FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): January 8, 2001
Allegheny Energy, Inc.
(Exact name of registrant as specified in its charter)
Maryland 1-267 13-5531602
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification Number)
10435 Downsville Pike
Hagerstown, Maryland 21740-1766
(Address of principal executive offices)
Registrant's telephone number,
Including area code: (301) 790-3400
<PAGE>
Item 1-8. Not Applicable
Item 9. Regulation FD Disclosure
On January 8, 2001, Allegheny Energy, Inc. (Allegheny) made the
following presentation.
[LOGO]
Transforming into a Leading National Energy Merchant
January 2001
1
[LOGO]
Alan J. Noia,
Chairman, President,
and Chief Executive Officer
Allegheny Energy, Inc.
2
Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995
--------------------------------------------------------------------------------
Certain statements within constitute forward-looking statements with respect to
Allegheny Energy, Inc. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
performance, or achievements of Allegheny Energy to be materially different from
any future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors may affect Allegheny Energy's
operations, markets, products, services, and prices. Such factors include, among
others, the following: general and economic and business conditions; industry
capacity; changes in technology; changes in political, social, and economic
conditions; changes in the price of electricity; regulatory matters; litigation
involving Allegheny Energy; regulatory conditions applicable to Allegheny
Energy; the loss of any significant customers; and changes in business strategy
or development plans.
3
Terms
--------------------------------------------------------------------------------
Consideration: $490 million plus a 2% equity interest
in Allegheny Energy Supply
Closing: Expected in the first quarter of 2001
Approvals: FERC, Hart-Scott-Rodino
4
Enhances Allegheny Energy's
Earnings Growth and Shareholder Value
--------------------------------------------------------------------------------
o Accretive to Allegheny Energy's earnings in 2001 by $0.30 to $0.40 per
share, excluding goodwill
o Near- and long-term corporate earnings growth in excess of 10%
o Supports Allegheny Energy Supply's growth as an energy merchant and allows
it to compete with other power growth companies
5
Enhances Allegheny Energy's
Earnings Growth and Shareholder Value
--------------------------------------------------------------------------------
o Enhanced gross margins on Allegheny Energy Supply's existing and planned
generation through portfolio optimization
o Accelerated revenue potential from both in-house marketing activities and
Merrill Lynch referral agreement
6
Accelerates Allegheny Energy's Transformation
Into a Leading National Energy Supplier
--------------------------------------------------------------------------------
[Map of United States showing NERC Regions Allegheny Energy Power Stations
and Service Territory in Mid-1999]
7
Accelerates Allegheny Energy's
Transformation Into a Leading National Energy Supplier
--------------------------------------------------------------------------------
o 8,505 MW of total generating capacity
o 2,795 MW of unregulated capacity
o 88 MW under development
8
Accelerates Allegheny Energy's Transformation
Into a Leading National Energy Supplier
--------------------------------------------------------------------------------
[Map of United States showing NERC Regions, Allegheny Service Terrirory, current
Power Stations and Future Power Stations in 2000]
9
Accelerates Allegheny Energy's Transformation Into a Leading National
Energy Supplier
--------------------------------------------------------------------------------
o Nearly 13,000 MW of total generating capacity
o Allegheny Energy Supply formed in November 1999
o 6,459 MW transferred to Allegheny Energy Supply
o 2,350 MW to be transferred from regulated affiliate
o Nearly 2,500 MW announced under development
o 1,793 MW being purchased
GEM Provides a Platform to Unlock
the Value of allegheny Energy Supply's
Low-Cost Generating Fleet
10
The GEM Platform
--------------------------------------------------------------------------------
o Established power and gas trading presence
o Top-tier trading and marketing skills
o Leverages Allegheny Energy Supply's expertise in operating low-cost
generating assets and GEM's strength in power marketing to create a strong
energy merchant
o Enables growth more quickly and at lower risk than strategy of organic
growth
Combined with GEM, Allegheny Energy Supply Will Be a
Best-in-Class Generation, Trading, and Marketing Operation
11
The Allegheny Energy Supply/
Global Energy Markets Team
--------------------------------------------------------------------------------
o Dan Gordon to lead the newly combined team
o GEM's existing management team has executed employment contracts with
Allegheny Energy Supply
o Integration process under way to determine final structure
12
[LOGO]
Thomas Davis
Executive Vice President, Merrill Lynch
President, Corporate and
Institutional Client Group
13
[LOGO]
Daniel L. Gordon
President, Allegheny Energy Supply's
