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Published on August 26, 2007

Author: Malbern

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Slide1:  MERGERS andamp; ACQUISITIONS: A REGULATORY PERSPECTIVE Presented by Frank J. Hanley, CRRA President AUS Consultants – Utility Services 155 Gaither Drive, Suite A Mount Laurel, NJ 08054 856-234-9200 www.ausinc.com e-mail: fhanley@ausinc.com OCTOBER 6, 2006 26th ANNUAL BONBRIGHT CENTER ELECTRIC AND NATURAL GAS CONFERENCE UNIVERSITY OF GEORGIA TERRY COLLEGE OF BUSINESS THE REGULATED ENERGY INDUSTRYCOMPLETED, FAILED AND PENDING MERGERS2001-2006:  THE REGULATED ENERGY INDUSTRY COMPLETED, FAILED AND PENDING MERGERS 2001-2006 Since January 2001 through September 2006, the utility industry has seen over 100 major mergers. There have been 39 attempted major mergers (enterprise value andgt; $100 million) of energy companies. 19 Completed 14 Failed 6 Pending AUS CONSULTANTS COMPLETED ENERGY COMPANY MERGERS 2001-2006:  COMPLETED ENERGY COMPANY MERGERS 2001-2006 2006 - Duke Energy Corporation / Cinergy Corp. (Duke Energy Corporation) 2006 - MidAmerican Energy / PacifiCorp (MidAmerican Energy Holdings) 2005 - Kinder Morgan Inc. / Terasen Inc. (Kinder Morgan Inc.) 2005 - PNM Resources, Inc. / TNP Enterprises, Inc. (PNM Resources, Inc.) 2004 - AGL Resources Inc. / NUI Corporation (AGL Resources Inc.) 2003 - Black Hills Corporation / Mallon Resources (Black Hills Corporation) 2002 - Potomac Electric Power Co. / Conectiv Inc. (Pepco Holdings, Inc.) 2002 - Energy East Corp. / RGS Energy Group (Energy East Corp.) 2002 - Duke Energy Corp. / Westcoast Energy Inc. (Duke Energy Corp.) 2002 - National Grid PLC / Niagara Mohawk (National Grid PLC) 2001 - FirstEnergy Corp. / GPU, Inc. (FirstEnergy Corp.) 2001 - Dominion / Louis Dreyfus Natural Gas Corporation (Dominion) 2001 - NS Power Holdings / Bangor Hydro-Electric Company (Emera Inc.) 2001 - Williams Companies Inc./ Barrett Resources (Williams Companies Inc.) 2001 - DTE Energy Company / MCN Energy Group (DTE Energy Company) 2001 - Enbridge Inc. / MidCoast Energy Resources, Inc. (Enbridge Inc.) 2001 - The AES Corporation / IPALCO Enterprises (The AES Corporation) 2001 - NUI Corporation / Virginia Gas Company (NUI Corporation) 2001 - El Paso Energy Corp. / Coastal Corporation (El Paso Energy Corp.) AUS CONSULTANTS Slide4:  AUS CONSULTANTS FAILED ENERGY COMPANY MERGERS 2001-2006 2006 - Exelon Corp. / Public Service Enterprise Group (Exelon Corp.) 2005 - Black Hills Corp. / NorthWestern Energy (Black Hills Corp.) 2005 - Montana Public Pwr. / NorthWestern Energy (Montana Public Pwr.) 2005 - Texas Pacific Group / Portland General Electric (Texas Pacific Group) 2004 - A private group of investors / UniSource Energy 2002 - S. Nevada W. Authority/ Nevada Power Co. (S. Nevada W. Authority) 2002 - NW Natural / Portland General Electric (NW Natural) 2002 - Public S. Co. of New Mexico / Western Resources (P. S. Co. of N.M.) 2001 - Dynegy Inc. / Enron Corporation (Dynegy Inc.) 2001 - Sierra Pacific Res. / Portland General Electric (Sierra Pacific Res.) 2001 - FPL Group, Inc. / Entergy Corporation (FPL Group, Inc.) 2001 - P. S. Enterprise Group / Cinergy Corp. (P. S. Enterprise Group) 2001 - Consolidated Edison / Northeast Utilities (Consolidated Edison.) 