Exhibit D-6
-
D-6 Cost Study
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Allegheny Power Acquisition of
Mountaineer Gas Company
Cost Study
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Allegheny Power Acquisition of
Mountaineer Gas Company
Cost Study
Contents
Executive Summary
Transaction
Seller
Buyer
Post Transaction Overview
Cost - Benefit Analysis
Benefits - Direct Savings
Benefits - Indirect Savings
Costs
Joint Stipulation Quality of Service Issues
Organization Chart
Territory Map
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Allegheny Power Acquisition of
Mountaineer Gas Company
Cost Study
Executive Summary
The combination of Mountaineer Gas Company with
Allegheny Power will provide efficiencies for the benefit of
Mountaineer Gas customers and the stakeholders of Allegheny
Power. Efficiencies will be realized through the sharing of
resources and sharing of central services. Annual synergy
savings of $9.7 million are expected as a result of these
efficiencies and as a result of a one-time integration cost
of $10 million.
Allegheny and Monongahela Power recognize that the
proposed acquisition initially confers the bulk of the
quantifiable financial benefits (as more fully set forth in
the following paragraphs) to the ratepayers of Mountaineer
Gas. However, Applicants contend that the Transaction
ultimately confers substantial long term benefits on the
entire Allegheny system through increased energy (gas and
electric) market share, fuel option (gas or coal), fuel
location, generation flexibility, and strategic growth
opportunities. In addition, the acquisition of Mountaineer
Gas will allow Monongahela and Allegheny to offer customers
access to more comprehensive products and services than
either company alone could offer. The retail natural gas
experience and expertise of Mountaineer Gas will complement
the electricity and telecommunications experience and
expertise of the Allegheny system, offering improved
capabilities in the delivery of a more complete range of
products and services for all customers.
These benefits, Applicants contends, in the long term
will benefit the Allegheny system as a whole (including
Mountaineer Gas), shareholders, customers, and employees.
The synergy savings discussed herein reflect those savings
attributable to this Transaction. No synergy savings have
been calculated for, or attributed to, the co-ordination of
Mountaineer Gas and West Virginia Gas as due to the
recentness of the West Virginia Gas acquisition, the
differing entity sizes, customer base, and revenue streams
combine to make any such calculation too speculative to be
relied upon.
A joint stipulation agreement relating to post
transaction operation of Mountaineer Gas has been executed
by Allegheny Power, Eastern Systems Corporation, Independent
Oil & Gas Association (IOGA), Weirton Steel Corporation, the
West Virginia PSC Consumer Advocate Division, and the West
Virginia Public Service Commission Staff. The joint
stipulation agreement will have minimal impact on the
efficiencies that will be realized as a result of the
integration of Mountaineer Gas and Allegheny Power.
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Transaction
Allegheny Energy, Inc. (NYSE: AYE) and Energy Corporation of
America (ECA) have executed a stock purchase agreement
under which Allegheny Energy's delivery business, Allegheny
Power, will acquire Mountaineer Gas Company (MGC), a wholly
owned subsidiary of ECA, for $323 million (which includes
the assumption of approximately $100 million in debt). The
combination will 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, excluding
transaction costs and other costs related to the transition.
Seller
Mountaineer Gas Company ("MGC") is a wholly owned
subsidiary of Energy Corporation of America ("ECA"), an
independent diversified energy company. MGC provides
natural gas sales, transportation and distribution service
to approximately 200,000 residential, commercial, industrial
and wholesale customers in the State of West Virginia.
MGC's service territory is primarily in southern West
Virginia and the northern and eastern panhandles of West
Virginia. Mountaineer sells approximately 25-30 bcf/yr of
natural gas directly to residential and commercial customers
and provides approximately the same volume of transportation-
only services to industrial customers. As a public utility,
MGC is subject to regulation by the West Virginia Public
Service Commission ("WVPSC"). Mountaineer Gas Services,
Inc. ("MGS"), a wholly owned subsidiary of MGC, operates
natural gas producing properties, gas gathering facilities
and intrastate transmission pipelines. MGS has
approximately 375 wells in the Appalachian area.
Buyer
Allegheny Power, an Allegheny Energy company, is an
energy delivery company that provides energy to about three
million people in parts of Maryland, Ohio, Pennsylvania,
Virginia, and West Virginia. Allegheny Power provides
natural gas to about 24,000 customers in West Virginia.
