Allegheny debt is upgraded by Fitch

Ratings agency joins Moody's, S&P in boosting outlook

March 17, 2004|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Allegheny Energy Inc., the Hagerstown-based utility owner that has been struggling to rebuild its financial base, got another piece of good news yesterday as a third ratings agency boosted the outlook for its debt.

Fitch Ratings replaced the company's negative debt outlook with a stable outlook. Fitch also affirmed existing debt ratings for the company and its subsidiaries.

The outlook has improved, the rating agency said, because Allegheny managed both to refinance debt and to meet reporting deadlines for the first time in more than a year.

By doing so, Allegheny has significantly reduced the likelihood of near-term insolvency for its subsidiary, Allegheny Energy Supply LLC, which owns and operates electric generating facilities. That will help stabilize credit at Allegheny's utilities, which buy power from Allegheny Energy Supply, Fitch said.

One utility, Allegheny Power, serves more than 1.7 million customers from southern West Virginia to the New York border and from beyond the Ohio River to Western Maryland and Washington.

Last week, Allegheny refinanced its outstanding bank debt through a credit facility and term loan totaling $300 million, and two term loans totaling $1.25 billion at Allegheny Energy Supply. It extended the payoff dates as much as seven years. The companies also used cash to reduce debt by about $175 million.

The extended payoff "greatly relieves the pressure on Allegheny Energy Supply," said Ellen Lapson, managing director of Fitch in New York. "It gives them a period of years in which to improve the profitability of the company. The company may be able to improve profitability and reduce debt.

"They could benefit from cost reductions and from improvements in the wholesale power market," Lapson said.

Allegheny filed its financial statements for 2003 Thursday with the Securities and Exchange Commission, beating a March 31 deadline and reporting a substantial narrowing of fourth-quarter and annual losses. The filing marked the first time since July 2002 that the company has met financial reporting deadlines.

In addition, the company's auditor, PricewaterhouseCoopers LLP, revised an earlier opinion doubting the company's ability to remain a going concern.

Allegheny reported a fourth-quarter loss of $13.65 million, or 11 cents per share, on revenue of $760 million compared with a net loss of $281.8 million, or $2.23 per share, on revenue of $661 million in the 2002 quarter. For the year that ended Dec. 31, the company's loss was nearly halved, to $355 million, or $2.80 per share, compared with a loss in 2002 of $632.7 million, or $5.04 per share.

Allegheny welcomed the upgrade by Fitch, which joined Moody's and Standard and Poor's in boosting the outlook for Allegheny's debt.

"It's another external validation that the company is getting back on stable ground financially," company spokeswoman Janice Lantz said. "Although we have a long way to go, this is a small step toward improving our credit rating."

In its report, Fitch said new management at Allegheny has a handle on problems at Allegheny Energy Supply and a solid approach to reducing debt leverage.

"Their management is on the right path," Lapson said. "Hopefully, they will be able to improve the profitability and cash flow of the company and reduce debt. That would be good for bondholders."

But Lapson also noted that outages at two generating plants could affect the financial picture.

Outages at Hatfield's Ferry, in Pennsylvania, and Pleasants Power Station in West Virginia will reduce operating cash flow in the first half of this year.

"Failure to bring these units back into operation before summer [when the cost of power increases] would cause an operating cash flow deficiency relative to Fitch's current forecast," the report said.

In addition, "There's a possibility that [the outages] result from poor maintenance and a need for more pro-active maintenance," Lapson said. "That's one of the things that could cause the company to spend more money in the future."

The company plans to cut its debt by $1 billion by the end of next year, in part by paying $250 million in cash and by selling $250 million worth of assets, including a natural gas delivery business in West Virginia that was acquired several years ago, Lantz said.

But in a reversal of a previous plan, the company no longer plans to sell one of its largest coal-fired plants to repay debt, she said.

In November 2002, Allegheny discovered accounting errors and has been working since then to correct them. In the annual report, Allegheny said PricewaterhouseCoopers advised it this month that "material weaknesses" remain in its internal financial controls.

"Allegheny continues to address its internal control issues and expects to resolve these issues by the end of 2004," the Hagerstown company said.

Shares of Allegheny closed yesterday at $12.07, down 6 cents, in trading on the New York Stock Exchange.

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