Allegheny Power System, Inc., the chief electric utility for Western Maryland and the surrounding region, said yesterday that it has signed an agreement to merge with Duquesne Light Co., which serves the Pittsburgh area, in a deal worth an estimated $2.6 billion.
If approved by state and federal regulators, the merger would create a utility serving 2 million customers in five states -- Maryland, Pennsylvania, West Virginia, Virginia and Ohio -- with assets of $10.6 billion.
"This is not a surprise to the industry," said Thomas E. Hamlin, a utilities analyst with Wheat First Butcher Singer, a Richmond, Va.-based securities firm.
"There has been a lot of speculation who Allegheny would merge with and who Duquesne would join with. It creates a strong company going forward."
The combined utility would be known as Allegheny Energy and headquartered in Hagerstown, Allegheny's current home base.
Alan J. Noia, president and chief executive officer of Allegheny, would assume the post of chairman and CEO of the combined operation, the utilities said.
David D. Marshall, president and chief executive officer of Duquesne, would become president and chief operating officer of the new entity under the merger.
The merger, said Hamlin, is in step with a nationwide trend toward consolidation in the electric utility industry as companies seek ways to cut costs in the face of growing competition.
Indeed, the proposal comes 18 months after Baltimore Gas and Electric Co., announced plans to merge with Potomac Electric Power Co. of Washington that would create the nation's ninth-largest energy concern with more than $15.5 billion in assets.
The utility industry is gearing up for increased competition and deregulation as a result of the 1992 Energy Policy Act, which requires the Federal Energy Regulatory Commission, which oversees utilities, to direct states to adopt policies that lead to increased competition between power suppliers.
Large savings expected
Allegheny, which has some of the lowest-priced energy in the mid-Atlantic region, and Duquesne, which has some of the highest, estimate that they'll save $1 billion over five years from the merger.
Analysts expect the companies to pass on a share of the $1 billion savings to customers in the form of reduced power rates spread out over the five years.
The savings, the utilities said, would primarily result from the elimination of overlapping jobs and lower operating costs.
Cindy Shoop, an Allegheny spokeswoman, said the utilities expect most of the job reductions to occur through attrition and hiring freezes, rather than layoffs.
Allegheny Power's Noia said, "This merger strategically positions Allegheny Energy as a major regional player in the increasingly competitive electric power market."
The combined venture, he said, would seek to expand its customer base and broaden its array of energy-related products and services.
Duquesne's Marshall said, Allegheny's predominantly suburban and rural customer base is a "natural fit" for Duquesne's predominantly urban base.
Duquesne, he added, would continue its efforts to shed its heavy investment and reliance on nuclear power, which has contributed in the past to some of the nation's high utility rates.
Industry analysts expect the proposed merger to get heavy scrutiny from some regulators, particularly the Federal Energy Regulatory Commission, which will take a hard look at whether the deal ensures that competition flourishes in the marketplace.
The Pennsylvania Public Utilities Commission also is expected to give the deal tough scrutiny with an eye toward assuring higher rates do not befall Pennsylvania customers if the deal is approved.
It could be another 18 months before regulators have completed their reviews, said utility experts.
Hamlin, the analyst, believes that a stronger operation would emerge from the marriage.
"These are two very well-managed companies," said Hamlin. "This puts them in a strong position for other deals that might be out there."
He and other analysts expect a further consolidation of the utility industry, not unlike that currently being seen in the telephone industry in which some of the regional Baby Bells are joining forces, such as the recent merger of Bell Atlantic and Nynex.
"Getting electricity into a house or business is not unlike getting phone service into it. There are a lot of similarities and costs savings from these mergers," said Hamlin.
Allegheny Power, a holding company founded in 1925 which operates four electric utility subsidiaries in five states, is the larger of the two companies.
It brings the lion's share of the customer base to the deal -- 1.4 million. The utility reported a net profit in 1996 of $210 million on revenues of $2.3 billion. It has 5,000 employees.
Duquesne dates to 1880
Duquesne, which supplies electricity to Pittsburgh and southwestern Pennsylvania and was founded in 1880, has about 600,000 customers.
It reported a profit of $179 million on revenues of $1.2 billion. It has 3,500 employees.
Under the agreement, Duquesne shareholders would receive 1.12 shares of Allegheny Power common stock for each share of DQE stock.
Allegheny said it intends to issue 86.5 million shares, valued at $2.6 billion, to shareholders of Duquesne, based on the April 4 closing stock price of Allegheny, $29.75.
Allegheny shares dropped 75 cents yesterday to $29, while DQE rose $1.75 to $28.875.
Pub Date: 4/08/97