Allegheny in Largest Utility Acquisition This Year

Allegheny Power System Inc. agreed to buy DQE Inc. for $4.2 billion in stock and assumed debt, in the largest utility acquisition announced so far this year.

Allegheny’s stock offer is valued at $32.48 a share based on Monday’s trading, 20% more than the Friday closing price for DQE, the parent of Duquesne Light Co.

Plans to deregulate U.S. electricity sales are prompting acquisitions designed to make regional utilities into diversified, national competitors.

By acquiring DQE, the electric company serving the Pittsburgh area, Allegheny would gain 580,000 customers and pick up expertise in selling new services and products as Pennsylvania prepares to open electricity sales to competition in 2001, analysts said.

New York-based Allegheny’s service area in southwest Pennsylvania nearly surrounds Duquesne Light’s, allowing cost cutting that the two companies valued at $1 billion. Allegheny, which also sells electricity in Ohio, Virginia, West Virginia and Maryland, would have 2 million customers after the acquisition.

DQE shares rose $1.75 to close at $28.875 in New York Stock Exchange trading of 660,900 shares, more than four times the three-month daily average of 138,400. Allegheny fell 75 cents to close at $29, also on the NYSE.

Unlike Allegheny, DQE owns stakes in nuclear plants, leading some investors to question the premium being paid.

“The better companies are the ones with the least nuclear exposure. Allegheny was a nice place [for utility investors] to hide. Now it’ll have nuclear exposure too,” said Bill Turner, an analyst with Banc One Corp., which holds about 300,000 Allegheny shares.

Allegheny is a low-cost electricity producer, making most of its power with coal, usually the cheapest fuel for generation. DQE, which owns 30% of the Beaver Valley nuclear plant in Pennsylvania and 13% of Ohio’s Perry nuclear plant, charges what regulators say are the highest residential rates in Pennsylvania.

Allegheny was an attractive takeover target itself before the buyout was announced, Turner said. Its transmission network links it to utilities in the East, where dense populations and strict environmental rules make power prices higher.

Obtaining DQE’s skills in marketing are worth the risk of taking on the nuclear plants, said Edward Tirello, an analyst with NatWest Securities. DQE has compensated for limited growth in its small service area by adding product lines, he said.

DQE’s businesses other than selling electricity in its service area were responsible for about 19% of its 1996 earnings, said David Marshall, DQE’s chief executive. That’s up from 1% in 1992.

Allegheny is expected to tap DQE’s expertise to expand into new businesses.

Marshall would be president and chief operating officer of Allegheny, which would be renamed Allegheny Energy.

Allegheny would give 1.12 of its shares for each DQE share, issuing about 86.5 million shares in the transaction, which is valued at $2.5 billion based on Allegheny Power’s closing price Monday. Pittsburgh-based DQE had $1.7 billion in debt and preferred stock as of Dec. 31, the companies said.

The transaction, expected to close in 12 to 18 months, needs the approval of both companies’ shareholders, Pennsylvania and Maryland, the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission.

Acquiring DQE would give Allegheny market capitalization of about $10.6 billion and power-generating capacity of more than 11,000 megawatts, enough to light about 9.5 million homes.