2001 - UtiliCorp United / Empire District Electric (UtiliCorp United) Slide5:  AUS CONSULTANTS THE FAILED MERGER BETWEEN EXELON CORPORATION AND PUBLIC SERVICE ENTERPRISE GROUP (PSEG) Exelon Corp. / Public Service Enterprise Group (Exelon Corp.) Announced on December 20, 2004. Total enterprise value (including assumption of debt) - $26 billion. Terminated on September 14, 2006. THE FAILED MERGER BETWEEN EXELON CORPORATION AND PSEG:  THE FAILED MERGER BETWEEN EXELON CORPORATION AND PSEG AUS CONSULTANTS Which regulatory bodies needed to approve it? Regulatory Approvals: Approvals without conditions. Approvals with conditions: What conditions were imposed? Major New Jersey obstacles. Why? EXELON & PSEG A REGULATORY PERSPECTIVEWHICH REGULATORY BODIES NEEDED TO APPROVE IT?:  AUS CONSULTANTS EXELON andamp; PSEG A REGULATORY PERSPECTIVE WHICH REGULATORY BODIES NEEDED TO APPROVE IT? Major Approvals: Department of Justice (DOJ) Federal Energy Regulatory Commission (FERC) New Jersey Board of Public Utilities (NJBPU) Pennsylvania Public Utility Commission (PAPUC) Other Approvals: Connecticut Department of Environmental Protection (CDEP) Federal Trade Commission (FTC) Illinois Commerce Commission (ICC) New Jersey Department of Environmental Protection (NJDEP) New York State Public Service Commission (NYPSC) Nuclear Regulatory Commission (NRC) Securities and Exchange Commission (SEC) Texas Public Utility Commission (TPUC) Slide8:  AUS CONSULTANTS EXELON andamp; PSEG A REGULATORY PERSPECTIVE REGULATORY APPROVALS WITHOUT CONDITIONS All regulatory approvals required to complete the merger were obtained without special conditions imposed, except for FERC, PAPUC, DOJ and NJBPU. APPROVALS WITH CONDITIONS: WHAT CONDITIONS WERE IMPOSED? Federal Energy Regulatory Commission (FERC) On July 1, 2005 - FERC approval. Merger satisfied the public interest standard of the Federal Power Act. Proposed market concentration mitigation plan – Acceptable. Slide9:  AUS CONSULTANTS EXELON andamp; PSEG A REGULATORY PERSPECTIVE WHAT CONDITIONS WERE IMPOSED? Pennsylvania Public Utilities Commission (PAPUC) On January 27, 2006 - PAPUC approval Combination 'was in the public interest and provided substantial affirmative benefits'. Accepted November 30, 2005 ALJ’s recommendation to adopt September 2005 settlement. ALJ: commitments by Exelon were 'very real and substantial'. Slide10:  AUS CONSULTANTS EXELON andamp; PSEG A REGULATORY PERSPECTIVE WHAT CONDITIONS WERE IMPOSED? Department of Justice (DOJ) June 22, 2006 - DOJ approval. All competition concerns resolved. Divestiture of generating capacity. Sales agreements within 150 days after completion of the merger to sell six power plants required. Largest required in an energy company merger. Slide11:  AUS CONSULTANTS EXELON andamp; PSEG A REGULATORY PERSPECTIVE MAJOR NEW JERSEY OBSTACLES The New Jersey Board of Public Utilities The New Jersey Department of the Public Advocate The New Jersey Division of the Ratepayer Advocate Slide12:  AUS CONSULTANTS EXELON andamp; PSEG A REGULATORY PERSPECTIVE THE NEW JERSEY BOARD OF PUBLIC UTILITIES On December 20, 2004, quest for approvals began. February 4, 2005 - Original petition filed with the NJBPU. Divestiture of a number of fossil fuel-fired generating facilities (2,900 MW) proposed. Transfer of control of the output of a portion of their nuclear generating capacity (2,600 MW) proposed. No offer to divest any nuclear plants. Specific benefits to the State of NJ: No rate increases for four years. Enhanced combined companies. Cost-effective, safe and reliable service. Efficiencies to help control operating costs. No adverse effects on local utility operations. Promote the public interest. Work force reduction June 28, 2005 - Hearings Commenced. As