Trading Division
Head of Global Energy Markets
14
Overview of GEM
--------------------------------------------------------------------------------
TWO-TIERED STRATEGY: Focus on longer-term transactions with higher
margins
Capitalize on market intelligence to create a
steady flow of short-term commodity trades
TRACK RECORD: #1 investment bank in power trading*
Top 20 overall in terms
of trading volume as of
Q3 2000*; 60 active
counter-parties; 7,000
trades in portfolio;
3,000 active
GROSS MARGINS 1999: $49 million
2000 (forecasted): $72.5 million
OPERATIONS: 24/7 desk in most North American power, natural
gas, and oil markets
* According to Power Markets Week, August 2000
------------------
15
GEM's Trading Activities
--------------------------------------------------------------------------------
o Fuel tolling agreements throughout the United States, including a
long-dated gas tolling arrangement in WSCC
o Load service and load-shaping agreements in PJM, New York, and WSCC
o Asset optimization transactions
o Natural gas and crude oil securitization transactions
o Other complex derivative/structured finance/commodity risk management
strategies
16
GEM's Infrastructure
--------------------------------------------------------------------------------
o GEM has an established, tested, and comprehensive risk management
infrastructure that combines the sophistication of a financial services
firm with the unique attributes of energy commodities
o The GEM infrastructure provides a solid and experienced platform from which
GEM conducts its business
o Risk analytics, risk reporting, option valuation and built-in redundancies
ensure the integrity and reliability of GEM's operations
o GEM's infrastructure is a key competitive advantage
17
Portfolio Optimization
--------------------------------------------------------------------------------
o GEM has a competitive
advantage to realize significant value from the AE Supply generation
portfolio. This competitive advantage stems from GEM's:
- Risk management infrastructure
- Derivative pricing/valuation models
- Innovative structured transaction expertise
- Market information and trading experience
- Significant synergies within existing portfolio
18
Forming a Leading Energy Merchant Company
--------------------------------------------------------------------------------
FACTORS NECESSARY FOR SUCCESS COMBINED PLATFORM
--------------------------------------------------------------------------------
Access to a portfolio Easy access to six liquid trading hubs
of generating assets Nearly 13,000-MW generation portfolio
--------------------------------------------------------------------------------
Trading, marketing, and Management team with
risk management skills 50+ years combined experience
--------------------------------------------------------------------------------
Growth potential Established national fleet with
projects under development
--------------------------------------------------------------------------------
Internal success factors A properly incentivized team
Firm-wide commitment to success
--------------------------------------------------------------------------------
Portfolio diversity Existing base of low-cost assets
Newly acquired/development gas plants
--------------------------------------------------------------------------------
19
Allegheny Energy Supply and GEM
--------------------------------------------------------------------------------
YEAR-TO-DATE SEPTEMBER 30, 2000
RANK COMPANY MWH (MM)
1 Enron 404.0
2 AEP 290.9
3 PG&E 210.0
4 Duke 199.3
5 Southern 154.0
6 Reliant 133.0
7 Constellation 130.9
8 Aquilla 127.9
9 Dynegy 95.9
10 Edison 93.8
11 AE SUPPLY 90.3
12 Avista 89.7
13 Williams 84.3
14 El Paso 79.2
15 PSEG Power 74.7
Combined with GEM,
Allegheny Energy Supply
will be one of
the largest power
marketers in the nation
based on volume of trades
20
[LOGO]
Michael P. Morrell,
Senior Vice President
and Chief Financial Officer
Allegheny Energy, Inc.
(President, Allegheny Energy Supply, Effective Feb. 1)
21
Additional Terms
--------------------------------------------------------------------------------
o Merrill Lynch will refer its clients with energy trading needs to Allegheny
Energy Supply
o Acquisition includes support infrastructure necessary to conduct business
o Merrill Lynch non-compete in North America for 30 months
22
Strategic Benefits of the Transaction
--------------------------------------------------------------------------------
o Enhances risk management skills
o Optimizes portfolio
o Unlocks value of generation assets
o Should enhance the value of Allegheny Energy Supply
23
Synergy Opportunities
--------------------------------------------------------------------------------
o $20-25 million of expected annual revenue synergies
o New structured transactions
o Expected cost savings of $4-8 million annually
24
EBIT and Earnings Opportunities
--------------------------------------------------------------------------------
(MILLIONS)
2001 2005
---- ----
GEM EBIT $70 $131
GROSS SYNERGIES 25 25
---- ----
TOTAL 95 156
CASH EARNINGS $35 $60
* Assumes FASB removes current requirement for goodwill amortization.
