Northeast Utilities and Consolidated Edison ran from the altarto the courtroom last week. Their $3.8 billion marriage (excludingassumption of $3.9 billion in NU debt) has been called off and thecompanies now are waging a legal battle over which one of themviolated the agreement.
The breakup apparently stemmed from ConEd’s accusation thatNortheast’s unregulated subsidiary, Select Energy, was mismanagedand made certain power “supply obligations” that created a”significant risk” to the company violating its obligations underthe merger agreement.
Following a week of negotiations, Northeast declared the mergerdead last Monday. NU CEO Michael G. Morris said ConEd would notproceed with the merger on the agreed upon terms. That, he said,constitutes a “breach of the merger agreement, and we are treatingthe agreement as effectively terminated. We have instructed ourattorneys to take appropriate steps to protect our shareholders’interests.”
“Northeast Utilities is a substantially stronger and morevaluable company than when we signed the merger agreement, and wesee no basis for Con Edison’s refusal to proceed on the agreed uponterms,” he added.
The concerns about NU’s unregulated operations came out of theblue and are misplaced, said Morris. Changes in NU’s business sinceit signed the deal with ConEd have been “overwhelmingly for thebetter,” he said. “Our earnings for 2000 were above targets in alloperations. We achieved a dramatic turnaround with our unregulatedbusinesses, which delivered a profit of nearly $30 million lastyear. And we are receiving substantially more for our nuclearassets than anticipated when the merger was signed. These and otherpositive developments have produced multiple rounds of creditrating upgrades for NU and its operating companies.”
In filings with the Securities and Exchange Commission lastmonth, however, Northeast revealed that Select Energy’spower-supply contracts posed a risk to the company’s profitabilityif electricity prices skyrocket. Coned concluded that Select wouldhave problems getting cheap power after its entitlement to part ofthe output of the Millstone Nuclear power plants ended. The mainproblem, ConEd said, was that Select was at risk of not havingenough power to serve Connecticut Light & Power at prices thatwould be profitable. Northeast, however, said the risk was reducedby agreements with its hydroelectric subsidiary and by theavailability of power in the competitive market.
Last Tuesday, ConEd sued Northeast in federal court forallegedly failing to satisfy conditions of the merger. ConEd askedthe U.S. District Court for the Southern District of New York toabsolve it of any obligations it had to Northeast and asked thecourt to protect it from any damages sought by Northeast.
“Con Edison is, and at all times has been, in compliance withthe merger agreement with Northeast Utilities, which remains ineffect,” 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 fewmonths. ConEd’s share price, meanwhile, managed a slow climb duringthe week to more than $36/share on Friday, but it has remained inthe mid$30s for several months.
The merger would have created the nation’s largest electricitydistributor. ConEd planned to buy all of the common stock ofNortheast for $26.70 a share in a stock-and-cash transaction. Thecompanies already had received all the necessary regulatoryclearances except final approval from the Securities and ExchangeCommission, which was expected shortly.
However, the merger ran into trouble last fall when Connecticutregulators imposed conditions, including large rate cuts, thatConEd found overly burdensome. ConEd’s efforts to soften theregulatory conditions failed.
A cloud also was cast over the merger by objections fromConnecticut Attorney General Richard Blumenthal, who was a sharpcritic of ConEd’s business and environmental practices. Blumenthalasked a state court to delay the merger until it ruled on an appealhis office filed to overturn the regulators’ approval.
Last week Blumenthal blasted the deal again and filed a motionurging the state Department of Public Utility Control to rescindits approval right away.
“By their own combative accusations, NU and ConEd have shownthey are not the willing partners that presented themselves anddefended the deal to the DPUC,” said Blumenthal. “DPUC approvalshould not be out there like a blank check or an open ticketavailable for whatever deal may emerge from this dispute. The DPUCneeds to burn that blank check and eliminate the risk of ConEdcashing it.
“Until this merger has drawn its last breath, we will continueto fight it in court,” he added. “Rescinding approval will sendthis merger to its final resting place without the need for furtherlitigation.
“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 toNU’s integrity and competence demonstrates conclusively how bad adeal it might have been.”
Northeast Utilities operates New England’s largest energydelivery system. The company serves 1.77 million electric customersin Connecticut, New Hampshire and Massachusetts and 185,000 naturalgas customers in Connecticut. Con Edison provides transmission anddistribution services to 3.3 million electric customers, 1.2million gas customers and 2,000 steam customers in New York.
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