of June 22, 2006, no ALJ recommendations due to unsuccessful settlements discussions. Slide13:  AUS CONSULTANTS EXELON andamp; PSEG A REGULATORY PERSPECTIVE THE NEW JERSEY BOARD OF PUBLIC UTILITIES August 5, 2006 – New Offer to NJBPU: Benefits worth $1.46 billion to PSEG's ratepayers and the state. $600 million for NJ customers through December 31, 2008. Other Benefits: Drop $200 million request for electric and gas rate relief. $150 to $200 million in taxes to the State. $450 million in lower wholesale power prices. Slide14:  AUS CONSULTANTS EXELON andamp; PSEG A REGULATORY PERSPECTIVE THE NEW JERSEY BOARD OF PUBLIC UTILITIES August 17, 2006 – NJBPU Counter Offer: Requested an additional $220 million in rate relief. Requested no rate increases for five years. Requested the sale of two additional power plants. Agreement could not be reached. September 14, 2006 – Termination of merger agreement by mutual consent and without penalty. Slide15:  AUS CONSULTANTS FAILED ENERGY COMPANY MERGERS 2001-2006 2005 - Black Hills Corp. / NorthWestern Energy (Black Hills Corporation) Black Hills made takeover bid in November 2005. Value - $1.178 - $1.250 billion. November 16, 2005 – Offer rejected by Northwestern. 2005 - Montana Public Power / NorthWestern Energy (Montana Public Power) July 2005 - First takeover bid. Value - $1.1 - $1.2 billion. July 7, 2005 – Offer rejected by Northwestern. Second takeover bid made in October 2005. Value - Same as first one. October 27, 2005 – Offer rejected by Northwestern. 2005 - Texas Pacific Group / Portland General Electric (Texas Pacific Group) March 2004 - Offer to Enron Corp.. Valued - $2.35 billion. March 10, 2005 - Rejected by Oregon Public Utility Commission (ORPUC) April 6, 2005 - Merger agreement terminated by mutual consent. Slide16:  AUS CONSULTANTS FAILED ENERGY COMPANY MERGERS 2001-2006 2004 - A private group of investors / UniSource Energy Corporation December 29, 2003 – Initial offer. Value - $3.0 billion. December 21, 2004 - Arizona Corporation Commission (ACC) – Denied. December 30, 2004 - Merger agreement terminated by mutual consent. 2002 - Southern Nevada Water Authority (SNWA) / Nevada Power Co. (Southern Nevada Water Authority) August 23, 2002 – Initial offer. Value - $2.0 billion. September 12, 2002 – Offer rejected. Slide17:  AUS CONSULTANTS FAILED ENERGY COMPANY MERGERS 2001-2006 2002 - NW Natural / Portland General Electric (NW Natural) October 8, 2001 – Initial offer Value - $3.0 billion. On December 2, 2001, Enron Corporation filed for reorganization under Chapter 11. On March 19, 2002, ALJ agreed to suspend for 60 days the procedural schedule. May 16, 2002 - Merger agreement terminated by mutual consent on May 16, 2002. According to Richard G. Reiten, Chairman and CEO of NW Natural, 'The agreement signed in October 2001, before Enron’s problems began, simply does not work given the complexities of the situation'. Specific information about the agreement are not available. 2002 - Public Service Company of New Mexico / Western Resources (Public Service Company of New Mexico) November 9, 2000 - Merger agreement announced. Value - $4.442 billion. On July 20 and July 21, 2001, KCC in essence, rejected the merger proposal. July 20, 2001, KCC permanently halts the proposed separation of the electric operations and unregulated operations. The July 21, 2001, KCC rejected a $150 million rate increase requested by Western Resources. PNM requested WR to rewrite the terms of the original agreement. WR refused to modify