Business & Money

The Exelon-PSEG Super Merger:

Experts debate the risks of a proposed acquisition that would increase the largest nuclear fleet in the country.

Even as many energy and financial experts are touting the so-called "synergies" of the proposed merger between Exelon and PSEG, some are growing concerned over one of the deal's chief selling points: the high concentration of nuclear power.

In fact, prior to the merger, Exelon's nuclear generation was equivalent to 37 percent of all nuclear generation in unregulated states from 2001-2003-and over this period nuclear generation accounted for 88 percent of the company's total power output. No company, in other words, offers as pure a play on the economic potential of nuclear generation in the United States as does Exelon, noted Sanford C. Bernstein & Co equity analyst Hugh Wynne, in a report.

The combined entity formed from Exelon and PSEG would have combined generation assets of 52,000 MW, including some 20,000 MW of low-cost nuclear capacity. On December 20, at a press conference announcing the deal, company executives noted several times how Exelon's top-quartile performance in the management of nuclear facilities would bring cost savings and performance advantages to PSEG's nuclear operation. The Exelon-PSEG group expects cost reductions to make up 85 percent of the anticipated savings from the merger, with increased output from PSEG's nuclear fleet accounting for another 15 percent. Moreover, an executive familiar with the deal says nuclear synergies makes up nearly one-third of the overall savings.

For PSEG, the merger could not have come at a better time, with the company's finances under scrutiny because of missteps in PSEG's generation operations. Standard and Poor's late last year had revised PSEG's outlook from stable to negative, citing "erratic performance at the nuclear fleet over the past few months," among other things. In fact, PSEG's 1,100-MW Hope Creek Nuclear plant had been off line since October 10, when a steam line failure and shutdown with complications prompted the Nuclear Regulatory Commission to send a team of investigators to the plant. At press time, PSEG was working to get the plant back online.

Meanwhile, despite those setbacks, Exelon has insisted that it can improve performance at PSEG's nuclear operations - so much so that Exelon already has begun to coordinate the nuclear fleets of the two companies, and to implement its proprietary methods for improved nuclear operation.

In fact, such confidence was on display by Christopher Crane, president and CNO at Exelon Nuclear, as he spoke glowingly of how every 1 percent increase in capacity factor for PSEG's nuclear fleet would generate additional pre-tax income of $12 million.

But critics question whether Exelon can really deliver as promised. They believe that Exelon's stellar performance operating nuclear plants cannot be continued indefinitely. They say the company's so-called top-quartile performance will prove more difficult to maintain as the company's nuclear fleet continues to age.

Furthermore, some analysts say that the nation's nuclear fleet already is exhibiting a great degree of unpredictability. Take, for example, how utilities in the last few years have had to spend hundreds