MOODY'S DOWNGRADES ALLEGHENY ENERGY AND AFFILIATES; RATINGS REMAIN UNDER REVIEW
Approximately $3 Billion of Debt Securities Affected.
New York, November 06, 2002 -- Moody's Investors Service downgraded the ratings of Allegheny Energy,
Inc. (Allegheny), including its senior unsecured debt to
B1 from Ba1. Moody's also downgraded the ratings of subsidiaries
Allegheny Energy Supply, Monongahela Power, Potomac Edison,
West Penn Power, Allegheny Generating Company, and the rating
of Allegheny Energy Supply Statutory Trust 2001. The ratings of
Allegheny and its subsidiaries remain under review for possible further
The ratings of the following issuers were downgraded and remain under
review for further downgrade:
· Allegheny, senior unsecured to B1 from Ba1
· Allegheny Energy Supply, senior unsecured and issuer rating
to B1 from Ba2
· Allegheny Generating Company, senior unsecured to B1 from
· Allegheny Energy Supply Statutory Trust 2001, senior secured
to B1 from Ba2
· Monongahela Power Company, senior secured to Baa3 from
A3, senior unsecured debt and issuer rating to Ba1 from Baa1,
preferred stock to Ba3 from Baa3, commercial paper to Not Prime
· Potomac Edison Company, senior secured to Baa3 from A3,
senior unsecured debt and issuer rating to Ba1 from Baa1, commercial
paper to Not Prime from Prime-2
· West Penn Power Company, senior unsecured and issuer rating
to Baa1 from A1, commercial paper to Prime-2 from Prime-1
· Mountaineer Gas Company, commercial paper to Not Prime
None of these issuers have outstanding commercial paper.
These rating actions reflect:
(1) limited financial flexibility and deterioration in cash flow and earnings,
(2) cash from operations which, absent substantial operating improvement,
fails to cover capital spending and dividends even allowing for a recent
50% dividend reduction
(3) poor near term prospects for merchant power prices and the poor returns
generated on substantial investments in that area,
(4) potential default under its credit agreements requiring ongoing waivers
or cures by November 29th and the need to extend its $70 million
bilateral line of credit that expires on November 30th,
(5) uncertainties regarding the delay in filing the company's financial
(6) the need to sell assets in order to bolster liquidity.
The deterioration in Allegheny's financial performance reflects weak wholesale
power markets, problems with its energy trading activities,
and declines at its regulated utilities due to operating difficulties
attributable to unplanned equipment outages and adverse weather conditions.
Allegheny substantially increased its generating presence in the Midwest
through the acquisition of three power plants in 2001. Margins
in the Midwest have since declined due to substantial excess generating
capacity and Moody's does not expect market conditions in this region
to improve for at least the next 1-2 years.
Allegheny's energy trading activities have consumed cash particularly
due to hedging arrangements that were intended to protect against the
company's exposure under a contract to sell power to the California Department
of Water Resources (CWDR). Furthermore, the state of California
has challenged the terms of the $4 billion CDWR contract prompting
Allegheny to appeal to the FERC for an expedited ruling.
Allegheny's financial flexibility is limited. Its cash position
is modest and waivers that cure certain technical defaults on its credit
facilities expire on November 29th. Moreover, a $70
million funded bilateral line of credit expires on November 30th.
The company also faces claims for cash collateral from trading counter-parties.
Merrill Lynch demanded payment for $115 million in September in
connection with an agreement to repurchase its remaining ownership in
Allegheny Energy Supply. This demand is presently being litigated.
The downgrade of Allegheny's regulated utility subsidiaries reflects the
potential for increased pressure to support the cash needs of the parent,
and diminished financial flexibility of the family of companies.
Moody's also notes that the renegotiated provider of last resort (POLR)
contracts between Allegheny Energy Supply and the utility companies have
resulted in an increase in costs for the electric utilities.
The continuing review of Allegheny and its affiliates will focus on:
(1) prospective cash flow generation and asset sales in relation to cash
needs for debt service and capital spending,
(2) the implications of uncertainties of financial reporting and any concomitant
restatements and possible asset write-downs
(3) the ability of the utility subsidiaries to obtain their own credit
(4) the probable outcome of negotiations with lenders, who will
likely request collateral as a condition to continued waivers or extensions
Headquartered in Hagerstown, MD, Allegheny Energy, Inc.
is an integrated energy company that owns various regulated and unregulated
subsidiaries engaged in generation and distribution of electricity,
and other businesses. Its utility subsidiaries deliver electricity
to customers in Maryland, Ohio, Pennsylvania, Virginia,
and West Virginia, and natural gas to customers in West Virginia.
Moody's Investors Service
VP - Senior Credit Officer
Moody's Investors Service