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DQE ends Allegheny Energy merger

Wednesday, July 29, 1998

By Ken Zapinski, Post-Gazette Staff Writer

DQE Inc., unwilling to share Allegheny Energy Inc.'s financial pain, said yesterday that it was scuttling its proposed merger with the Maryland-based utility company.

Recent decisions by the state Public Utility Commission will hurt Allegheny Energy so much that Duquesne Light Co. is better off on its own, DQE President and Chief Executive David D. Marshall said.

"Under the merger agreement, DQE is not required to consummate the merger under these circumstances, and we do not intend to do so," Marshall wrote to Allegheny Energy Chairman and CEO Alan J. Noia.

Allegheny Energy disagreed with DQE's analysis and said it would continue to hold DQE to the terms of the $4.3 billion stock-and-debt deal struck in April 1997. Allegheny Energy "stands firmly behind the merger and will continue to work toward completing it without delay," the company said late yesterday.

Backing out of the deal without proper cause could cost DQE up to $50 million, according to the merger agreement.

The most significant impact of the deal's collapse is that Duquesne Light will move forward with the sale of the Beaver Valley nuclear power plant in Shippingport, its coal-powered plants at Cheswick and Elrama, and the six other power plants it owns by itself or with other utilities.

Duquesne Light will continue to maintain and operate the wires carrying electricity to its 580,000 customers in Allegheny, Beaver and Westmoreland counties. The rates for that service will remain regulated by the PUC.

But those customers will have to buy their power from an outside supplier. The sale of the plants could be completed by January 2000, when all electric customers in the state will be free to choose their own power supplier.

DQE, Duquesne Light's parent company, employs about 3,500 workers, about 1,100 of them at the Beaver Valley plant. The International Brotherhood of Electrical Workers, which represents about 2,000 DQE employees, has opposed the sale of the power plants.

Alexander Galatic, a senior energy consultant with Pittsburgh-based Strategic Energy Ltd., said the sale should have a minimal impact on workers. "They might not work for Duquesne Light anymore. They'll work for whoever owns the generators," Galatic said.

Reaction to yesterday's announcement was mixed.

Pittsburgh Mayor Murphy, who fought the deal until it was modified by the PUC, was critical. "It is ironic that now that the merger has been structured to promote competition and guarantee consumer savings, DQE is expressing its desire to terminate the merger," Murphy said.

The consumer group Citizen Power, which had opposed the merger, celebrated its demise. And former PUC Commissioner John Hanger said the death of the deal would be good for consumers. The outside companies which purchase the plants would have ready sources of power to sell at competitive prices, he said.

Also, Duquesne Light may be able to sell the plants for more than they are worth on the company's books, Hanger said. If that turns out to be the case, it would reduce the subsidy that customers would have to pay to the utility to cover its stranded costs.

Stranded costs -- investments in power plants and other expenses that utilities won't be able to recover as the state moves to a competitive electric market -- lie at the heart of the conflict.

Duquesne Light asked the PUC for a $1.9 billion stranded costs subsidy and received most of what it requested.

Allegheny Power, on the other hand, asked for $1.6 billion and received $524 million, about one-third of its request. The company said the decision would cause severe financial harm. It filed suit in state and federal court to overturn the decision.

DQE's board of directors decided not to wait for a court ruling and voted yesterday to kill the deal.

Some observers think there is more to the dispute than just dollars. Though the deal was billed as a merger, it was really an acquisition of DQE by Allegheny Energy.

Galatic of SEL said the two companies had different views of the future. Noia and Allegheny Energy wanted to compete in the state's changing power market where consumers would be free to shop for the company that would sell them electricity. Marshall and Duquesne Light didn't want to be part of a future that relied on marketing products to customers, skills that traditional utilities never needed, Galatic said.

"What utilities have done best is working with regulators and policy makers," he said. And that's what Duquesne Light will continue to do with its transmission-only business.

In his letter to Noia, DQE's Marshall asked Allegheny Energy "to join with us in promptly agreeing to a termination by mutual consent. Such a mutual termination would permit both companies to return to business in the ordinary course." Such a move would also get DQE off the hook for a multimillion break-up fee.

Under the terms of the merger proposal, Duquesne Light could owe Allegheny Energy up to $50 million if it breaks the agreement. A mutual termination would eliminate that penalty.

Either party would be free to kill the deal without penalty if it suffers "a material adverse effect" beyond the companies' control, according to Allegheny Energy Chief Financial Officer Michael P. Morrell. But the PUC decisions cited by DQE do not meet that test, he said.

DQE will terminate the merger agreement unilaterally by Oct. 5 "if circumstances do not change sufficiently to remedy the adverse effects described above," Marshall wrote to Noia. This statement appears to hold out more hope for the deal than really exists. DQE refuses to accept certain technical conditions regarding access to Duquesne Light and Allegheny Power transmission lines which the PUC approved at Allegheny Power's request last week.

DQE officials did not elaborate on the two-page letter from Marshall to Noia which they released after the markets closed yesterday. Allegheny Energy stock closed at $27.69, down 62 cents. The stock is down 7 percent since the merger was announced.

DQE stock closed at $36, up 31 cents. The stock is up 33 percent since the merger announcement.



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