Allegheny can now trade, too

Company acquires Merrill Lynch's Global Energy unit

Boost to earnings

It gains ability to be a national power supplier

January 09, 2001|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Moving to complete its effort to become a national energy supplier, Allegheny Energy Inc. said yesterday that it has agreed to buy Merrill Lynch & Co. Inc.'s energy trading unit for $490 million and a 2 percent stake in its power-generation subsidiary.

The acquisition of Global Energy Markets will add 30 cents to 40 cents a share almost immediately to Allegheny's earnings when the transaction is completed, which is expected in the first quarter of this year, according to the Hagerstown-based company's chief executive, Alan J. Noia. It also expected to increase Allegheny's earnings by more than 10 percent a year, he said.

Allegheny will continue to build and acquire power plants throughout the country and now will trade electricity and natural gas and other fuels to become a national power supplier.

"It gives them the piece that was missing to become a national energy supplier, which was trading," Thomas Hamlin, a utility analyst for First Union Securities Inc., said. "[It] enables them to become a price maker instead of a price taker."

Global Energy Markets will give Allegheny - which owns electric utilities and serves 3 million customers in Maryland, Ohio, Pennsylvania, Virginia and West Virginia - the support infrastructure necessary to sell power on the national wholesale market.

After two years of operations, Global Energy Markets is ranked in the top 20 in the nation in terms of electric volume traded as of the third quarter of 2000 by Power Markets Weekly, an industry trade publication. The acquisition will place Allegheny as the 11th-largest power marketer in the nation, company officials said.

"For the better part of a year, I have personally worked on finding a partner with world-class trading, marketing and risk management skills," said Noia, who is also company president and chairman, during an analysts' conference yesterday in New York.

"This acquisition brings us these skill sets in spades. It is a major, transforming step. It represents a unique opportunity to combine a disciplined trading and risk-management business with one of the best low-cost generation portfolios in North America.

"I feel confident this move will break us out of the pack more than anything else we've done so far."

Allegheny's generating subsidiary, Allegheny Energy Supply Co., will issue $490 million of debt to finance the acquisition of Global Energy Markets, which will continue to be headquartered in New York.

As part of the deal, Merrill Lynch has agreed not to compete for an unspecified period and will refer any clients seeking energy commodity risk management needs to Allegheny Energy Supply for the next 2 1/2 years.

Mike P. Morrell, Allegheny's chief financial officer, said the addition of a commodity marketing and trading unit will "enhance the value of Allegheny Energy Supply in the event of an IPO and spin-off."

The transaction is awaiting approval from Federal Energy Regulatory Commission, the Federal Trade Commission and Department of Justice.

"Allegheny knows that growth will be in the trading of energy," said Joan T. Goodman, a utilities analyst with Credit Suisse First Boston. "They're not the only company that feels that way. Some will be stronger than others. But they're in a good position and a good geographic location.

"I think [the market] will be favorable because it opens up a new avenue of income for them."

Allegheny owns 9,000 megawatts of generating capacity and said Friday that it will build a $400 million, natural gas-fired power plant near South Bend, Ind. With construction of that plant and others and some acquisitions Allegheny will have 13,000 megawatts in generating capacity.

Allegheny also has announced plans to build a 1,080-megawatt natural gas-fired power plant in La Paz County, Ariz., and a 540-megawatt power plant in Springdale, Pa. Five 44-megawatt turbines that Allegheny built have gone into service throughout Pennsylvania, and two more 44-megawatt units are to be constructed in the state.

In November, the company said it would acquire three Enron power plants with 1,710 megawatts of natural gas-fired capacity. The sale price was not disclosed for those three facilities, which are in Illinois, Indiana and Tennessee.

"Since mid-1999, we have tripled the generating capacity of our supply subsidiary," Noia said. "As you can see, we are transforming ourselves into a leading player in the national energy marketplace."

Shares of Allegheny climbed $3.18 to $45.25 on the New York Stock Exchange yesterday.

Bloomberg News contributed to this article.

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