Allegheny Energy Inc. (AYE) bagged approval from the Virginia State Corporation Commission to recover its cost of purchased power through rate hike. As per the approval, the company will be able to recover purchased power costs for the state of Virginia during the 12-month period ending Jun 30, 2010. However the regulatory body reduced the utility’s proposed rate increase of $19.4 million rate hike by $3.2 million. This is the second scaling down of Allegheny Energy’s proposed rate hike in Virginia . Earlier, in April 2009, the company had asked for $22.6 million rate hike, which was scaled down by $3.2 million to a $19.4 million. 

Allegheny Energy incurred purchased power costs, which increased $26.1 million and $77.7 million for the three and nine months ended September 30, 2009, respectively, to $134.2 million and $380.4 million, respectively. For a residential customer with a monthly consumption of 1,000 kilowatt-hours of power, Allegheny’s original proposal would have increased the bill by $5.47 to $96. The scaled-down proposal would result in a monthly bill of $94. 

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 serves electricity to approximately 1.6 million customers spread across the states of Pennsylvania , West Virginia , Maryland and Virginia . We reiterate our Neutral recommendation on the shares. 

Going forward, Allegheny Energy’s positive investment factors include higher generation rates in Pennsylvania and Maryland , higher residential usage and ongoing transmission projects. Looking ahead, 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 shares 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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