Allegheny Energy debt rating is cut below investment grade by Moody's

Hagerstown utility struggles on many fronts

October 02, 2002|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

In another blow to Allegheny Energy Inc., Moody's Investors Service downgraded the debt rating of the struggling Hagerstown energy company to below investment grade yesterday and placed it under review for further downgrades as a result of declining cash flow and earnings.

Allegheny's senior unsecured debt was lowered to Ba1 from Baa2, and its short term rating to "not prime" from "prime-2."

Moody's also downgraded the ratings at Allegheny's subsidiaries, including Allegheny Energy Supply, Monongahela Power, Potomac Edison and West Penn Power.

The downgrade wallops Allegheny squarely on the chin just as it is working to overcome a troubling year marked by an industry downturn, a liquidity crunch and a lawsuit over its $490 million purchase of Merrill Lynch & Co. Inc.'s energy-trading unit.

"The rating action reflects declining cash flow and earnings, increased reliance upon sales in the merchant power market, which Moody's expects to be depressed at least until 2004, and poor results from energy trading which stem from unfavorable long-term contracts and hedging arrangements," the Moody's report said.

"The rating action also reflects weak liquidity that results from a significant shortfall of cash from operations in comparison to capital spending and dividends."

"We are disappointed with Moody's decision," Allegheny Chairman and Chief Executive Officer Alan J. Noia said in a statement. "However, we understand that the credit-rating agencies are dealing with unprecedented challenges facing the energy marketplace. We intend to work closely with Moody's to address its concerns."

Allegheny said it will review all current financing plans and options. The company has also taken steps to improve its balance sheet by trimming its work force, reducing capital spending by about $700 million over the next several years and reducing its reliance on wholesale energy trading.

Allegheny's quarterly dividend payment of 43 cents a share could play a role in helping it out of its cash crunch. The board of directors is scheduled to review the dividend in December.

According to Moody's, the downgrade could force Allegheny to put up about $60 million in cash collateral required under provisions of trading agreements with other parties to do business with a financially strapped company.

Surety bonds totaling about $55 million could account for another claim on Allegheny's liquidity.

Allegheny officials said the issue of collateral is subject to negotiation with other trading counter parties.

Moody's said Allegheny has about $160 million in available cash.

"The [suretey] claim is not subject to any ratings trigger," said Gregory L. Fries, Allegheny's head of investor relations. "Just because we have been downgraded doesn't mean that we are required to post collateral or pay back surety bonds."

Allegheny is embroiled in two legal disputes. It is battling California over a $4 billion energy contract that the state wants renegotiated, and it is suing Merrill Lynch, claiming fraud and breach of contract over the trading business it bought last year.

Allegheny claims that Merrill Lynch used sham trades to artificially inflate the trading unit's revenue and trading volume.

Shares of Allegheny fell $1.10 yesterday to close at $12, a 72.6 percent plunge from its 52-week high of 43.86.

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