Northeast, ConEd Wage Legal War, Call Off Merger
Northeast Utilities and Consolidated Edison ran from the altar
to the courtroom last week. Their $3.8 billion marriage (excluding
assumption of $3.9 billion in NU debt) has been called off and the
companies now are waging a legal battle over which one of them
violated the agreement.
The breakup apparently stemmed from ConEd's accusation that
Northeast's unregulated subsidiary, Select Energy, was mismanaged
and made certain power "supply obligations" that created a
"significant risk" to the company violating its obligations under
the merger agreement.
Following a week of negotiations, Northeast declared the merger
dead last Monday. NU CEO Michael G. Morris said ConEd would not
proceed with the merger on the agreed upon terms. That, he said,
constitutes a "breach of the merger agreement, and we are treating
the agreement as effectively terminated. We have instructed our
attorneys to take appropriate steps to protect our shareholders'
"Northeast Utilities is a substantially stronger and more
valuable company than when we signed the merger agreement, and we
see no basis for Con Edison's refusal to proceed on the agreed upon
terms," he added.
The concerns about NU's unregulated operations came out of the
blue and are misplaced, said Morris. Changes in NU's business since
it signed the deal with ConEd have been "overwhelmingly for the
better," he said. "Our earnings for 2000 were above targets in all
operations. We achieved a dramatic turnaround with our unregulated
businesses, which delivered a profit of nearly $30 million last
year. And we are receiving substantially more for our nuclear
assets than anticipated when the merger was signed. These and other
positive developments have produced multiple rounds of credit
rating upgrades for NU and its operating companies."
In filings with the Securities and Exchange Commission last
month, however, Northeast revealed that Select Energy's
power-supply contracts posed a risk to the company's profitability
if electricity prices skyrocket. Coned concluded that Select would
have problems getting cheap power after its entitlement to part of
the output of the Millstone Nuclear power plants ended. The main
problem, ConEd said, was that Select was at risk of not having
enough power to serve Connecticut Light & Power at prices that
would be profitable. Northeast, however, said the risk was reduced
by agreements with its hydroelectric subsidiary and by the
availability of power in the competitive market.
Last Tuesday, ConEd sued Northeast in federal court for
allegedly failing to satisfy conditions of the merger. ConEd asked
the U.S. District Court for the Southern District of New York to
absolve it of any obligations it had to Northeast and asked the
court to protect it from any damages sought by Northeast.
"Con Edison is, and at all times has been, in compliance with
the merger agreement with Northeast Utilities, which remains in
effect," the New York utility said in a statement last Monday.
NU's stock price plummeted last week to a new 52-week low of
$18.21. It had been trading in the low $20s over the past few
months. ConEd's share price, meanwhile, managed a slow climb during
the week to more than $36/share on Friday, but it has remained in
the mid$30s for several months.
The merger would have created the nation's largest electricity
distributor. ConEd planned to buy all of the common stock of
Northeast for $26.70 a share in a stock-and-cash transaction. The
companies already had received all the necessary regulatory
clearances except final approval from the Securities and Exchange
Commission, which was expected shortly.
However, the merger ran into trouble last fall when Connecticut
regulators imposed conditions, including large rate cuts, that
ConEd found overly burdensome. ConEd's efforts to soften the
regulatory conditions failed.
A cloud also was cast over the merger by objections from
Connecticut Attorney General Richard Blumenthal, who was a sharp
critic of ConEd's business and environmental practices. Blumenthal
asked a state court to delay the merger until it ruled on an appeal
his office filed to overturn the regulators' approval.
Last week Blumenthal blasted the deal again and filed a motion
urging the state Department of Public Utility Control to rescind
its approval right away.
"By their own combative accusations, NU and ConEd have shown
they are not the willing partners that presented themselves and
defended the deal to the DPUC," said Blumenthal. "DPUC approval
should not be out there like a blank check or an open ticket
available for whatever deal may emerge from this dispute. The DPUC
needs to burn that blank check and eliminate the risk of ConEd
"Until this merger has drawn its last breath, we will continue
to fight it in court," he added. "Rescinding approval will send
this merger to its final resting place without the need for further
"I have said from the start that ConEd is a bad partner. Now,
with the two sides at each other's throats, ConEd's challenge to
NU's integrity and competence demonstrates conclusively how bad a
deal it might have been."
Northeast Utilities operates New England's largest energy
delivery system. The company serves 1.77 million electric customers
in Connecticut, New Hampshire and Massachusetts and 185,000 natural
gas customers in Connecticut. Con Edison provides transmission and
distribution services to 3.3 million electric customers, 1.2
million gas customers and 2,000 steam customers in New York.