Allegheny Energy Redeems Debt - Analyst Blog

In a process to strengthen its balance sheet,

(

) announced that its unit, Energy Supply Company, LLC (AE Supply), will redeem all outstanding $150.5 million 7.80% Medium Term Notes due on 2011.

Allegheny ended the first quarter of 2010 with cash and cash equivalents of $185.9 million and intends to utilize its existing cash balance to repay debts. The company will require $161.6 million to repay its debts, which include accrued interest as well as an early redemption premium apart from the principal amount.

Allegheny Energy’s major peers are

(

),

(

), and

(

). On a competitive landscape, Allegheny’s net margin is better than the net margins of its peers. We believe that the debt reduction will not only reduce future interest expense of the company but would also improve its net margin with respect to its peers.

The adjusted earnings of Allegheny Energy at the end of the first-quarter 2010 was 61 cents a share, which was 9 cents lower than the Zacks Consensus Estimate of 70 cents a share. The average forecast for second quarter, fiscal 2010 and fiscal 2011 are 37 cents per share, $2.09 per share and $2.26 per share, respectively.

Catalysts positively influencing the company include higher generation rates, rising residential usage, a regulated delivery utility business that provides steady earnings growth, and also the disposal of retail distribution operations in Virginia that has helped infuse liquidity into the business.

We appreciate the initiative of the company to reduce debts and prudently manage its balance sheet. However, we believe these positives would be offset by the pending regulatory approval for its merger with FirstEnergy, lower industrial demand, higher emission and hedging costs, and lower output. We presently retain a Neutral rating and a Zacks # 3 Rank (Hold) on the stock.

Based in Greensburg, Pennsylvania, Allegheny Energy Inc. owns and operates electric generation facilities, and delivers electric services to customers in Pennsylvania, West Virginia, Maryland and Virginia.