25
Financing
--------------------------------------------------------------------------------
o $490 million to be financed with debt
o Committed to investment grade rating for Allegheny Energy Supply Company
26
Fulfilling Our Goals and Promises -
Allegheny Energy Historical Performance
--------------------------------------------------------------------------------
Percentage of Total Revenues-Unregulated
1998 2000 2005
10% 43% +33% 70%
Percentage of Net Income-Unregulated
1998 2000 2005
0 17% +17% 75%
Total Generating Portfolio (MW)
1998 2000 2005
8,397 8,763 +4% 18,000
27
Earnings Outlook
--------------------------------------------------------------------------------
Earnings
2001 per share
Company guidance (without acquisition) $3.10 - $3.30
Generation acquisition increment .40 .40
GEM acquisition increment* .30 - .40
Company guidance (with acquisition) $3.80 - $4.10
Consensus $3.18
* Assuming no FASB requirement to amortize goodwill.
28
[LOGO]
Transforming into a Leading
National Energy Merchant
January 2001
29
# # #
During the presentation, Mr. Alan J. Noia, Allegheny's Chairman, President
and Chief Executive Officer, spoke from the following prepared text.
Certain statements within constitute forward-looking statements with
respect to Allegheny Energy, Inc. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance, or
<PAGE>
achievements of Allegheny Energy to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors may affect Allegheny Energy's
operations, markets, products, services, and prices. Such factors include,
among others, the following: general and economic and business conditions;
industry capacity; changes in technology; changes in political, social, and
economic conditions; regulatory matters; litigation involving Allegheny
Energy; regulatory conditions applicable to Allegheny Energy; the loss of
any significant customers; and changes in business strategy or development
plans.
AL NOIA'S PROJECT FALCON TALKING POINTS
SLIDE 1 TITLE SLIDE
SLIDE 2 AL NOIA INTRODUCTORY SLIDE
Good morning. On behalf of Allegheny Energy, I would like to thank you all for
your interest in what I believe is an exciting next step as we transform our
Company into a leading national energy merchant. I would like to welcome all of
those in attendance here in New York today and also those who have joined us via
phone and by webcast. We have a compelling story to tell today -- one that we
believe advances Allegheny Energy from Main Street to Wall Street. But, before I
get to that, let me introduce those who are here with me: Tom Davis, Executive
Vice President of Merrill Lynch and Company and President of its Corporate and
Institutional Client Group; and Flavio Bartmann, Managing Director and Head of
Strategy and Capital Allocation for Global Debt Markets. I would also like to
introduce Mike Morrell, Senior Vice President and Chief Financial Officer of
Allegheny Energy and soon-to-be President of our Allegheny Energy Supply
subsidiary, and Dan Gordon, Head of Global Energy Markets and the soon-to-be
appointed President of Supply's Trading Division. Also, in attendance from
Allegheny Energy are Greg Fries, Manager of Investor Relations; Rich Gagliardi,
Vice President of Administration; Cynthia Shoop, Vice President of Corporate
Communications; Peter Dailey, Executive Director of Business Development; Ken
Blasko, Director of Strategic Planning; and Terry Burke, Deputy General Counsel.
Also, a special welcome to Steve Rice, a long-standing member of our Board who
was in town today on other business and could stop by to join us.
SLIDE 3 "SAFE HARBOR LANGUAGE"
Before we begin discussing the announcement that was made earlier this morning,
I would like to direct your attention to the safe harbor statement in our
material and on the screen. While I will be moving ahead, I encourage you to
take the time to review this language.
As you know, today we announced the acquisition of Global Energy Markets, or
G.E.M, which is Merrill Lynch's energy commodity marketing and trading unit. We
are rapidly growing our fleet of generating plants throughout the United States.
Just last Friday we announced plans to construct a 630-MW natural gas-fired
merchant plant near South Bend, Indiana. With this and other expansion projects
and acquisitions, Allegheny's portfolio will grow to nearly 13,000 MW. I'll
discuss this in a bit more detail in a few minutes.
