Allegheny Energy Inc.’s (AYE) subsidiary Trans-Allegheny Interstate Line Company (TrAILCo) will issue $450 million aggregate principal amount of 4.0% unsecured notes due 2015. TrAILCo will also enter a new $350 million, three-year unsecured revolving credit facility concurrently with the closing of the notes offering. TrAILCo will use the net proceeds from the notes, together with funds from the new credit facility, to repay all amounts outstanding under its existing credit facility.
 
Allegheny Energy has successfully reduced its long-term debt from a high of $5.1 billion at year-end 2003 to $4.3 billion after the first nine months of 2009, with long term debt-to-capitalization of 58.6%, much lower than the industry figure of 68%. The company ended the first nine months of fiscal 2009 with $278.3 million of cash and cash equivalents along with more than $1.2 billion of its $1.4 billion revolving credit facility unutilized. It has no significant debt maturities until 2011. Allegheny therefore has a significant leeway in financing approximating $1.1 billion of capital expenditure each in 2009 and 2010. Of this, the majority will be spent on its transmission and distribution network ($0.6 billion and $0.8 billion in 2009 and 2010, respectively). The rest would primarily be spent on scrubbers to meet environmental obligations.
 
Headquartered in Greensburg, Pennsylvania, 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 provides electricity to approximately 1.6 million customers spread across 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 the company’s regulated delivery utility business to 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 such as AES Corporation (AES) and TECO Energy Inc. (TE).
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