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Allegheny Keeps Growing Distribution Business

Allegheny Keeps Growing Distribution Business

Allegheny Energy's delivery business, Allegheny Power, plans to buy Mountaineer Gas Co. (MGC), a wholly owned subsidiary of Energy Corp. of America (ECA), for $323 million, including assumption of $100 million in debt. The deal would give Allegheny its second gas distribution system, assuming the previously announced plan to acquire UtiliCorp's West Virginia Power division goes through.

Gaining Mountaineer Gas, West Virginia's largest gas provider, would give Allegheny Energy 11.7 Bcf of gas storage and 200,000 new gas customers in a region where the company already provides energy services. The deal would grow Allegheny's service territory to more than 30,000 square miles and its customer base to 1.6 million. Allegheny expects to manage Mountaineer Gas operations from Charleston, WV.

"One component of Allegheny Energy's growth strategy is the expansion of our energy delivery business," said Allegheny CEO Alan J. Noia. "While we will continue to grow our generation and supply assets, we believe that adding delivery operations increases our customer base and provides stable cash flow while at the same time diversifying our asset portfolio."

Allegheny expects cost savings to come primarily from integration of administrative functions. Mountaineer Gas' service territory is contiguous to Allegheny Energy's and adjoins the service territory of its most recent acquisition, West Virginia Power. The deal depends upon, among other things, approvals of the Public Service Commission of West Virginia and the Securities and Exchange Commission, both expected within six months. The combination is expected to be accounted for as a purchase and is anticipated to be accretive to Allegheny Energy's earnings in the first full year of the combination.

"I think they're looking to make distribution acquisitions part of growing their customer base," said Donaldson Lufkin & Jenrette analyst Jay Dobson. "So long as they pay reasonable prices for these things, it's not a terrible strategy. Obviously it's still regulated, so it doesn't have tremendous upside. This transaction looks to be on average with other transactions we've seen."

In September, Allegheny Power announced plans to buy UtiliCorp's West Virginia Power for $75 million (see NGI Sept. 13). The deal would add 26,000 electric customers and 24,000 gas customers. At the time, Allegheny also signed a 20-year gas supply agreement with UtiliCorp subsidiary Aquila Energy.

The Public Service Commission of West Virginia (PSC) recently gave its blessing to the West Virginia Power deal. Before completion, the Security and Exchange Commission still must give its approval. The purchase has already received the go-ahead from the Federal Energy Regulatory Commission and the Federal Trade Commission. The PSC specified a six-year freeze of gas base rates and a three-year freeze on electric rates be implemented. The commission also required a reduction in rates in 2003 to rates now offered by Monongahela Power Co., an Allegheny Energy subsidiary doing business in West Virginia as Allegheny Power.

"The interesting thing about the gas purchases is they're contiguous to our existing service area, but in both cases there are a few gas customers already in our existing electric service area," said Allegheny spokesman Allen Staggers. "For example, of the 200,000 customers of Mountaineer gas, 40,000 are in Allegheny Power's existing service area."

Gas "is the other part of the energy product mix," Staggers said. "By having both we can naturally offer both forms of energy to our customers. We believe it's a very complementary business to ours." He said the company "would probably continue" to look at gas distribution assets. "We're just now finishing up our analysis of the West Virginia Power operations as far as how we plan to integrate those into our company. With this [Mountaineer] acquisition being 10 times as large as that, that's going to change things." With the two acquisitions completed, Allegheny will provide electric or gas service in every county in West Virginia.

Allegheny also is diving into gas-fired generation for the first time with the ongoing installation of two 44 MW units at the Springdale Power Station in Allegheny County, PA. The company's generation currently is 89% coal, 1% hydro and 10% pumped storage.

Allegheny Energy is headquartered in Hagerstown, MD. Allegheny Power delivers electricity to about three million people in parts of Maryland, Ohio, Pennsylvania, Virginia, and West Virginia. Allegheny Energy Supply Co. LLC operates and markets competitive retail and wholesale electric generation and operates regulated electric generation for its affiliates. Allegheny Ventures invests in and develops energy-related and telecommunications projects.

Joe Fisher, Houston

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