Allegheny sells two units to Constellation Energy

$22.3 million cash deal allows utility to cut costs

January 03, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

In a move to reduce its financial obligations, struggling Allegheny Energy Inc. sold two of its energy services subsidiaries yesterday at a loss to Constellation Energy Group Inc. for $22.3 million in cash.

Under the terms of the agreement, Baltimore-based Constellation acquired 100 percent ownership of Fellon-McCord & Associates Inc., a natural gas and electricity consulting and management services firm, and Alliance Energy Services LLC, a provider of natural gas supply and transportation services.

The sale of the businesses, both in Louisville, Ky., will allow Allegheny to cut significant costs as it continues to negotiate with lenders to restructure $1.7 billion in debt. Last month, Allegheny warned that if it doesn't resolve its credit issues soon, it may be forced into bankruptcy.

"We're very pleased," said Guy Fletcher, an Allegheny spokesman. "We said we were going to take a number of steps to refocus on our core assets and increase our financial flexibility. This does both. We are continuing to consider the sale of certain company assets to help our balance sheet and company performance.

"But we'll only consider proposals that make sense for the company and our shareholders."

The Hagerstown-based energy company has been under pressure since early October, when Moody's Investors Service cut its credit rating to below investment grade as a result of declining cash flow and earnings, triggering collateral calls from parties with which it does business. Allegheny defaulted on key credit agreements about a week later, on Oct. 8.

On Tuesday, Allegheny received a two-week extension of waivers to give it more time to work out finances.

Allegheny purchased Fellon-McCord and Alliance for $30.5 million in cash in November 2001. But part of the agreement required Allegheny to pay an additional $18.7 million for performance contingencies and in case Allegheny sold the businesses.

So while the company took a loss on the sale, Fletcher said it was more important to Allegheny to cut $60 million in costs. Allegheny will save about $6 million in working capital support it provided to Alliance and another $54 million in guarantees it made to back Alliance's natural gas purchases.

"It's never good when you're selling for a loss, but if they can turn their liquidity around, the future could look brighter," said Craig Shere, equity analyst with Standard & Poor's Investment Advisory Services LLC. "They just got an extension on the ability to renegotiate the loans they are in technical default on, so I assume this is what the banks are looking for."

The new year could bring better news for Allegheny, Shere said.

From March 2001 to September 2002, Allegheny lost $469 million on its California power contracts because it was locked into buying wholesale power at $61 per megawatt hour to supply the state with electricity. Wholesale prices have dropped significantly over the past year. But the company expects those contracts, which are still under legal dispute with the state, to start earning significant cash flow this year.

In addition, Allegheny could benefit from a recent decision by the Federal Energy Regulatory Commission requiring California to return millions of dollars in collateral to Constellation, which had to post a guarantee to do business in the state.

Allegheny also could get a favorable ruling on the guarantees it posted.

"If [Allegheny] can avoid filing for bankruptcy, the future looks much better than what the last month or two have been like," Shere said.

But as turmoil in the industry continues, financially stronger companies like Constellation will benefit as weakened energy companies that are trying to shore up their balance sheets continue selling assets at discounted rates.

Fellon-McCord and Alliance have about 80 employees, and they service about 1,000 customer facilities. The deal will make Constellation the nation's largest competitive supplier of energy to large commercial and industrial customers.

In September, Constellation bought a Virginia-based commercial and industrial energy-services company that added about 3,000 large electricity customers to its client list.

"We are pleased to reach this arrangement which significantly expands our large commercial and industrial business," said Mayo A. Shattuck III, chairman and chief executive of Constellation. "This acquisition continues our focus on serving the energy cost management needs of large energy users while extending our reach along the energy value chain."

Shares of Allegheny rose 24 cents yesterday to close at $7.80 on the New York Stock Exchange. Constellation's stock jumped 61 cents to close at $28.43.

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