Allegheny Increases Credit Facility

Allegheny Energy, Inc. (AYE - Analyst Report) recently announced that its unregulated power generation subsidiary Allegheny Energy Supply Company, LLC (AE Supply) bagged a new $1 billion senior unsecured revolving credit facility with a three-year maturity. Allegheny plans to use the money from the new credit facility for general corporate purposes and capital expenditure for its unregulated plants.

The new credit facility will increase and replace AE Supply’s existing $400 million revolving credit facility, which was scheduled to mature in May 2011. The withdrawals under this credit facility will bear interest that is calculated based on the London Interbank Offered Rate (LIBOR) along with a margin based on AE Supply’s senior unsecured credit rating. As of now the margin on LIBOR-based loans is 3.5%.

Allegheny is focused on strengthening its liquidity position and improve its financial flexibility by reducing interest burden. The company in recent times has concentrated on refinancing debt with lower interest rates.

AE Supply’s proactive role in debt reduction has already reduced the interest burden of the Generation & Marketing segment by $2.8 million and $9.9 million year-over-year for the three and six months ended June 30, 2009, respectively. This was due to lower average debt outstanding at lower interest rates under AE Supply’s credit facility and increased capitalized interest resulting from capital projects that were partially funded by cash from operations.

Headquartered in Greensburg, PA, Allegheny Energy is an electric utility company with over $3 billion in annual revenues. The company is engaged in both regulated electricity and natural gas distribution utility operations as well as in the unregulated wholesale energy markets. It owns and operates generating facilities and serves electricity to approximately 1.6 million customers spread across the states of Pennsylvania, West Virginia, Maryland and Virginia.

Going forward, Allegheny Energy’s positive investment factors include higher generation rates in Pennsylvania and Maryland, higher residential usage and ongoing transmission projects. We expect that the company’s regulated delivery utility business will provide steady earnings growth while the disposal of retail distribution operations in Virginia will infuse liquidity. However, the positives would be offset by lower industrial demand and higher emission and hedging costs.

We reiterate our Neutral recommendation on the low dividend yield stock which reflects our view that the stock will trade at-par with the peer group of electric utility companies like AES Corporation (AES) and TECO Energy Inc. (TE - Snapshot Report).