Allegheny Power service territory adjoins and overlaps
portions of Mountaineer Gas Service Territory. Approximately
40,000 Mountaineer customers receive electric service from
Allegheny Power. The Customer Call Center for all Allegheny
Power customers is located in Fairmont West Virginia. While
Allegheny Power is relatively new to the gas distribution
business, it has a long history with the people and Public
Service Commission of West Virginia through the delivery of
electricity.
Allegheny Energy, Inc. is a diversified energy company
headquartered in Hagerstown, Md.
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Post Transaction Overview
Mountaineer Gas will become a wholly owned subsidiary
of Monongahela Power. Consistent with the treatment
afforded the unregulated assets of West Penn Power in HCAR
No.35-27121 and the ongoing restructuring of Allegheny's
generation and unregulated activities. Monongahela Power
may transfer Mountaineer Gas' unregulated production
company, Mountaineer Gas Services, to Allegheny Supply.
Monongahela Power will operate the gas and electric
utilities using shared resources, such as computer systems,
billing systems, buildings, trucks, equipment, labor,
accounting and other central services, to the greatest
extent practicable. It is anticipated that Allegheny Energy
Service Corporation ("AESC"), Allegheny's service company,
will continue to operate Mountaineer Gas with Mountaineer
Gas employees.
Cost - Benefit Analysis
Benefits and related costs of this stock purchase
transaction occur as a result of the integration of the two
utilities, Mountaineer Gas and Allegheny Power. Other
aspects of the stock purchase are not considered in this
study.
Benefits - Direct Savings
Annual direct savings of this transaction will result
from sharing of resources and corporate services of as
identified here.
General Operations - $1.5 million;
General Operations will have the opportunity to share
resources such as those involved in dispatching while
maintaining those resources that have specific skill sets
for daily gas operations.
Call Center Operations - $1.2 million;
The joint stipulation agreement indicates that the
Mountaineer Call Center is to be maintained for two years
following the acquisition of common stock. Full savings
that result from changes in the Mountaineer and Allegheny
Power Call Centers will be delayed due to this agreement.
Savings that will begin as a part of the integration process
include several activities that are currently out-sourced by
Mountaineer. These activities will be evaluated to
determine if they can be performed directly by Allegheny
Power. Full estimated efficiencies will still be gained as
call center capabilities are expanded to provide service to
both electric and gas customers in combination with
performing those activities presently out-sourced.
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Accounting and Finance - $1.2 million;
Significant efficiencies will be obtained through
eliminating the overlap of electric and gas accounting and
financial functions. Some specific areas of overlap include
budgeting and reporting. Both Allegheny Power and
Mountaineer Gas have financial reporting responsibilities to
West Virginia and Federal authorities. It is recognized
that there are some unique accounting requirements for gas
and electric companies that require specific knowledge and
experience. Cross training in the area of accounting will
create the opportunity for additional efficiencies.
Executive Compensation - $1 million;
Overlap of executive responsibility results from the
combination of Allegheny Power and Mountaineer Gas. The
services of Mountaineer Gas executives will be retained by
contract during a period of integration to provide knowledge
and experience of the gas operations. This arrangement will
insure that gas operations will be smoothly integrated into
Allegheny Power.
Marketing - $ 750,000;
Marketing of electric and gas delivery products and
services have many similarities that will be joined to gain
efficiencies. Cross training will provide the knowledge for
application of electric and gas tariffs, rules, and
regulations.
Information Systems - $ 600,000;
Support and operation of computer systems and software
will be combined as appropriate for efficient operation
following the integration process.
Human Resources - $ 400,000.
The Human Resources group at Mountaineer Gas and
Allegheny Power perform a similar function. These groups
will be integrated to provide the most efficient process.
Benefits - Indirect Savings
Annual indirect savings of this transaction will result
from savings in the areas identified below:
Online Service System - $1.5 million;
Mountaineer was planning to implement an Online Service
System that would include placing computers in company
trucks. The electronic mapping system that Mountaineer Gas
uses would work in association with the Online Service
System. This system would allow service orders to be sent
directly from the Call Center to a truck. There are other
activities that would also create operating efficiencies by
taking advantage of the connection among the trucks, Call
Center, and mapping system. Allegheny Power has piloted a
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similar system that could be capable of this level of
savings.
