AYP picks up more power Allegheny subsidiary buys half a generator for $170 million

Lure of deregulated market

Duquesne Light is seller of unit near Morgantown

November 01, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

In a big, contrarian bet on turbines and megawatts, an affiliate of Allegheny Power bought half a generator yesterday in the hope that it can peddle the unit's electricity in an increasingly deregulated market.

AYP Energy, Allegheny's unregulated subsidiary, paid $170 million for 50 percent of a unit at the Fort Martin Power Station near Morgantown, W.Va. The seller, Duquesne Light, had owned the 276-megawatt asset since Allegheny built it in the mid-1960s.

Allegheny spokeswoman Cynthia Shoop called the deal, which was put into motion a year ago, the biggest investment in unregulated generating capacity so far in the nation. Allegheny is based in Hagerstown and sells power in several states, including Western Maryland and parts of Howard and Carroll counties.

Now AYP has to find buyers for its new juice. And it has to explain to Allegheny shareholders why it is acquiring generation capability at a time when others in the industry are thinking about getting rid of it.

The country already has more generators than it needs, Wall Street analysts say. And as deregulation increasingly lets people shop around for power, forcing down the price of a kilowatt, generation companies are expected to have a harder time making a profit.

AYP's unit "is not going to be a big driver of earnings-per-share going forward" for Allegheny, said Gary F. Hovis, who follows utilities for Argus Research in New York. Hovis did call $170 million for the asset "a good price."

But all electric utilities, he said, "are operating in a mature industry. They're not going to go out of business, but there's no growth there as far as sales of electricity are concerned."

Thomas Kalup, AYP's energy markets director, acknowledged that AYP's Fort Martin plant won't hit its financial stride immediately. "We know that, in the near term, we don't recover our fixed costs," he said. "But we're obviously bullish on the future. We think that capacity will have a value down the road."

Close to the coal fields, the Fort Martin plant can generate electricity at a relatively low cost. And its location, Kalup said, will let it sell electricity from the East Coast to Indiana.

Fort Martin has two units; Allegheny owns the other 1.5 units of XTC capacity there. AYP's half-generator isn't working now. It's getting maintenance and is expected to go back online in late November.

But Kalup and his colleagues have been trying all fall to line up buyers for its electricity. The Fort Martin asset is AYP's first generator.

"We basically bought this unit on spec," he said. "We didn't have a committed buyer. We just hit the streets, started knocking on doors" of other utilities, municipal distribution webs and rural electric cooperatives, he said.

AYP, formed by Allegheny earlier this year to take advantage of ** deregulation, has signed contracts to sell some electricity in December and is "working on annual deals for 1997," Kalup said. "What we're looking for is a good mix of longer-term deals with short-term deals."

He declined to identify the December buyers.

The kind of deal that AYP can't do, however, is with its parent company. Regulators allowed AYP to buy the Fort Martin capacity only if it agreed not to sell juice back to Allegheny.

That makes Kalup's job all the harder. But he's confident that deregulation will free up more and more buyers of free-lance electricity, and that AYP will be able to sell it to them profitably.

"The prospects are excellent," he said. "We're confident that the price of capacity will be reflected in the market, and this unit is going to be perfectly positioned to take advantage of that."

Allegheny stock fell 37.5 cents a share to $29.875 yesterday.

Pub Date: 11/01/96

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