Northeast Utilities and Consolidated Edison ran from the altarto the courtroom this week. Their $3.8 billion marriage (excludingassumption of $3.9 billion in NU debt) is off and the companies noware waging a legal battle over which one of them violated theiragreement.

NU’s stock price plummeted yesterday more than 10% to $18.80,slightly above its 52-week low, while ConEd’s share price roseslightly (23 cents) to end the day at $36.28.

The breakup apparently stemmed from ConEd’s accusation thatNortheast’s unregulated subsidiary, Select Energy, made certainpower “supply obligations” that created a “significant risk” to thecompany and violated its obligations under the merger agreement.ConEd didn’t elaborate on its charges. It did say, however, themerger deal is still on.

“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. It also said itwas seeking a declaratory judgment that Northeast Utilities failedto live up to the merger agreement. The legal action is in responseto NU’s own lawsuit.

NU CEO Michael G. Morris said ConEd would not proceed with themerger on the agreed upon terms. That, he said, constitutes a”breach of the merger agreement, and we are treating the agreementas effectively terminated. We have instructed our attorneys to takeappropriate 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 merger agreement was reached on Oct. 13, 1999 and approvedby shareholders on April 14, 2000. Under terms of the merger, ConEdagreed to acquire all of the common stock of Northeast for $26.70 ashare in a stock-and-cash transaction. The companies receivednecessary clearances from three federal and seven state regulatoryagencies and are awaiting the final regulatory approval from theSecurities and Exchange Commission, which was expected shortly.

However, the merger, which would have created the nation’slargest electricity distributor, began to run into trouble lastfall when Connecticut regulators imposed conditions, includinglarge rate cuts, that ConEd found overly burdensome. ConEd’sefforts to soften the regulatory conditions failed. A cloud alsowas cast over the merger by objections from Connecticut AttorneyGeneral Richard Blumenthal, who was a sharp critic of ConEd’sbusiness and environmental practices. Blumenthal asked a statecourt to delay the merger until it ruled on an appeal his officefiled to overturn the regulators’ approval.

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.”

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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