Confirming his summary judgement made in April of this year (see NGI, April 18), U.S. District Judge Harold Baer Jr. last week found against Allegheny Energy Inc. on its breach of contract and fraudulent inducement claims against Merrill Lynch & Co. Inc. over Allegheny's purchase of Merrill's Global Energy Markets (GEM) trading business in 2001.

Following the ruling, Greensburg, PA-based Allegheny said it plans to appeal Baer's decision, which also confirmed his earlier summary judgment that Allegheny must pay Merrill Lynch $115 million plus interest for the repurchase of a minority equity interest in Allegheny Energy Supply LLC, a subsidiary of Allegheny Energy.

The equity stake was issued to Merrill Lynch in 2001 as partial payment for GEM. The lawsuits arose as a result of a dispute between Allegheny and Merrill Lynch regarding Allegheny's purchase of GEM from Merrill in 2001 for $490 million and a 2% equity interest in the trading unit. Merrill Lynch had initially filed a lawsuit against Allegheny charging that it did not follow through on part of the purchase transaction. Allegheny had promised to buy out Merrill's stake in the trading unit for $115 million if the business failed to acquire a set level of generating capacity within 18 months. The trading unit did not achieve that level, and Merrill wanted to liquidate its interest. Allegheny refused.

After Merrill Lynch filed its lawsuit, Allegheny filed its counterclaims, charging that Merrill made false and misleading representations about the trading operation "with the intent of inducing Allegheny to purchase GEM for more than $490 million, thus providing Merrill Lynch with significant profits." Allegheny told the court that the trading business it purchased may have been involved in wash and sham trading with Enron Corp., and its revenues, trading volumes and growth rates may have been artificially inflated in order to capture a higher purchase price.

While the appeal is pending, Allegheny will not be required to make any payment to Merrill Lynch but will likely be required to post some form of collateral with the court in connection with its appeal.

In the first quarter of 2005, Allegheny recorded a $38.5 million (pre-tax) charge to reflect estimated interest on the $115 million amount through March 31, 2005. Allegheny said that to the extent that Monday's decision is upheld, the $115 million payment would be treated as a purchase of Merrill Lynch's minority interest and would therefore have no effect on Allegheny's earnings.

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