the original agreement. August 13, 2001 - Talks between PNM and WR stopped. October 13, 2001 - PNM sued WR. November 20, 2001 - WR sued PNM. January 8, 2002, Merger agreement officially terminated. Pending suits have been settled. Slide18:  AUS CONSULTANTS FAILED ENERGY COMPANY MERGERS 2001-2006 2001 - Dynegy Inc. / Enron Corporation (Dynegy Inc.) November 12, 2001 – Takeover bid. Value - $24 billion. November 28, 2001 - Takeover bid withdrawn. Enron’s credit ratings were cut to junk-bond status by Sandamp;P. December 2, 2001 - Enron filed for bankruptcy. Enron sued Dynegy for breach of contract. Pending suits have been settled. Slide19:  AUS CONSULTANTS FAILED ENERGY COMPANY MERGERS 2001-2006 2001 - Sierra Pacific Resources / Portland General Electric (Sierra Pacific Resources) November 8, 1999 – Initial offer Value - $3.1 billion. Approvals: March 2000 – Department of Justice (DOJ) approval. July 27, 2000 – Nuclear Regulatory Commission (NRC) approval. 4th Quarter 2000 - Federal Energy Regulatory (FERC) approval. February 23, 2000 - Nevada Public Utilities Commission (NVPUC) ruled that it did not have any jurisdiction. October 30, 2000 - Oregon Public Utility Commission (ORPUC) conditional approval. April 26, 2001 - Merger agreement terminated by mutual consent Slide20:  AUS CONSULTANTS FAILED ENERGY COMPANY MERGERS 2001-2006 2001 - FPL Group, Inc./Entergy Corporation (FPL Group, Inc.) July 31, 2000 - Merger agreement announced. Value - $27 billion. March 19, 2001 – The companies suggested the merger might be in jeopardy. April 2, 2001 - Merger agreement terminated by mutual consent. 2001 - Public Service Enterprise Group/Cinergy Corp. (P. S. Enterprise Group) March 9, 2001 - Acquisition bid. Value - $8.5 billion. March 11, 2001 - Offer dropped by mutual consent. Slide21:  AUS CONSULTANTS FAILED ENERGY COMPANY MERGERS 2001-2006 2001 - Consolidated Edison/ Northeast Utilities (Consolidated Edison) October 13, 1999 – Merger agreement announced. Value - $7.5 billion. October 19, 2000 - Connecticut Department of Public Utility Control (DPUC) conditional approval. October 23, 2000 - Merger in jeopardy: DPUC conditions may not be attainable. February 28, 2001, Northeast Utilities asked Consolidated for written assurance that it intended to abide by the definitive merger agreement. March 5, 2001 – Merger agreement terminated by Consolidated Edison. Northeast Utilities filed a law suit against Consolidated Edison. October 12, 2005, U.S Courts of Appeals determined that Consolidated Edison could not be sued by Northeast Utilities. Slide22:  AUS CONSULTANTS FAILED ENERGY COMPANY MERGERS 2001-2006 2001 - UtiliCorp United / Empire District Electric Company (UtiliCorp United) May 11, 1999 - Merger agreement announced. Value - $1.060 billion. December 11, 2000 - Arkansas Public Service Commission (ARPSC) rejected merger by adopting ALJ’s recommendation of December 4, 2000. December 28, 2000 - Missouri Public Service Commission (MOPSC) conditional approval of ALJ’s December 7, 2000 ruling. January 2, 2001 - Merger agreement terminated by UtiliCorp United. January 3, 2001 - Kansas Corporation Commission (KCC) stated that in the context of the already failed merger, it rejected the ARP. Slide23:  Why Do Mergers Fail? Mutual Agreement 4 Lack of Regulatory Approvals 5 Approved, but conditions imposed considered unacceptable or unattainable 1 AUS CONSULTANTS Offer Rejected or Withdrawn by Company 4 1- Influenced by regulators WHAT ARE THE MAIN REASONS FOR CANCELING A