MOODY’S DOWNGRADES ALLEGHENY ENERGY AND AFFILIATES; RATINGS REMAIN UNDER REVIEW FOR POSSIBLE FURTHER DOWNGRADE
Moody’s Investor’s Service downgraded Allegheny Energy, Inc. (AYE) to B2 from B1 (senior unsecured). Moody’s also downgraded unregulated subsidiary Allegheny Energy Supply Company (AYE Supply) to B3 from B1 (senior unsecured).
Moody’s also assigned ratings to the syndicated bank credit facilities of AYE and AYE Supply as follows: B2 to AYE’s unsecured bank credit facility; B1 to the AYE Supply “new money” bank credit facility, which has a first priority lien on the assets of AYE Supply; and B2 to the AYE Supply restructured bank credit facilities, which have a second priority lien.
Moody’s also downgraded the ratings of utility subsidiaries Monongahela Power Company (MP; senior secured to Ba1 from Baa3), Potomac Edison Company (PE; senior secured to Ba1 from Baa3), and West Penn Power Company (WPP; senior unsecured to Ba1 from Baa3).
The ratings of AYE and its subsidiaries remain under review for possible further downgrade.
Moody’s rating action reflects:
(1) Liquidity concerns and limited financial flexibility in the near and intermediate term, particularly relating to meeting debt repayment schedules on the AYE and AYE Supply bank credit facilities in 2003 and 2004;
(2) Weak operating cash flow relative to consolidated debt levels;
(3) Pressures on cash flow and earnings at AYE’s core utility operations due to an increase in purchased power costs pursuant to the renegotiated power sales agreement with AYE Supply;
(4) Execution risk associated with AYE's plan to meet the debt repayment schedule and strengthen the company's balance sheet through asset sales and/or public or private funding.
The ratings remain under review due to uncertainties regarding the continued delay in reporting audited year-end and first quarter financial statements, as well as the recent announcement of the need to obtain further Securities Exchange Commission approval to engage in financing because the company’s consolidated common equity ratio has fallen below the required 28% threshold previously established with the SEC.
In assigning the bank credit facility ratings, Moody’s recognizes the collateral coverage provided by the assets of AYE Supply, which largely consist of low-cost, base load, coal-fired power plants. The B1 senior secured rating on the $420 million of the new money facility for AYE Supply reflects the fact that it benefits from a first priority lien on the assets of AYE Supply. The B2 senior secured rating on the refinancing facilities totaling about $1.6 billion reflects the fact that these facilities are secured by a second priority lien. The $330 million credit facility for AYE, which is unsecured, is rated B2, consistent with the rating of AYE’s other debt.
The deterioration in Allegheny's financial performance reflects weak wholesale power markets, problems with its energy trading activities, and pressures at its regulated utilities due to increasing purchased power costs from greater market exposure pursuant to the renegotiated power sales contract with AYE Supply. 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. Moody's does not expect market conditions in this region to significantly improve for the next 2 years. Additionally, Allegheny's energy trading activities have consumed significant levels of 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). The June 2003 renegotiation of the terms of the power contract with the CDWR to reduce the price and volume supplied going forward could be constructive in facilitating the possible sale of the contract. However, the expected write-down of the value of the contract could exacerbate strains on AYE’s financial flexibility.
The rating of parent AYE reflects the fact that it is supported by dividends from regulated subsidiaries that have relatively stable cash flows. However, the rating also reflects AYE’s exposure to its unregulated subsidiary, AYE Supply, whose financial flexibility is limited. AYE Supply could also face additional claims for cash collateral from trading counter-parties.
The downgrade of Allegheny's regulated utility subsidiaries reflects the potential for increased pressure to support the cash needs of the parent, as well as the overall diminished financial strength of the AYE family of companies. Although the utilities’ credit statistics might support higher ratings on a stand alone basis, Moody’s believes that there will be on-going pressure for dividends to support the parent. The ratings range of the AYE regulated utilities is narrow because AYE effectively manages all of its regulated operating subsidiaries as a single system, and these subsidiaries share their resources through a regulated money pool. Moody's also notes that the renegotiated provider of last resort (POLR) contracts between AYE Supply and the utility companies have resulted in an increase in costs for the electric utilities as an increasing portion of purchased power costs will be subject to market conditions.
The ratings of the following issuers were downgraded and remain under review for possible further downgrade:
• Allegheny Energy, Inc., senior unsecured to B2 from B1
• Allegheny Energy Supply, senior unsecured and issuer rating to B3 from B1
• Allegheny Energy Statutory Trust 2001, senior secured rating to B2 from B1
• Allegheny Generating Company, senior unsecured to B3 from B1
• Monongahela Power Company, senior secured to Ba1 from Baa3, senior unsecured debt and issuer rating to Ba2 from Ba1, preferred stock to B1 from Ba3
• Potomac Edison Company, senior secured to Ba1 from Baa3, senior unsecured debt and issuer rating to Ba2 from Ba1
• West Penn Power Company, senior unsecured and issuer rating to Ba1 from Baa3
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.
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