Allegheny Energy (AYE) yesterday announced that its unregulated generation subsidiary Allegheny Energy Supply Co., LLC (AE Supply) will purchase for cash up to $220 million principal amount from its medium term notes. The offer will expire on Sept 4.
 
The $220 million to be paid off is to be sourced from two debts. Of the $650 million outstanding notes due 2012 with a coupon rate of 8.25%, AE Supply plans to retire a maximum of $160 million. While from the $400 million outstanding notes due 2011 with a coupon rate of 7.80%, the company plans to retire a maximum of $100 million.
 
Headquartered in Greensburg, Pennsylvania, Allegheny is engaged in both regulated electricity and natural gas distribution utility operations as well as in the unregulated wholesale energy markets. The company operates through two business segments: the low margin Delivery & Services and the high margin Generation & Marketing. 
 
The Delivery & Services segment consists of three regulated electric utilities, which operate electric transmission and distribution systems and a natural gas distribution system. This segment provides electricity to 1.6 million customers in Pennsylvania, Virginia, Maryland and West Virginia.
 
The Generation & Marketing segment consists of unregulated power generation operations and marketing operations, which are conducted primarily through its subsidiary, AE Supply.
 
The early retirement of $220 million of medium term loans will clean up the books of AE Supply. Subsequently, apart from the remaining medium term notes, it will have only $447 million of term loans due 2011 and $1.3 million of pollution control bonds due 2012 in the medium term. The rest of its debt consisting of $267 million of pollution control bonds and $100 million debentures are only due post-2013.
 
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 using cash from operations. We maintain our Neutral recommendation on Allegheny.
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