Allegheny says DQE has no right to back out Protracted battle could be starting over merger deal

July 31, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Allegheny Energy Inc. fired back yesterday at a Pittsburgh utility that called this week for an end to their pending alliance and pledged to "pursue all remedies available to protect the legal and financial interests" of the company and its shareholders.

The Hagerstown-based utility also appeared to threaten to file a lawsuit against proposed merger partner DQE Inc. if it failed to go through with the $2.6 billion corporate marriage.

"DQE has no right to terminate the merger agreement now and will have no right to refuse to close the merger when regulatory approvals are obtained," Allegheny Chairman and Chief Executive Officer Alan J. Noia wrote yesterday to DQE's top executive.

"The damages to which you are exposing DQE are enormous, and, while I hope that you will reconsider your course, I am fully prepared to act if you do not," Noia added, referring to a $100 million fee DQE might have to pay to kill the merger.

DQE, in a letter to Allegheny dated Tuesday, cited a recent decision by Pennsylvania regulators that disallows nearly $1 billion in controversial stranded-cost recovery as the principal reason for seeking to terminate the merger by "mutual consent."

Stranded costs represent the depreciation on power plants and contracts that utilities contend they are owed as deregulation takes hold in the once-monopolistic electric utility industry. Allegheny has filed lawsuits in federal and state courts protesting the Pennsylvania regulators' stranded-cost order.

DQE said yesterday that it was "unimpressed" with Allegheny's statements.

"Allegheny Energy has apparently decided to pursue a public relations effort to threaten and discredit DQE," the Pittsburgh company said.

The dispute between Allegheny and DQE marks the first time nationwide that a utility in the process of merging has turned on its partner, and analysts said the dispute sets the stage for a protracted fight.

"I've never seen a case like this," said Edward J. Tirello, a Bankers Trust New York Corp. utility analyst.

"But I'm sure you'll see more of this, because things are getting more complicated."

"Mergers done in the old days were executed because the two companies wanted to eliminate costs and gain efficiencies, but that's not the game anymore," Tirello said.

"The game today involves collecting stranded costs, retail access programs and deciding whether to focus on generation or distribution and ancillary services."

Tirello said that "unless the deal is radically altered, I think it's dead."

By contrast, when Baltimore Gas and Electric Co. and Potomac Electric Power Co. killed their merger plans in December, both agreed, citing regulatory constraints.

Similarly, Wisconsin Energy and Northern States Power Co. called off their planned link as a result of federal regulatory demands.

For DQE, however, breaking up might not only be hard to do, but it also would be expensive.

Under terms of their April 1997 merger agreement, DQE is required to pay Allegheny up to $100 million if it decides to end the alliance and hook up with another company within 18 months.

The combination of Allegheny and DQE would create a power company with $10.6 billion in assets and 2 million customers in Maryland, Pennsylvania, West Virginia, Virginia and Ohio.

Pub Date: 7/31/98

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