For the better part of a year, I have personally worked on finding a partner
with world-class trading, marketing, and risk management skills. This
acquisition brings us these skill sets in spades. It is a major, transforming
step. It represents a unique opportunity to combine a disciplined and
established trading and risk management business with one of the best, low-cost
generation portfolios in North America. I am thrilled about the opportunities
that it creates for our shareholders and employees. G.E.M's strength in energy
trading is also in line with and complements our strategy to grow our successful
low-cost fleet regionally and now nationally.
SLIDE 4 "TERMS"
The consideration to be paid for G.E.M is $490 million in cash and a 2 percent
equity interest in our Supply subsidiary. The transaction requires regulatory
approvals from only the FERC and the Federal Trade Commission/Department of
Justice. We expect that it will be successfully completed this quarter, at which
time G.E.M will assume responsibility for all energy commodity risk management
activities within Allegheny Energy Supply.
SLIDE 5 "ENHANCES AYE'S EARNINGS GROWTH AND SHAREHOLDER VALUE"
The addition of G.E.M will create significant value for our shareholders. We
expect that the transaction will be 30 to 40 cents accretive to net income
before goodwill amortization in the first full year after the close of the
transaction. Coupled with our recently announced acquisitions and other already
planned development projects, G.E.M will help ensure we achieve corporate
earnings growth in excess of 10 percent and supports our growth and
competitiveness.
SLIDE 6 "ENHANCES AYE'S EARNINGS GROWTH AND SHAREHOLDER VALUE"
Our growth in corporate earnings will result primarily from portfolio
optimization and increased revenue opportunities. Specifically, G.E.M will
enhance the gross margin on our existing and planned generation. In addition,
growth is expected from both in-house marketing and trading activities and from
the referral agreement that we have with Merrill Lynch. Mike and Dan will
discuss each of these areas in greater detail a bit later.
SLIDES 7 "ACCELERATES ALLEGHENY ENERGY'S TRANSFORMATION"
As you can see, we are transforming ourselves into a leading player in the
national energy marketplace.
SLIDE 8 "ACCELERATES ALLEGHENY ENERGY'S TRANSFORMATION"
In less than a year, we have announced significant increases in our generating
capacity.
SLIDE 9 "ACCELERATES ALLEGHENY ENERGY'S TRANSFORMATION"
We announced in November the purchase of three natural gas-fired merchant
generating facilities in the Midwest. This acquisition will add more than 1,700
MW to our portfolio and provide us with new capacity within the ECAR MAIN, and
SERC. Additional capacity of nearly 2,500 MW will come from plant development
projects in Arizona, Pennsylvania, and Indiana. Since mid-1999, we have tripled
the generating capacity of our Supply subsidiary.
SLIDE 10 "ACCELERATES ALLEGHENY ENERGY'S TRANSFORMATION"
Over the past year, as we looked for ways to unlock the value of our generating
assets, we carefully considered other similar transactions along with the
"build-your-own" alternative. We stopped searching when we found G.E.M. We
believe that G.E.M's market knowledge and market presence complement our
existing skills and provide a platform from which we can immediately unlock the
value of our low-cost fleet. G.E.M will also help us better mitigate the risks
inherent in managing our energy and fuels portfolio.
SLIDE 11 "THE G.E.M PLATFORM"
Changes in our industry are creating exciting growth opportunities for companies
with a comprehensive understanding of power marketing and trading and an asset
base to continue to capitalize on market opportunities. G.E.M's top-tier trading
and marketing skills and strength in power marketing, coupled with our expertise
in operating low-cost generating assets will ensure that we are one of the
strongest energy merchants in the industry.
SLIDE 12 "THE ALLEGHENY ENERGY SUPPLY TRADING DIVISION TEAM"
The Trading Division of Allegheny Energy Supply will be led by Dan Gordon, as
its President, who will have responsibility for all commodity risk management
activities. Dan will report to Mike Morrell. Dan is the founder and head of
G.E.M and also served as a Director in the Global Debt Markets Division of
Merrill Lynch. Prior to joining Merrill, Dan was one of the original members of
the Goldman Sachs/Baltimore Gas & Electric joint venture known as "Constellation
Power Source." An integration process has already begun. With complementary
skills and our asset base, we believe that with G.E.M we have a winning
combination.
# # #
During the presentation, Daniel L. Gordon, head of the global energy markets at
Merrill Lynch spoke from the following prepared remarks.
