Fitch lowers credit rating of Allegheny

Reduction is announced as utility faces deadline Tuesday with lenders

Action could hurt talks

Failure to restructure debt could result in bankruptcy

January 10, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Facing a Tuesday deadline to restructure $1.7 billion in debt, Allegheny Energy Inc. was hit with more difficulties yesterday when Fitch Ratings lowered the Hagerstown energy company's credit rating, blaming weakened performance at the utility's energy generation business and potential exposure to financial obligations.

The downgrade comes as Allegheny is negotiating with its banks, selling assets to raise cash and attempting a private equity sale to stabilize its finances. Failure to reach agreement would likely mean a bankruptcy filing, the company has warned.

The Fitch report said the credit downgrade was based on the assumption that the company would successfully complete negotiations with its banks.

"Obviously, we're disappointed when our ratings are reduced," said Allegheny spokesman Scott Shields. "They felt it was necessary for them to do that. We're really not surprised. We're continuing our negotiations with our lenders to resolve our financial situation."

Analysts said the downgrade could hurt the company's efforts to turn things around.

"It certainly doesn't help," said Edward Metz, an energy analyst at SNL Financial. "The real question is, are the other ratings agencies going to follow suit?"

Shares of Allegheny fell 19 cents yesterday to close at $8.51.

Allegheny, whose two subsidiaries defaulted on several key credit agreements in October, has received three extensions on waivers as it renegotiates terms of credit agreements, with the most recent due to expire Tuesday.

"From our perspective, we don't think there are any negative ramifications from the downgrade," said David B. Burks, a utilities analyst at J.J.B. Hilliard, W.L. Lyons. "But I would hate to see it raise the cost of them attaining a new deal. I hope it doesn't affect the negotiating process with the banks. Clearly, that remains priority No. 1 for the company."

"I thought it was kind of premature for Fitch to do something like that," Burks said. "Their bonds are already in junk status. Allegheny's situation is fluid. A lot of major issues could change the company outlook."

Like many other energy companies, Allegheny was battered by the downturn in the economy, trading and accounting scandals, and weak capital markets.

Fitch had previously downgraded Allegheny's credit rating, and in early October, Moody's Investors Service reduced the utility's rating to below investment grade as a result of declining cash flow and earnings.

Moody's action triggered collateral calls from parties that do business with the utility. The credit defaults came about a week later, on Oct. 8.

To reduce its financial obligations since then, the company suspended its $1.72 annual dividend and sold two energy services businesses for $22.3 million cash.

Two days ago, Allegheny filed with the Securities and Exchange Commission seeking permission to solicit proxies to amend its company charter to remove a provision known as "preemptive rights."

That provision allows existing stockholders to purchase any new issue of shares in proportion to the amount of shares they currently own, before the new issue can be offered to others. Negotiating a private sale can be extremely difficult without dropping shareholder rights to shares, the company said.

"We'd like to remove the provision because it significantly impairs a company's ability to raise new capital," said Debbie Beck, general manager of Allegheny's corporate communications.

"We have been approached by several firms who have expressed interest in making equity investments in Allegheny. Those investments would be done primarily through company issuance of debt security that are convertible to common stock."

Beck said the company would not speculate on the timing or amount of the issuance.

Fitch lowered Allegheny's senior unsecured debt to B+ from BB and left the company on Rating Watch Negative. Fitch said the ratings are based on the collective cash flows from Allegheny's three regulated utility companies and its unregulated generation company, Allegheny Energy Supply.

Allegheny's downgrade "reflects the weakened profile at AE Supply ... and potential exposures to AE Supply through $230 million of financial guarantees," the Fitch report stated. "In 2003, [Allegheny] is expected to rely principally on the upstream dividends from the regulated utilities to service its stand-alone debt and pay for corporate overheads."

That linkage to the financial distress of its parent also caused Fitch to downgrade ratings for Allegheny's regulated utilities, West Penn Power Co., Monongahela Power Co. and Potomac Edison Co. The three utilities provide electricity to 1.5 million customers and natural gas to 230,000 customers in Maryland, Ohio, Pennsylvania, Virginia and West Virginia.

In one positive note yesterday, energy analyst Samir Nangia at Credit Lyonnais Securities raised his recommendation on Allegheny to "add" from "hold" based on the company successfully obtaining secured financing and its potential for acquisition.

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