Positioning itself to become a top tier national energymarketing and trading merchant, Allegheny Energy Inc. announcedyesterday it will acquire Global Energy Markets (GEM), the energycommodity marketing and trading arm of Merrill Lynch & Co.Subsidiary Allegheny Energy Supply LLC will pay $490 million andgive its new partner a 2% equity interest. In turn, Merrill Lynchwill refer clients to its partner.

The deal would give already powerful Allegheny even more muscleas it moves into the high stakes energy trading arena. In the pastyear and a half, it has been building and buying generators andmaking joint agreements across the country, and the move into thetrading arena with a powerful financial partner was not a surprise.

In the past year and a half, Allegheny has been on agenerator-spending spree. It bought three gas-fired properties in theMidwest with about 1,710 MW from Enron North America in November (seeDaily GPI, Nov. 15, 2000). In September,Allegheny Energy Supply set up a joint venture with UGI Development toexpand and market generation output from UGI’s generating station nearWilkes-Barre, PA (see Daily GPI, Sept. 15,2000).

A year ago it bought UtiliCorp United’s West Virginia PowerDivision (see Daily GPI, Dec. 14,1999). In August, it picked up more of a presence in West Virginiawith the $323 million purchase of Mountaineer Gas Co. (see Daily GPI,Aug. 25, 2000).

Allegheny management expects big things from its new financialalliance. CEO Alan J. Noia said the acquisition would transform thecompany into a “major national player” in the trading marketplace,and said that “the changes in our industry are creating excitinggrowth opportunities for companies with a comprehensiveunderstanding of energy marketing and trading and an asset base tocontinue to capitalize on market opportunities.”

Allegheny’s generating fleet, which Noia called “one of our mostvaluable assets,” will benefit from the acquisition most, and hepredicted that “growth is expected from both in-house marketingactivities” and from the referral agreement with Merrill Lynch.

The acquisition is expected to close in the first quarter of2001, and will be accounted for as a purchase and be accretive toearnings in the first year of closing. More important, theacquisition is expected to boost Allegheny’s earnings by more than10% a year, Noia said. GEM would remain headquartered in New YorkCity, as will its employees, which number between 50 and 75.

For Merrill Lynch, the deal will give it the ability to offer”broader energy risk management, structuring and advisory services”to its clients with access to Allegheny’s trading and generationoperations, said G. Kelly Martin, senior vice president and head ofGlobal Debt Markets at Merrill Lynch.

Daniel L. Gordon, who had been in charge of GEM for MerrillLynch now becomes president of Allegheny Energy Supply’s TradingDivision. He said that the restructured team is committed tobuilding Allegheny into one of the “leading merchant energycompanies in the world.” He will now have responsibility for allcommodity risk management activities for Allegheny.

With the acquisition, Allegheny Energy Supply catapults into thetop 20 U.S. ranks of trading and marketing operations. In only twoyears of operation, GEM was ranked in the top 20 in terms ofelectric volumes traded in the third quarter of 2000. It isexpected that the combined volumes of trades could move thecombined company into the top 10 for all power marketers in thenation based on trade volume.

Allegheny’s deal with Merrill Lynch is similar to a venture betweenConstellation Energy Group and Goldman Sachs Group Inc., formed aboutthree years ago. Their Orion Power Holdings invested about $1 billionin the State of New York power projects in 1999 alone (see Daily GPI,Aug. 24, 1999). In 2000, ConstellationEnergy Group, had sold more than 50.5 million MWh of electricity bySeptember 2000, a 69% increase from the same period in 1999 (see DailyGPI, Sept. 15, 2000). The rankings werebased on filings of sales made to the Federal Energy RegulatoryCommission.

The next move for Allegheny could be in making an initial publicoffering, according to Deutsche Banc’s James Dobson. Dobson predictedthat Allegheny could follow the trend of other successful IPO launchesfor unregulated generation subsidiaries as early as this year to addto its already lucrative earnings (see Daily GPI, Nov. 14, 2000). There was no comment fromAllegheny management on whether this would occur.

Allegheny Energy Supply operates and markets competitive retailand wholesale generation in markets across the United States andoperates regulated generation for its affiliates. It currently hascapacity of nearly 13,000 MW in locations across the country.

Its parent, Allegheny Energy, includes Allegheny Power, whichdelivers electric energy and natural gas to about three millioncustomers in Maryland, Ohio, Pennsylvania, Virginia and WestVirginia; Allegheny Energy Supply Co. LLC, which operates andmarkets competitive retail and wholesale electric generation andoperates regulated electric generation for its affiliates; andAllegheny Ventures, which invests in and developstelecommunications and energy-related projects.

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