Management Fees - $ 720,000;
These management fees are allocated from the parent
corporation of Mountaineer Gas Company and will be
eliminated following this transaction.
TCO refund - $ 500,000; (Not a synergy savings)
This refund was identified as synergy savings in the initial
U-1 filing. Upon further review it was determined that the
refund will occur regardless of the status of this
transaction. Therefore, this item should be excluded from
synergy savings
Materials and Supplies - $ 300,000;
Saving in materials and supplies will result from
efficiencies gained through procurement and handling of
materials and supplies.
Property Taxes - $ 100,000.
It is expected that some property that is presently taxable
will not be required after Mountaineer is fully integrated
with Allegheny Power as a result of operating efficiency
Other Savings
Additionally, indirect savings potentially can be derived
from reconfiguration of service centers.
Costs
A one-time integration cost of $10 million will be
incurred as a result of combining Mountaineer Gas with
Allegheny Power. This cost is required to achieve synergy
savings related to reorganization, system additions, and
other one-time costs.
The following items will be included as part of the one-
time integration costs.
Consulting
Consultant services will be used during the integration
phase to provide expertise and guidance in regards to the
assimilation of gas operations and processes into those of
Allegheny Power. Mountaineer Gas executives also will be
retained for a period to provide the knowledge and
experience needed during the integration process.
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Computer Systems and Software
Computer systems and software will be acquired to enable
several of the synergy savings to take place. In addition,
changes to existing computer systems and software will be
needed to accommodate additional gas customers and
employees.
Training
Training of appropriate gas and electric employees will be
needed to provide the required skills to effectively operate
when Mountaineer is fully integrated with Allegheny Power.
These training costs will be both internal and external.
Employee Expenses
Employee expenses will include the costs of change in
operations as well as costs incurred as a result of
employees participating on the integration teams.
Operations
Expenses associated with operations will include items such
as appropriate signage on vehicles and buildings, and other
changes to facilities
Customers
Customer expenses will include informational mailings and
media announcements relating to the change in ownership of
Mountaineer Gas. Customer expenses will also include
changing bill forms and providing expanded Call Center
operation.
Other
Other expenses may include expenses such as legal fees,
filing fees, and financial fees.
Joint Stipulation Quality of Service Issues
Allegheny Power agreed to several issues in the Joint
Stipulation Agreement that will impact the initial costs and
full synergy savings of this transaction by delaying some
operational changes for a period of time. These issues were
addressed under item 16 of the Joint Stipulation Agreement
as "Quality of Service" issues.
Service Centers
The joint stipulation agreement will have minimal
impact on potential synergy savings derived from
reconfiguration of service centers because it does not place
restrictions on the consolidation of service centers in the
towns or counties which will now have two service centers.
Allegheny Power will advise the Commission six months in
advance of any planned closures or mergers of any service
centers.
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The following excerpt is from Joint Stipulation
Agreement item 16.a.
Treatment of Service Centers. Allegheny
Power agrees it will advise the Commission
six months in advance of any planned closures
or mergers of any service centers. Except
for closure of a service center resulting
from consolidation or merger of service
centers in towns or counties which will now
have two service centers, Allegheny Power
will not close any service centers for a
period of two years following the acquisition
of the common stock of Mountaineer Gas.
Allegheny Power may give notice of closures
during the initial two years following the
acquisition of the common stock of
Mountaineer Gas.
Other Operational Facilities
The Sissonville Call Center, corporate office, and
adequate meter shop function will be maintained within the
Charleston area for Mountaineer Gas for a period of two
years following acquisition of common stock. As a result,
full synergy savings projected from operational changes at
the Call Center and from operational changes to the meter
shop functions will be delayed. The required treatment of
operational facilities will cause minimal changes in the
synergy savings at the corporate office.
The following excerpt is from Joint Stipulation
Agreement item 16.b.
Treatment of Other Operational Facilities.
Allegheny Power will maintain the
Sissonville Call Center and will also
maintain a corporate office and adequate
meter shop function within the Charleston
area for Mountaineer Gas for a period of two
years following the acquisition of the common
stock of Mountaineer Gas. Allegheny Power
agrees it will advise the Commission six
months in advance of any consolidation,
merger, relocation or closure of these
facilities. Allegheny Power may give such
notice during the initial two years following
the acquisition of the common stock of
Mountaineer Gas.
