Despite continuing challenges to Constellation Energy Group's plans to sell itself to Exelon Corp., analysts say the $7.9 billion deal is likely to overcome major regulatory obstacles, including those in Maryland, where critics are seeking concessions to make the merger more palatable.
On Wednesday, even as the companies and merger opponents continued to spar over details of the deal, energy analysts said the merger — scheduled for a shareholder vote next month — is expected to go through. At this point, energy analyst Paul Fremont said, the two companies are "not signaling that there is an obvious deal-killer."
But the process of reaching a merger agreement acceptable to all parties is complicated.
Constellation and Exelon on Wednesday rejected some of the main conditions proposed by critics, including the state consumer advocate's proposal for a three-year rate freeze. The companies also rebuffed a recommendation by Gov. Martin O'Malley's administration that they develop more state-based renewable energy resources.
Instead, the companies made a counteroffer that they said would provide Baltimore Gas and Electric Co. a stronger voice in the bigger, combined company and address concerns that the merged company would push up prices in the mid-Atlantic electricity grid.
That offer was met with skepticism from the state.
"I'm not sure if that's going to win us over," O'Malley spokeswoman Raquel Guillory said, adding that officials with the Maryland Energy Administration were reviewing documents with a "very keen eye."
Meanwhile, EDF Group, Constellation's second-largest shareholder and a partner in its nuclear business, said Wednesday that state regulators should reject the merger unless EDF's concerns over the governance and management of their partnership were addressed. EDF is France's national utility.
Negotiations involving the companies and state, consumers and other interested parties are not unusual in energy deals requiring regulatory approval. The Maryland Public Service Commission, or PSC, which has the power to veto the merger, is scheduled to begin its review on Oct. 31. Shareholders are to vote on Nov. 17.
Fremont, an analyst at Jefferies & Co., said Wednesday that state energy regulators could approve the proposed merger if Exelon and Constellation accepted changes proposed by the PSC.
"Outright rejection seems unlikely because nobody is actually recommending that, including EDF," Fremont said.
Failure to reach agreement on rates and other issues doomed two earlier attempts by Constellation to sell itself. But the Baltimore-based energy giant did agree to measures proposed by the commission to gain approval for its deal to sell half its nuclear business to EDF in 2009.
Given its history, Maryland has been viewed as the toughest regulatory obstacle for the deal.
Morningstar analyst Travis Miller put the chance of the deal's closing at 75 percent. Miller said the companies took a "step in the right direction" this week when they reached a settlement with the independent market monitor for the PJM electricity grid, alleviating the monitor's concerns that a combined company would have too much market concentration and could push up prices.
The PJM grid serves much of the Mid-Atlantic region.
That settlement will also pave the way for an approval by the Federal Energy Regulatory Commission, Miller said.
Given the deal with PJM's market monitor, "We believe approval in [Maryland] is the next (smaller) hurdle for merger consummation," UBS Securities analyst Julien Dumoulin-Smith wrote in a research note.
Exelon and Constellation initially agreed to sell three coal-fired plants in Maryland to mitigate market power concerns. The settlement now restricts the company from selling those facilities to certain companies, among other limitations. The companies said Wednesday that they planned to ask the federal commission and the PSC to accept the deal as part of any potential decision approving the merger.
The People's Counsel, however, has asked the federal commission for a hearing on the combined company's control over electricity prices. The consumer advocate wants Exelon to sell four power plants in and around Philadelphia in addition to the three Maryland facilities — a recommendation that the companies rejected in testimony filed Wednesday with the Public Service Commission.