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03 Jun 2005
MOODY'S UPGRADES ALLEGHENY ENERGY, INC. (Sr. Unsec. To Ba2 from B1) AND ITS AFFILIATES; RATING OUTLOOK IS STABLE
Approximately $5 Billion of Debt Securities Affected
New York, June 03, 2005 -- Moody's Investors Service upgraded Allegheny Energy, Inc.'s
(AYE) senior unsecured debt rating to Ba2 from B1. Moody's
also upgraded the ratings of affiliates Allegheny Energy Supply Company,
LLC (AYE Supply), Allegheny Energy Supply Statutory Trust 2001,
Allegheny Generating Company (AGC), Monongahela Power Company (MP),
The Potomac Edison Company (PE), and West Penn Power Company (WPP).
This concludes the review for possible upgrade that was initiated on February
24, 2005. The rating outlook is stable for AYE and its affiliates.
The upgrades are prompted by the following:
1) AYE's continued progress in reducing debt and the expectation
that the company will achieve its stated debt reduction target of at least
$1.5B by year end 2005;
2) The upgrade incorporates substantial expected improvement in financial
ratios over the next 2 to 3 years, driven by rising funds from operations,
the use of free cash flow and asset sales to repay debt, the winding
down of unfavorable hedging transactions, and the expectation of
reasonable rate relief for AYE's regulated utility subsidiaries;
3) A lower business risk profile resulting from the focus on lower risk
core utility operations;
4) AYE's improving liquidity profile.
The company's credit profile has been strengthened by significant debt
reduction resulting from the sale of higher risk unregulated assets,
such as the recent sale of OVEC and the Lincoln Generating Station,
and the utilization of free cash flow for debt repayment. AYE recently
announced the sale of the Wheatland generating facility, and the
company intends to sell Mountaineer Gas Company by the end of 2005 and
Midwest peaker Gleason in early 2006. AYE has already reduced debt
by approximately $1.3 billion since December 1, 2003,
and Moody's expects AYE to exceed its debt reduction target of at
least $1.5 billion by the end of 2005, through a combination
of funds from operations and additional asset sales.
For the year 2005, Moody's expects that the ratio of funds
from operations (FFO) to debt, on an adjusted basis, will
exceed 9%, the ratio of FFO to interest will be approximately
2 times, and the ratio of adjusted debt to capitalization will improve
to about 70%. The upgrade prospectively considers substantial
further improvement in these ratios that is expected in 2006 and 2007,
with Moody's calculation of projected FFO to debt improving to the
range of 12% to 15% in 2006 and exceeding 15% thereafter.
There could be negative consequences for the ratings if the company fails
to demonstrate this expected improvement while maintaining or reducing
its business risk profile. On the other hand, indications
that the company is likely to exceed these ratios while maintaining or
reducing its business risk profile could have positive consequences for
AYE's ratings incorporate the relatively strong and stable source of cash
flow from AYE's three regulated utility subsidiaries. The
credit metrics of WPP and PE would support higher ratings on a stand alone
basis, but the ratings for the utility subsidiaries are constrained
by the overall credit profile of the group in the context of the financial
and operational interrelationship of the family of companies. AYE
effectively manages all of its regulated operating subsidiaries as a single
system, and the utility subsidiaries share their resources through
a regulated money pool borrowing arrangement.
The upgrade of AYE's ratings also considers the improved liquidity
position of the consolidated enterprise, which includes cash on
hand of about $175 million (as of March 31, 2005),
and expected availability of approximately $250 million under revolving
credit facilities (at closing) that the company is currently negotiating,
which are expected to have a term of 5 years.
The ratings of AYE Supply consider the cost competitiveness of its generating
assets and the stability of its provider of last resort contractual arrangements
with the regulated utilities. Its relatively low-cost base
load, coal-fired power generation fleet provides a competitive
advantage. However, the rating of AYE Supply also considers
its high leverage and the below market pricing of its contractual sales
to its utility affiliates. Since the utility operations are subject
to rate limitations, including a rate cap in Pennsylvania,
the AYE system as a whole does not fully benefit from the cost competitiveness
of AYE Supply's generating fleet. Moody's rating action
incorporates the expectation that AYE's consolidated profitability
will improve due to the expiry of power supply contracts and the reset
of the Pennsylvania rate cap.
The ratings continue to be constrained by negative factors that include
weak cash flow coverage ratios over the past several years, very
high balance sheet leverage that is largely a residue of unsuccessful
legacy business investments such as natural gas-fired, peaking
generation plants and energy trading, the overhang of uncertainty
in relation to litigation with Merrill Lynch resulting from the energy
trading business, and the need for regulatory support for recovery
of rising costs at the utility subsidiaries and environmental capital
The outlook is stable and reflects the expectation that AYE's credit
profile will continue to improve substantially over the next 2 to 3 years,
with modest further debt reduction and substantial improvement in cash
flow, and that there will be a reasonably supportive regulatory
response to rate filings to recover increased costs and outlays for environmental
Ratings that are upgraded include the following:
1) AYE, senior unsecured to Ba2 from B1
2) AYE Supply, senior secured to Ba2 from Ba3, senior unsecured
and Issuer Rating to Ba3 from B2
3) AGC, senior unsecured to Ba3 from B2
4) Allegheny Energy Supply Statutory Trust 2001, senior secured
to Ba2 from Ba3
5) MP, senior secured to Baa3 from Ba1, senior unsecured and
Issuer Rating to Ba1 from Ba2
6) PE, senior secured to Baa2 from Ba1, senior unsecured and
Issuer Rating to Baa3 from Ba2
7) WPP, senior unsecured and Issuer Rating to Baa3 from Ba1
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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