Allegheny Energy: Eyeing Growth in West Virginia

|
 |  Includes: AYE, FE
by: Zacks Investment Research

Allegheny Energy (AYE) reached an agreement with the Public Service Commission of West Virginia, the Consumer Advocate Division and other parties regarding its request for a base rate hike. However the approval of the Public Service Commission of West Virginia is pending.

Allegheny Energy, as per the agreement, will receive a base rate increase of 3.8% ($40 million annualized) with effect from Jun 29, 2010. Subsequently, effective Jan 1, 2011, the company’s base rates will increase by another $20 million through reduction in fuel and purchased power costs. Allegheny Energy initially requested a $122 million hike in an August 2009 filing.

After approval, Allegheny Energy estimates the monthly bill for a residential customer consuming 1,000 kilowatt-hours will increase from $91.78 to $95.88, or by 4.5%, in Jun 2010.

Allegheny Energy in February 2010 entered into a merger agreement with Ohio-based energy company FirstEnergy Corp. (NYSE:FE). FirstEnergy is U.S.’s fifth largest investor-owned utility serving 4.5 million customers spread over Ohio, Pennsylvania, New Jersey, and New York.

As per the proposed terms, shareholders of Allegheny Energy would receive 0.667 shares of FirstEnergy common stock in exchange for each share. The price per share represents a premium of 31.6% to the closing stock price of Allegheny as on Feb 10, 2010. The transaction is expected to be completed by the first half of fiscal 2011.

Headquartered in Greensburg, Pennsylvania, Allegheny Energy is an electric utility company with over $3 billion in annual revenues. The company is engaged in both regulated electricity and natural gas distribution utility operations as well as in the unregulated wholesale energy markets. It owns and operates generating facilities and provides electricity to approximately 1.6 million customers spread across Pennsylvania, West Virginia, Maryland, and Virginia.

Going forward, higher generation rates in Pennsylvania and Maryland, higher residential usage and ongoing transmission projects bode well for the company. We expect the regulated delivery utility business to provide steady earnings growth, while the disposal of retail distribution operations in Virginia will infuse liquidity.

These would be offset by the pending regulatory approval for its merger with FirstEnergy, lower industrial demand, higher emission and hedging costs, and lower output. Thus we maintain our market neutral recommendation on the Zacks #3 stock.