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What a difference a few months makes. Last year, the French utility Sithe Energies announced it was looking to sell its North American businesses, but no one was buying. After Sithe shed some of its properties, however, Philadelphia-based PECO Energy Company became interested, and Morgan Lewis & Bockius began the makings of a structured acquisition that could reach $1.5 billion by the time it is completed in the fourth quarter of 2000. Morgan has represented PECO in regulatory work for at least 20 years, according to Howard L. Meyers, senior partner of the business and finance section of Morgan. The managing partner of the firm’s Philadelphia office led the team which engineered the utility deal. Meyers has worked with regulated electric, gas and water utilities and interstate common-carrier pipelines for more than 20 years, representing them in acquisitions, securities offerings and financings. His involvement with PECO began in 1998. The PECO-Sithe deal wasn’t initiated until Sithe sold fossil-fuel plants formerly owned by New Jersey’s GPU, Inc. in early 2000, making it virtually “a different company,” he said. Vivendi, a French media, telecom and utilities group, and Marubeni Corp. of Japan are Sithe’s two principal shareholders; 10 percent of Sithe is owned by incumbent management. Meyers said all three groups will sell their shares to PECO on a pro rata basis under the agreement. It was not so much the price of the deal as the concerns of each of the parties involved that proved to be sticking points, Meyers said. “The challenge came in dealing with a selling company of a substantial size, that was owned by two major shareholders, each with their own concerns.” Vivendi’s worries came from a need to reduce its debt, which spurred its desire to withdraw from its North American energy activities. It needed to shed some companies in order to become attractive to PECO, Meyers said. “[The business Sithe dropped] either didn’t fit with PECO’s business plans or presented regulatory concerns,” he said. In purchasing Sithe without the fossil-fuel plants, PECO avoided possible problems with the Federal Energy Regulatory Commission and antitrust concerns of the Department of Justice and the Federal Trade Commission, he said. Marubeni’s main concern, according to Meyers, was the timing of the deal and the uncertainty of the market in the future. The price it will recover in the agreement beginning in 2002 and ending in 2005 will depend on “the energy markets and the value of Sithe assets at those times,” he said. Negotiations between PECO and Sithe began early this summer, and by Aug. 11, a Friday night, the agreements were signed, said Meyers. The announcement was made the following Monday. “There was a lot to be done. It was six weeks of hard activity and lots of planning, which didn’t happen overnight,” he said, laughing. Meyers characterized the deal as a “put-call agreement.” The first, “put,” half of the deal commits PECO to purchasing a 49.9 percent interest in Sithe for $682 million in cash; the second, “call,” half of the deal binds Sithe’s shareholders to allow PECO to purchase the remaining 50.1 percent of total shares. The share price for the call will be determined by a formula based on the market price of Sithe assets at those future dates. “The `formula price’ of that second acquisition could range from approximately $650 million to $900 million,” said Meyers. Under the deal, PECO will acquire 3,800 megawatts of Sithe’s existing merchant generation, 2,500 megawatts under construction and another 3,700 megawatts of generation in various stages of advanced development, as well as the company’s domestic marketing and development businesses. Sithe’s assets are primarily in Massachusetts and New York, but the company also owns plants in Pennsylvania, California, Colorado and Idaho. Combined with PECO’s generating capacity, the resulting company will be able to generate 46,000 megawatts of power, making it one of the nation’s largest electric power producers. OUT-OF-TOWNERS All parties in the deal besides PECO were represented by New York counsel — Sithe by Latham & Watkins, Vivendi by Sherman & Sterling and Marubeni by Winthrop Stinson Putnam & Roberts. Sithe most likely chose New York counsel because they are headquartered there, Meyers said. “As the financial capital of the world, many clients are predisposed to seek counsel there,” said Meyers. That was one of the reasons Morgan started an office in Manhattan, he said. “Many times, we staff a deal with both New York and Philadelphia counsel, but New York was not involved in this one.” Dealing with the three New York firms was not as frenetic as it may sound, because Latham mainly took the lead in the deal, he said. STRONG IN-HOUSE At the heart of the deal was a strong partnership between Morgan attorneys and PECO’s in-house counsel, Meyers said. “Their department is extremely capable and could have handled much of this on their own if they wanted to.” Leading PECO’s team was Deputy General Counsel Edward J. Cullen. Assistant General Counsel John C. Halderman, formerly the general counsel of developer Rouse & Associates and a former associate at Pepper Hamilton, worked on PECO’s corporate and real estate issues. Meyers said Halderman took on a monumental job in handling the day-to-day issues of the deal. “I worked both with John [Halderman] and PECO’s vice president of corporate development and planning, Paul Haviland, who served as the principal negotiator for PECO,” he said. PECO’s Ward Smith handled regulatory matters, and Mark B. Peabody handled labor and employee benefits. With a deal of such magnitude in the works, the jobs needed to be divided, and coordinating that was a major task, said Meyers. PECO decided to take the lead on employee benefits, environmental and regulatory matters, where Smith played a big role, he said. “[The level of Morgan's involvement] is different with every client, because every in-house department is different. It depends on how they want to proceed. To make the team efficient, you draw on whatever strengths each of you has.” MORGAN’S TEAM It took a team of 13 at Morgan to make the PECO-Sithe deal a reality. Meyers and business and finance associate John J. Kenney handled the document drafting. Associates Kristen Lockwood Cline and John P. Giangiulio were due diligence counsel. Partner Richard D. Martinson and associate Florence M. Ott handled federal tax matters. Partner Brian J. Dougherty handled employee benefits and pensions, a major part of any significant acquisition transaction, Meyers said. Partner John J. McAleese handled environmental matters. Thomas P. Gadsden of the government regulation section worked on energy regulation. Anthony C. DeCusatis, with the firm’s energy group, was of counsel. The firm drew on its Washington, D.C., office resources as well as Philadelphia. Antitrust associate Bilal Sayyed handled Hart-Scott-Rodino matters. Partner Floyd L. Norton was joined by associate Michael C. Griffen to tackle energy regulatory issues. PECO is juggling the Sithe acquisition with its pending merger with Unicom. Meyers said Morgan is representing PECO in the Unicom deal on a limited basis, in the regulatory area. The Unicom merger is expected to close before the Sithe deal closes, Meyers said. Once the deal is complete, the Unicom name will disappear, and Exelon will become the name of the new holding company and generation subsidiary headquartered in Kennett Square. The PECO name will continue to be used for the local electric distribution company based in Philadelphia.

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