Allegheny reports progress in talks

Firm now has until Jan. 31 to restructure its debt

January 16, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Frustrated Allegheny Energy Inc. investors may be near the end of their rope as negotiations drag on to resolve the company's debt financing, but energy analysts say the faithful should be rewarded in the end.

After receiving a fourth extension of waivers on credit agreements, Allegheny now faces a deadline of Jan. 31 to work out its finances. The Hagerstown energy company has been struggling since October, when its credit rating was lowered to below investment grade. Allegheny defaulted on several key credit agreements Oct. 8.

But in the first positive sign since talks with lenders began almost four months ago, Allegheny, in announcing the extension Tuesday, said it was based on "substantial progress made in negotiations" with its lenders to restructure $1.7 billion in debt. Previously, it had said only that negotiations were continuing.

"The fact that it takes a few days longer or shorter doesn't matter as long as it's done," said Craig Shere, equity analyst with Standard & Poor's Investment Advisory Services LLC. "But from an investor's standpoint, if you're looking at this, it's like watching a pot boil.

"The odds are this deal will get done and, if it's done, the shares are expected to rise," Shere said. "The possibility of bankruptcy, 5 or 10 percent, is still very meaningful. The question is, `Is it fairly priced?' I'm saying yes, it is. I have a `hold' on the shares."

Shares of Allegheny jumped 65 cents on investor optimism yesterday to close at $10.30, its highest level since October.

Allegheny, like many other energy companies, has been battered by the downturn in the economy, trading and accounting scandals, and weak capital markets.

Its troubles worsened, however, when Moody's Investors Service cut its credit rating as a result of declining cash flow and earnings. Since then, its credit has been cut twice by Fitch Ratings.

To reduce its financial obligations, the company suspended its $1.72 annual dividend and sold two energy services businesses for $22.3 million in cash. Allegheny is also exploring the possibility of holding a private sale of shares to raise cash.

In the past year, the utility has taken steps to strengthen its balance sheet by reducing its reliance on the wholesale trading business; 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.

But the key to its future lies in the outcome of the negotiations. Allegheny has repeatedly warned that if it cannot resolve its credit issues soon, it will be forced into bankruptcy.

"I think people should stop reading the tea leaves and just wait for the eventual outcome," said Chris Ellinghaus, energy analyst at Williams Capital Group. "Within the next week or two, they will either say `We did it,' or `We didn't.' It'll be tremendously positive news or extraordinarily bad news.

"My guess is, at the end of the month, Allegheny will not be filing for bankruptcy."

Analysts also said they are optimistic despite recent reports that two small lenders are holding up the restructuring deal.

"That's not a very big deal," Ellinghaus said. "Sometimes, small lenders will demand getting out of the syndicate because that's the time they have the maximum leverage. They're trying to protect their interest. It should be no problem to get them out of the syndicate."

Jeffrey Gildersleeve, a utilities analyst with Argus Research, agreed.

"It takes time to get all parties comfortable with a financing agreement," Gildersleeve said. "But the banks still seem to be positively in the game and coming close to reaching some agreement.

"You don't go through all this without coming to some agreement. As we've said all along, it's a big incentive for the banks and lenders to make this happen. The feeling is that it will get resolved."

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