regulators and shareholders.

The companies said they expect the combination will create immediate cost savings, and provide improved service because of efficiencies with generation, transmission, distribution and power marketing. They also claimed there will be greater earnings predictability.

“The question is whether the feds and state of New Jersey will put up with it,” said David M. Schanzer, a utility analyst at Janney Montgomery Scott. “If they were caught by surprise, this could be a little bit more of a difficult process.”

He foresaw no problem with regulators in Illinois and Pennsylvania, where Exelon has customers, but said New Jersey typically was skeptical of out-of-state companies controlling a utility that serves its residents.

A spokeswoman for the New Jersey Board of Public Utilities, Gloria Montealegre, said the agency had no immediate comment.

The companies said the transaction also would require approval of the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the Securities and Exchange Commission, and either the Department of Justice or the Federal Trade Commission.

Federal regulators would be concerned about the market power of the combined company, Schanzer said. “This is going to be the 800-pound gorilla,” he said.

The deal, if approved, will encourage other utilities to consider merging to compete, he said.

Schanzer said the companies’ estimate of annual savings of $400 million in the first year, eventually growing to $500 million, was a “reasonable, conservative” forecast.

Analyst Hugh Wynne at Bernstein & Co. said he saw the merger as a good fit commercially, and a sound transaction financially. Exelon has sustained its growth by making operational improvements, cutting costs and selling non-core businesses, he said.

“Now that they’ve pretty much squeezed that orange dry, they have to find another company where they can repeat that process of cost improvement,” Wynne said.

PSEG, although it has a “fairly bloated” cost structure, brings several years of experience in buying energy at auctions, which Exelon may soon be allowed to do in Illinois, he said.

The regulatory hurdles will prove easier to overcome than in the 2000 merger of American Electric Power and Central South West Power Corp., where he said agencies in 11 states siphoned cost savings to utility customers with little left for shareholders.

Here, both companies have generation that is unregulated, and they cover just one energy market and contiguous states. “I just see it as a lot cleaner to implement,” Wynne said.

John W. Rowe, chairman, president and CEO of Exelon, will become the president and CEO of Exelon Electric & Gas upon completion of the merger and will be responsible for all operations. E. James Ferland, chairman, president and CEO of PSEG, will become non-executive chairman of the board of Exelon Electric & Gas until his planned retirement in the spring of 2007.

The new board will be comprised of 12 members nominated by Exelon and six members nominated by PSEG.

The new company is to be the nation’s largest power generator, with approximately 52,000 megawatts of domestic capacity, including long-term contracts, the companies said.

Following the merger, PSEG stockholders will own approximately 32 percent, or 306 million of Exelon Electric & Gas’ pro-forma shares outstanding, and Exelon shareholders will own approximately 68 percent, or 650 million shares.

PSEG’s main subsidiaries are Public Service Electric and Gas Co. (PSE&G), New Jersey’s largest utility with 2 million electricity and 1.6 million gas customers, and PSEG Energy Holdings.

Exelon distributes electricity to 5.1 million customers in Illinois and Pennsylvania, and gas to 460,000 customers in the Philadelphia suburbs.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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