Certain statements within constitute forward-looking statements with respect to
Allegheny Energy, Inc. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
performance, or achievements of Allegheny Energy to be materially different from
any future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors may affect Allegheny Energy's
operations, markets, products, services, and prices. Such factors include, among
others, the following: general and economic and business conditions; industry
capacity; changes in technology; changes in political, social, and economic
conditions; regulatory matters; litigation involving Allegheny Energy;
regulatory conditions applicable to Allegheny Energy; the loss of any
significant customers; and changes in business strategy or development plans.
SLIDE 13 - DAN GORDON INTRODUCTORY SLIDE
o Thank you, Al, for the introduction.
o Before I begin, let me just say how very excited the entire Global Energy
Markets team is about this transaction. From a personal perspective, I have
no doubt that together with Allegheny, we will be able to take advantage of
many of the exciting opportunities within the deregulating energy
marketplace.
o GEM looks forward to becoming part of the Allegheny family and toward
building Allegheny Energy Supply into one of the leading merchant energy
companies of the world.
SLIDE 14 - OVERVIEW OF GEM
o Global Energy Markets has historically focused its business on executing
highly structured, long-dated transactions. These transactions have proven
to be highly profitable and critical to establishing an overall book of
business that is the cornerstone of our overall operations.
o In addition to these highly structured transactions, Global Energy Markets
also employs its market intelligence and proprietary pricing models to take
advantage of shorter-term arbitrage opportunities in energy markets
throughout North America.
o Having been actively trading for close to two years, the growth of our
business has been phenomenal. In the Q2 2000, we were the top investment
bank in power trading and ranked in the top 20. We are also quite active in
the natural gas markets in both financially and physically settled natural
gas transactions.
o We have over 60 active counterparties and a portfolio with over 7,000
trades
o In 1999, GEM Gross Margins were $49 million for only 9 months of trading
activity.
o As of December 1, 2000, GEM's Gross Margins were estimated at $72.5
million. On a going forward basis, GEM expects that - based upon its
existing book of business - as well as new transactions that will be
executed, significant revenue growth will occur.
o The GEM operation is a 24 hour, 7 day per week operation trading in all
major North American energy markets.
o There are over 50 individuals that support the Global Energy Markets
business.
o 20 "key" professionals have executed long term employment contracts with
Allegheny.
SLIDE 15 - GEM's TRADING ACTIVITIES
o As stated previously, GEM's trading activities have been focused on the
creation of an established book of business comprised of various long dated
structured transactions.
o A number of these transactions have been fuel tolling or "spark spread"
transactions in various regions of the United States, including WSCC.
o In addition to tolling agreements, GEM has structured load service and load
shaping agreements in PJM, New York and WSCC.
o GEM has significant expertise and experience in working with utilities to
design and impliment portfolio optimization transactions.
o Outside of "power", GEM also has been active in designing and executing
natural gas and crude oil securitization transactions. As a result of these
activities, GEM has built a valuable, diverse book of business that we
expect will highly compliment that Allegheny Energy Supply asset portfolio.
o In addition to existing synergies, we expect that as Allegheny Energy
Supply adds additional capacity - either through acquisition or development
- positive market opportunities will also present themselves.
SLIDE 16 - GEM INFRASTRUCTURE
o GEM's infrastructure has been one of the most critical factors behind its
success and is something that I and many GEM members are immensly proud of.
o Unlike other energy trading firms that have formed through ad hoc
strategies, GEM originates from an environment that has had a
long-standing, solid focus on trading and risk management.
o Our infrastructure is a combined platform of an underlying risk management
system that has been tried and tested by years of trading at Merrill Lynch
and a series of proprietary models and techniques unique to energy
commodities.
o It is GEM's infrastructure that proves to be one of our most significant
competitive advantages. Our infrastructure, combined with our experienced
and existing book of business will serve to mitigate Allegheny's existing
risk exposure. Once combined with Allegheny's premier generation portfolio,
GEM's strengths will enable a first class national energoy merchant.