MERGER? Slide24:  AUS CONSULTANTS PENDING ENERGY COMPANY MERGERS 2001-2006 As of October 1, 2006, there were 6 pending mergers: Kinder Morgan Inc. to be acquired by a group of private investors. FPL Group, Inc. / Constellation Energy Group (FPL Group, Inc.) WPS Resources Corp. / Peoples Energy Corp. (WPS Resources Corp.) National Grid PLC / KeySpan Corporation (National Grid PLC) Babcock andamp; Brown Infrastructure / NorthWestern Energy Corporation (Babcock andamp; Brown Infrastructure) MDU Resources Group / Cascade Natural Gas Corp. (MDU Resources Group) Slide25:  FPL Group, Inc. / Constellation Energy Group (FPL Group, Inc.) December 19, 2005 - Merger agreement announced. Value - $11 billion. Required regulatory approvals: Florida Public Service Commission (FPSC) Maryland Public Service Commission (MPSC) Department of Justice (DOJ) Federal Energy Regulatory Commission (FERC) Federal Trade Commission (FTC) Nuclear Regulatory Commission (NRC) Securities and exchange Commission (SEC) As of October 1, 2006, approvals by the MPSC, FERC and SEC were still pending. If approved, the merger will likely be completed during the first half of 2007. Kinder Morgan Inc. to be acquired by a group of private investors May 29, 2006 - Merger agreement announced. August 28, 2006 - Proposal accepted by Kinder Morgan. Value - $22 billion. Required regulatory approvals: Colorado Public Utilities Commission (CPUC) Nebraska Public Service Commission (NPSC) Wyoming Public Service Commission (WPSC) Federal Energy Regulatory Commission (FERC) Federal Trade Commission (FTC) As of October 1, 2006, all approvals were still pending. If approved, the merger will likely be completed during the first half of 2007. AUS CONSULTANTS PENDING ENERGY COMPANY MERGERS 2001-2006 Slide26:  AUS CONSULTANTS WPS Resources Corp. / Peoples Energy Corp. (WPS Resources Corp.) July 10, 2006 - Merger agreement announced. Value - $1.52 billion. Required regulatory approvals: Illinois Commerce Commission (ICC) Wisconsin Public Service Commission (WPSC) Department of Justice (DOJ) Federal Communications Commission (FERC) Federal Energy Regulatory Commission (FCC) Nuclear Regulatory Commission (NRC) As of October 1, 2006, all approvals were still pending. If approved, the merger will likely be completed during the first half of 2007. National Grid PLC / KeySpan Corporation (National Grid PLC) February 27, 2006 – Merger agreement announced. Value - $11.8 billion. Required regulatory approvals: Massachusetts Department of Telecomm. and Energy (MADTE) New Hampshire Public Utilities Commission (NHPUC) New York State Public Service Commission (NYPSC) Rhode Island Public Service Commission (RIPSC) Department of Justice (DOJ) Federal Energy Regulatory Commission (FERC) Federal Trade Commission (FTC) Nuclear Regulatory Commission (NRC) Committee of Foreign Investments in the USA (CFI) As of October 1, 2006, except for the CFI, all approvals were still pending. If approved, the merger will likely be completed by mid-year 2007. PENDING ENERGY COMPANY MERGERS 2001-2006 Slide27:  AUS CONSULTANTS PENDING ENERGY COMPANY MERGERS 2001-2006 Babcock andamp; Brown Infrastructure / NorthWestern Energy Corporation (Babcock andamp; Brown Infrastructure) April 25, 2006 - Merger agreement announced. Value - $2.2 billion. Required regulatory approvals: Montana Public Service Commission (MPSC) Nebraska Public Service Commission (NPSC) South Dakota Public Utilities Commission (SDPUC) Department of Justice (DOJ) Federal Energy Regulatory Commission (FERC) Federal Trade Commission (FTC) Committee of Foreign Investments in the USA (CFI) As of October 1, 2006, all approvals were still pending. If approved, the merger will likely be completed by mid-year 2007. MDU Resources Group / Cascade Natural Gas Corp. (MDU Resources Group) July 9, 2006 – Merger agreement announced. Value - $475 million. Required regulatory approvals: Minnesota Public Utilities Commission (MNPUC) Montana Public Service Commission (MTPUC) North Dakota Public Service Commission (NDPSC) Oregon Public Utility Commission (ORPUC) South Dakota Public Utilities Commission (SDPUC) Washington Utilities and Transportation Commission (WUTC) Wyoming Public Service Commission (WYPSC) Department of Justice (DOJ) Federal Trade Commission (FTC) As of October 1, 2006, all approvals were still pending. If approved, the merger will likely be completed by mid-year 2007. Slide28:  AUS CONSULTANTS OF THE PENDING ENERGY COMPANY MERGERS ONE MIGHT FAIL Most pending mergers are relatively new. Outcomes are highly uncertain. FPL/Constellation merger may fail: On December 19, 2005 merger agreement was announced. After June 30, 2007, companies may terminate the merger without penalty. As of October 1, 2006, FERC, SEC and Maryland PUC have not given approvals. Both companies confident about FERC and SEC approvals. Strong opposition by various parties in the State of Maryland may make approval difficult. Which regulatory bodies have not approved the merger: The Securities and Exchange Commission (SEC): Expected before year end 2006. Federal Energy Regulatory Commission (FERC): Deadline for ruling on the merger is February 2007. Maryland Public Service Commission (MPSC): Deadline to issue a decision is February 2007. Maryland Assembly – Major obstacle: The Assembly has threatened to halt the deal in order to force BGandamp;E to reduce the magnitude of a 72% rate increase. The Assembly has tried to remove current members of the PSC from their positions. On September 15, 2006, WBAL Radio and The Associated Press announced that the Court of Appeals of Maryland ruled that the Assembly did not have the right to fire the PUC. The court's decision returns the commissioners to their jobs. On September 15, 2006, The Baltimore Sun reported that lawyers who reviewed the decision for the paper said the decision was expected to improve the progress of the merger, but instead may make it more difficult. According to the Baltimore Sun, the Court ruled that the legislature could not remove members of the PSC. However, the court did not address a portion of the legislation prohibiting the sitting commission from taking final action on the merger. In other words, the commissioners can keep their jobs, but they can't rule on the merger. A catch-22 situation? Slide29:  AUS CONSULTANTS MERGERS andamp; ACQUISITIONS: A REGULATORY PERSPECTIVE NEW TREND IN THE MERGER REVIEWING PROCESS FROM NO HARM STANDARD TO POSITIVE BENEFITS STANDARD Slide30:  AUS CONSULTANTS MERGERS andamp; ACQUISITIONS: A REGULATORY PERSPECTIVE PRINCIPAL REGULATORY CONCERNS Concentration of Market Power. Sufficient Jurisdictional Rate Relief. Loss of Regulatory Control / Oversight. Inadequate Contact/Communication with a non-jurisdictional parent company. Loss of jobs in jurisdiction. Potential for increased financial risk of parent company and negative impact on jurisdictional utility. Potential for Bankruptcy Lack of utility management experience of acquiring entity.

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