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Rating Action:

MOODY'S ASSIGNS A Baa1 RATING TO $400 MILLION OF SECURITIES TO BE ISSUED BY ALLEGHENY ENERGY SUPPLY COMPANY, LLC

01 Mar 2001
MOODY'S ASSIGNS A Baa1 RATING TO $400 MILLION OF SECURITIES TO BE ISSUED BY ALLEGHENY ENERGY SUPPLY COMPANY, LLC

New York, March 01, 2001 -- Moody's Investors Service has assigned a Baa1 senior unsecured rating to $400 million in securities to be issued by Allegheny Energy Supply Company, LLC (AE Supply), proceeds of which will be used to partially finance AE Supply's $490 million acquisition of the Global Energy Marketing (GEM) trading operations from Merrill Lynch. The rating outlook is negative.

AE Supply is a relatively new subsidiary of Allegheny Energy, Inc. (AYE) formed to consolidate AYE's deregulated generating assets. It currently owns 6,472 megawatts of generating capacity, the majority of which were transferred by West Penn Power Company and The Potomac Edison Company, formerly vertically-integrated utility subsidiaries of AYE and which now function as pure transmission and distribution companies. AYE's third utility subsidiary, Monongahela Power Company will transfer 351 megawatts of generating capacity in Ohio and anticipates the transfer of an additional 2,083 megawatts in West Virginia during 2001 to AE Supply. The company has announced an additional 4,268 megawatts of generating capacity either through acquisition or greenfield construction in Arizona, Illinois, Indiana, Pennsylvania and Tennessee.

Moody's Baa1 senior unsecured rating for AE Supply is reflective of the company's portfolio of competitive generating assets and the underlevered position of its balance sheet that together provide strong credit protection measures. The contractual nature of AE Supply's revenue stream over the intermediate term, resulting from firm contracts with its transmission and distribution affiliates to be "default provider" under terms specified by state commissions, provide additional support for the rating. The rating, however, is tempered by several operating challenges confronting management. These include the successful integration between the trading group and the rest of the organization as well as building an infrastructure appropriate to service the company's growth strategy and managing the transition from a formerly-regulated to a newly competitive operating environment. Additionally, AE Supply's generating capacity is primarily coal-fired and therefore subject to changes in environmental regulation, especially those governing nitrogen oxide (NOx) and sulfur dioxide (SOx) emissions.

The negative rating outlook is reflective of near term financing risk associated with the company's growth strategy. Financing needs for acquisitions and greenfield construction announced to date are considerable. Absent the GEM acquisition, total costs for development and construction amount to approximately $2.3 billion. Moody's anticipates that AE Supply will finance its requirements with an appropriate amount of debt and equity in order to maintain a balanced capital structure. Failure to do so would probably cause a rating downgrade.

Allegheny Energy is an electric holding company headquartered in Hagerstown, Maryland. AE Supply, its wholly owned subsidiary, is based in Greensburg, Pennsylvania.

New York
Susan D. Abbott
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
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New York
Cheryl Solometo
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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