SLIDE 17 - PORTFOLIO OPTIMIZATION
o Experience and infrastructure are significant elements in an energy trading
business.
o GEM's market knowledge and information, modeling capabilities and extensive
experience in spark spread trading and regional/transmission arbitrage have
enabled it to effectively manage its portfolio through very volatile market
conditions.
o This series of abilities - when combined with Allegheny's portfolio - will
enable GEM to effectively hedge Allegheny's position and mitigate risk -
while at the same time optimizing the value embedded in the portfolio.
o There are many potential opportunities for portfolio optimization and value
extraction from the Allegheny portfolio. These include transmitting power
to high-priced Eastern markets - including PJM West - or engaging in
fuel-switching and other spark-spread oriented trading activities.
o GEM's experience in optimizing utility generation portfolios will enable it
to have similar success with the Allegheny portfolio while at the same time
not materially increasing risk.
SLIDE 18 - FORMING A LEADING ENERGY TRADING BUSINESS
o The combination of Allegheny Energy Supply with GEM has all of the proper
ingredients for the formation of a leading merchant energy company.
o There are many factors that are critical to creating such a company - among
these factors are an existing fleet of exceptional assets, the potential
for growth and a properly incented team of dedicated professionals.
o Allegheny has one of the best portfolios of generation assets, a strong
development capability, the soon to be closed acquisition of the Enron
assets and easy access to six liquid power trading hubs.
o With GEM, Allegheny will be able to manage its commodity price risk while
simultaneously extracting significant value from the energy commodity
markets.
SLIDE 19 - ALLEGHENY ENERGY SUPPLY & GEM
o This is the Brag-a-Watt slide. It is an unfortunate necessity as I don't
believe that there has ever been established a correlation between volume
and profitability.
o The combination of Allegheny Energy Supply and GEM will result in an energy
trading operation that will be among the top volume traders.
o However, the focus of the enterprise will not be on volume - but rather on
profits.
o We will not run our business with a primary focus on volume.
o Rather, we will run our business with a primary focus on managing the risk
and extracting value from the combined GEM book of business and the
existing Allegheny Energy Supply asset fleet as well as assets that are
newly acquired and/or developed.
SLIDE 20 MIKE MORRELL INTRODUCTION SLIDE
o Reiterate G.E.M team's excitement about joining Allegheny Energy
Supply.
o Introduce Mike Morrell.
# # #
During the presentation, Michael P. Morrell, Allegheny's Chief Financial
Officer, spoke from the following prepared text.
Certain statements within constitute forward-looking statements with respect to
Allegheny Energy, Inc. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
performance, or achievements of Allegheny Energy to be materially different from
any future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors may affect Allegheny Energy's
operations, markets, products, services, and prices. Such factors include, among
others, the following: general and economic and business conditions; industry
capacity; changes in technology; changes in political, social, and economic
conditions; regulatory matters; litigation involving Allegheny Energy;
regulatory conditions applicable to Allegheny Energy; the loss of any
significant customers; and changes in business strategy or development plans.
MIKE MORRELL'S PROJECT FALCON TALKING POINTS
SLIDE 21 ADDITIONAL TERMS
Thank you, Dan.
In addition to the transaction terms already presented by Al and Dan, there are
several more worth mentioning.
Merrill Lynch will refer any clients seeking energy commodity risk management
needs to Allegheny Energy Supply for a period of 2 1/2 years. This will help
ensure a steady and growing stream of trading opportunities, and through Merrill
Lynch's investment banking group, give us continued access to potential clients
that we might not otherwise have.
The support infrastructure necessary to conduct business is included in this
deal, including operating and trading system applications. We will likely need
to add some on-site accounting, legal and risk management people.
Merrill Lynch also has committed to a non-compete provision for a period after
the contract execution date.
SLIDE 22 STRATEGIC BENEFITS
Al described how Global Energy Markets, or G.E.M, enhances Allegheny Energy's
earnings growth and shareholder value and Dan described the trading activities
that will drive that growth and value. Much of that is based on the strategic
benefits of this transaction.
When people think of the kinds of activities Dan discussed, they may perceive an
increase in business risk. On the contrary, we believe G.E.M will actually
mitigate risk through the improved risk management skill set they bring to
Allegheny Energy Supply. While we have sound risk management practices in place,
they have been aimed almost solely at asset-based trading activities. G.E.M
brings skill sets that we previously did not have; namely, the experience and
expertise to successfully execute complex financial trades.
G.E.M will help us optimize our energy portfolio, further unlocking the value of
our low-cost generating assets.
Along with our generating asset development plans and acquisition possibilities,
which already make us more than a regional player, G.E.M will expand the market
reach of Allegheny Energy Supply well beyond our current boundaries.
