Deutsche Bank Buying Exelon After Pepco Update

Deutsche Bank continued its Buy rating on Exelon Corporation EXC after Exelon and merger partner Pepco Holdings, Inc. POM made a new filing with the Washington DC Public Service Commission (PSC) in what must surely be their final attempt to secure PSC approval for their proposed deal.

The companies also entered an agreement acknowledging that either party may terminate the merger at any time. And Pepco agreed not to declare or pay any further dividends on its common stock unless and until the merger is terminated – or risk losing the pre-paid $180 million break-up fee and $40 million in costs.

Concurrent with the Letter Agreement the companies have filed with the DC PSC requesting "Other Relief" as the PSC indicated they could when rejecting the settlement and proposing alternative terms of its own at the February 26 meeting.

Exelon and Pepco suggest three options for the PSC to move the merger forward, namely 1) approve the original settlement; 2) approve the settlement with the PSC's list of conditions, which EXC and POM both accept; and 3) approve an alternative proposal which the companies suggest may balance the views of the PSC and objections voiced by the other settling parties (e.g. the DC Mayor's office and OPC).

"Options 1 and 2 seem rather unlikely to us given prior positions of the parties, but we imagine the companies are leaving these on the table given the somewhat unusual circumstances where the deal has become caught in a power struggle between some key local interests," analyst Jonathan Arnold said in a client note.

Companies attempt to balance DC parties' competing interests Exelon and Pepco's third option would restore the $25.6 million residential rate credit rather than allowing the PSC to determine allocation. This was a key sticking point for the Mayor and OPC following the PSC's February ruling.

Separately, the companies propose taking $20 million from the MEDSIS (smart meter) program and adding this to the customer benefits bucket to be allocated among classes at the PSC's discretion, with unused balances flowing to MEDSIS. As a result it likely would not trigger most favored nation clause adjustments in other jurisdictions.

"In or view the third option may elegantly balance competing interests of the PSC and other DC parties, although we note these parties are not signatories to the new filing and – at the time of writing – had not commented publicly," Arnold said.

Time-wise the PSC has allowed seven business days for comments (by March 16) with Exelon and Pepco requesting a PSC decision – which would be the third one in this case – by April 7. Per their calendar the PSC are due to meet on March 2, March 16, March 23 and  April 13 although special meetings can be called with 48-hours notice.

Arnold has a $34 price target on Exelon stock, which were trading at $33.85.