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13 Aug 2004
MOODY'S REVISES RATING OUTLOOK FOR ALLEGHENY ENERGY, INC. AND CERTAIN OF ITS SUBSIDIARIES TO POSITIVE FROM STABLE
Approximately $5.5 Billion of Debt Securities Affected
New York, August 13, 2004 -- Moody's Investors Service has revised the rating outlook for Allegheny
Energy, Inc. (AYE: senior unsecured B2) to positive
from stable. Additionally, the rating outlook has been revised
to positive from stable for subsidiaries Allegheny Energy Supply Company,
LLC (AYE Supply); Allegheny Generating Company; and Allegheny
Energy Supply Statutory Trust 2001. The rating outlook remains
stable for the other subsidiaries of AYE: Monongahela Power Company,
The Potomac Edison Company, and West Penn Power Company.
The change in rating outlook reflects AYE's progress in reducing
debt and improving its liquidity position, and expectations that
the company will achieve its stated debt reduction target of $1.5B
by year end 2005 while increasing its operating cash flow. Actions
to date that have improved the company's financial flexibility include
the March 2004 extension of its bank credit facilities, the sale
of assets to reduce leverage, the elimination of power contracts
that contributed to large losses in 2002 and 2003 as well as on-going
collateral needs, the significant reduction in Allegheny's unregulated
energy trading activities after the sale of the California Department
of Water Resources (CDWR) contract and related hedges, and the termination
of certain tolling agreements constituting the company's "West Book" of
The change in outlook also recognizes the new management team's strategy
of focusing on the core utility business. The positive outlook
incorporates the expectation that AYE will increase cash flow relative
to debt, and will also improve its balance sheet. Moody's
believes that such improvements will include the issuance of equity and/or
the sale of additional assets. An upgrade in AYE's ratings could
be considered if AYE demonstrates further progress in deleveraging and
a sustainable improvement in cash flow generation that is likely to result
in a ratio of funds from operations (FFO) to Moody's calculation
of adjusted debt of around 9% by year-end 2005, while
at the same time maintaining a relatively stable business risk profile.
The outlook revision is also predicated upon the expectation that management
will complete its publicly announced $1.5 billion debt reduction
program by year-end 2005, some of which has already taken
place, will issue equity and/or complete additional asset sales
to further improve financial flexibility, will sustain improvements
in operating efficiencies and will achieve a reasonable resolution of
the litigation surrounding Merrill Lynch and environmental compliance
AYE has taken actions to address the liquidity issues it faced earlier
this year by refinancing its bank credit facilities and extending maturity
dates. Additionally, AYE announced the pending sale of its
9% interest in the Ohio Valley Electric Corporation and its natural
gas operations in West Virginia, including Mountaineer Gas,
which have historically been weak contributors to cash flow and earnings.
Upon the completion of these announced divestitures, it is expected
that cash proceeds and debt elimination from these sales will total approximately
$340 million, which will be applied towards the company's
$1.5 billion debt reduction goal.
The company has eliminated the bulk of its trading activities, which
had been a substantial drag on earnings and cash flow. However,
Moody's notes that the remaining activities will require continued
funding from AYE to satisfy counter-party collateral obligations.
Debt reduction, the sale of assets and the reduction in its speculative
trading portfolio are major steps in the company's strategy to strengthen
its financial profile and refocus on the lower risk utility business.
By year-end 2005, Moody's calculation of adjusted debt
to capitalization levels are projected to be in the 70% range.
Funds from operations (FFO) coverage of interest expense is anticipated
to be above two times and FFO to debt is expected to be at the 9%
level in the same timeframe, provided the company's announced
plans are executed as expected.
Allegheny Energy, Inc.'s senior unsecured rating of
B2 reflects its high leverage and weak cash flow generation, balanced
against the relatively stable operating performance of its utility subsidiaries,
particularly Monongahela Power Company, Potomac Edison Company and
West Penn Power Company, and its low cost generation fleet.
AYE's consolidated cash flow is substantially related to provider
of last resort contracts between unregulated subsidiary AYE Supply and
the three regulated utilities that sell power under regulatory tariffs.
While capital expenditures related to environmental compliance are substantial
over the next few years, these outlays are expected to ultimately
be largely recovered through the company's regulated rate base.
Headquartered in Greensburg, PA, 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.
Corporate Finance Group
Moody's Investors Service
Richard E. Donner
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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