Allegheny subsidiaries given a third reprieve by lenders

Utility again warns of possible bankruptcy if debt isn't restructured

January 01, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Allegheny Energy Inc. said yesterday that its subsidiaries received a two-week extension on waivers from bank lenders under their credit agreements, but the utility warned for the second time in a month that it may be forced into bankruptcy if negotiations to restructure $1.7 billion in debt fail.

The latest reprieve is the third granted to Allegheny subsidiaries Allegheny Energy Supply Co. LLC and Allegheny Generating Co. LLC, which now have until Jan. 14 to resolve issues with lenders and trading parties. But it also was the shortest; the first waiver was for 25 days and the second, which expired yesterday, for a month.

Allegheny has been struggling since early October when Moody's Investors Service cut its credit rating to below investment grade as a result of declining cash flow and earnings, triggering collateral calls from parties that do business with the utility. Allegheny defaulted on key credit agreements about a week later, on Oct. 8.

"It would be nice to have had financing in place by the end of the year, but this is a good sign," said Cynthia A. Shoop, vice president of corporate communications at Allegheny. "It's a positive thing that negotiations are continuing. We're hopeful to receive the new financing soon."

Should Allegheny fail to do so, "That's one of the things that could push us over the edge," Shoop said.

Shares of Allegheny rose 31 cents to $7.56 on the New York Stock Exchange yesterday.

As have many other energy companies this year, Allegheny has been hammered by the downturn in the economy, trading and accounting scandals, and weak capital markets.

In the past year, the utility has taken steps to strengthen its balance sheet by reducing its reliance on the wholesale trading business; lowering pretax operating expenses; canceling the building of several power plants; saving $700 million in capital expenditures over the next several years; and cutting the work force by 10 percent.

"What we've seen in the industry so far is that the banks have been very accommodating to companies in distress, such as Allegheny," said Jeffrey Gildersleeve, a utilities analyst at Argus Research. "They have an incentive to work with Allegheny, in that they're likely to get their money sooner than if the company were to go into Chapter 11."

"Forcing the company into Chapter 11 is a last resort, especially since Allegheny is still operating in a large capacity as a utility," Gildersleeve said. "But if things drag on for an extended period of time, that would be a negative sign."

Talks with lenders have continued since October when the Securities and Exchange Commission gave Allegheny permission to use Allegheny Energy Supply's assets as collateral for up to $2 billion in secured borrowings.

Even as those talks carry on, the utility is juggling several other sticky issues, including a legal dispute with California over a $4.5 billion contract to provide that state with power; a court battle with Merrill Lynch & Co. Inc. over the trading unit purchased from the investment firm; and more recently, accounting errors discovered during a comprehensive review of Allegheny's operations.

Last month, Allegheny said it will most likely have to restate first- and second-quarter results because of the accounting errors. The company also filed an filed an unaudited financial report with the SEC that showed a net loss of $334.4 million, or $2.67 per share, for the nine months that ended Sept. 30. Allegheny had originally forecast earnings of $2.50 to $2.70 per share for the year.

"Communication is crucial when there's bad things happening in a company," Gildersleeve said. "And the company has been pretty quiet. ... It's a little uncertain how all this will play out. There is still value at the utility company. While the nonregulated businesses sucked a lot of the value out, we believe the company will be spared in the end."

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