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' interests."

"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 cashing it.

"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 litigation.

"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.

Rocco Canonica

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