Pepco to acquire Conectiv in $2.2 billion deal

By the OGJ Online Staff

HOUSTON, Feb. 12, 2001—Potomac Electric Power Co. (Pepco) said Monday it will acquire Conectiv Inc. in a cash and stock deal valued at $2.2 billion, creating the largest electric utility in the U.S. mid-Atlantic.

The deal values shares of Wilmington, Del.-based Conectiv at $25 each. Pepco CEO John M. Derrick Jr. said in a teleconference the deal will immediately add 5-7 cents/share to earnings once it is completed and forecast the combined company’s earnings will grow about 6-8%/year, compared to current analyst estimates of 3-4%.

The companies said they expect the transaction to be completed in about 12 months, subject to various regulatory approvals. Pepco shareholders will own 67% of the combined company, which has yet to be named. It will have more than 1.8 million customers in Delaware, the District of Columbia, Maryland, New Jersey, and Virginia.

Derrick, who will become CEO of the new company, said Pepco will reduce its annual dividend to $1./share from $1.66/share, effective with the June 2001 dividend. He said the action would make Pepco’s dividend payout ratio comparable to those of other delivery companies and provide for continued investment in growth.

With 2,500 MW of owned generation, 500 MW under construction, and contracts in place through 2004 for the balance of its needs, Derrick said the new company “in contrast to California” has reliable sources “pinned down.” He called the combination the “right deal at the right time.”

In addition to more than doubling Pepco’s customer base and expanding its service territory by nine times, the combination will “allow us to achieve operating efficiencies that will benefit our shareholders, customers and employees alike,” he said.

Howard E. Cosgrove, Conectiv chairman and CEO, will retire after the merger is completed. The combined company will be headquartered in Washington, DC, while Conectiv will maintain its Wilmington headquarters.

Pepco stockholders will receive one share of the holding company’s common stock on a tax-free basis for each share of Pepco common stock they hold. Conectiv common stockholders will have the option to receive either $25 in cash or holding company shares, subject to proration.

Derrick said a significant portion of the acquisition will be financed through cash on hand, including proceeds from Pepco’s recently completed sale of generating assets. He also said Pepco authorized a $450 million share repurchase which should be completed in about 12 months.

In midmorning trading, Pepco shares were trading up at $21.40 from Friday’s close of $21.35 on the New York Stock Exchange, while Conectiv was trading up at $22.02 from Friday’s close of $21.