And, the addition of a commodity marketing and trading unit should enhance the
value of Allegheny Energy Supply in the event of an IPO and spin-off by adding
an essential dimension to an Independent Power Producer package offering.
SLIDE 23 SYNERGY OPPORTUNITIES
There are also revenue enhancement synergies and cost savings synergies
resulting from the combination of G.E.M and Allegheny Energy Supply.
We expect revenue enhancement of $20 to $25 million annually. This comes from
G.E.M's trading capabilities, portfolio management skills, forward trading
positions and market reach coupled with Supply's generating assets and existing
forward positions. G.E.M also has the capability to trade and manage the spark
spread, the difference between the cost of generating gas-fired power and the
market price received for that power. This is increasingly important given our
recent acquisition of 1,710 MW of gas-fired generation from Enron along with our
198 MW of existing gas-fired assets and announced gas-fired generating
development project capacity totaling nearly 2,500 MW.
Also, cost savings synergies should be in the range of $4 to $8 million,
annually.
SLIDE 24 EBIT/EARNINGS OPPORTUNITIES
This slide demonstrates the earnings before interest and taxes and earnings
opportunities from this combination of G.E.M and Allegheny Energy Supply.
Total EBIT and earnings growth reflected here for the 2001 to 2005 period are
about 14% annually. This earnings growth assumes that the Financial Accounting
Standards Board requirement for goodwill amortization is deleted by FASB. These
cash flow and earnings numbers are conservative. There is just no way to
quantify, today, the benefit that can be derived from the continued growth of
our generation fleet, with increasing fuel and regional diversity coupled with
the application of sophisticated risk management efforts.
SLIDE 25 FINANCING
The acquisition of G.E.M will be financed with $490 million of debt issued by
Allegheny Energy Supply. The debt will be a combination of medium term notes and
short-term debt. We remain committed to maintaining an investment grade rating
for Allegheny Energy Supply Company and expect to meet with the rating agencies
soon to apprise them of this latest development in the evolution of Allegheny
Energy. We have the necessary authority to raise the $490 million before
closing.
SLIDE 26 GOALS & PROMISES
We at Allegheny Energy have a positive record of delivering on our goals and
promises. We have previously stated goals of growing our unregulated revenues
and net income to 70 percent and 75 percent, respectively, by 2005. We also have
stated that our generation portfolio may grow to about 18,000 MW by 2005. We
have more than 8,800 MW of capacity currently in operation. We have recently won
an auction for 1,710 MW and have announced development projects for nearly 2,500
MW that brings the total to nearly 13,000 MW. This slide shows we are making
substantial progress toward those goals and, with the addition of G.E.M, are
making great strides in our transformation into a leading national energy
merchant.
SLIDE 27 EARNINGS OUTLOOK
Not shown on the prior slide is the most important goal - growing
earnings-per-share. In mid-December, 2000, we held a conference call to give our
outlook for earnings in 2001. At that time, we stated that our
earnings-per-share for this year, 2001, would fall within a range of $3.10 to
$3.30 without factoring in the recent acquisition of an additional 1,710 MW of
generating assets. That acquisition should add an incremental 40 cents per share
this year.
The addition of Global Energy Markets will add another 30 to 40 cents per share
to 2001 earnings.
Therefore, our revised earnings guidance range for 2001 is $3.80 to $4.10 per
share. This is a substantial increase over the 2000 guidance of $2.80 to $2.90
but, nevertheless, achievable assuming the acquisition of G.E.M and the recently
announced generating asset purchase close within their anticipated timeframes.
We have said that we will grow earnings-per-share by more that 10% per year
through 2004, and we will also have earnings growth at Allegheny Energy Supply
at a level that will allow it to compete and compete for capital with other
power growth companies. That will be especially important if we take the step of
doing an IPO or spin of Supply. After all, we are keen on creating value for our
shareholders, and we believe this acquisition, along with other steps we have
recently taken, will do just that.
SLIDE 28 CONCLUDING REMARKS
We are all very enthusiastic about this next step in Allegheny Energy's
transformation to a leading national energy company. At this time, we'd be happy
to answer your questions.
# # #
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Allegheny Energy, Inc.
By: /s/ Michael P. Morrell
------------------------
Name: Michael P. Morrell
Title: Senior Vice President
Dated: January 8, 2001
