The day after Allegheny Energy Inc. locked in a crucial refinancing deal, shares of the debt-ridden company plunged on news that earnings this year and next will be substantially lower than expected and that more uncertainty lies ahead.
The Hagerstown energy company announced at the close of trading Tuesday that it had completed a $2.4 billion refinancing deal, alleviating concerns that it would be forced to file for bankruptcy protection. Allegheny also said it was contemplating a private equity sale and issuance of convertible debt to help relieve its financial woes.
Investors reacted to fears of share dilution and low cash flow projections soon after the market opened yesterday. By 1 p.m., Allegheny's stock had fallen 35 percent to $5.30. The stock price closed at $5.55, down $2.35, on volume of 17 million shares, seven times their average.
"It was a tough day for Allegheny," said Jeffrey Gildersleeve, an energy analyst at Argus Research. "Everyone was anxiously awaiting the announcement of the refinancing deal, but the reality of the situation is that there is considerable work left to do. There is certainly continued execution and operating risk out there. Clearly, there's not a lot of confidence in where the company is at right now.
"They have the liquidity and finance, but it's unclear what the company will look like after this is through," Gildersleeve said. "They've said all assets are on the block. It's hard to value a company over the next few years if you don't know what pieces will be there. Either way, there's a long road ahead."
Analysts also blamed the stock's sell-off on Allegheny's lowered earnings forecast. High interest rates related to the financing deal cut Allegheny's projected earnings to $126 million, or $1 per share, this year and to $120 million, or 96 cents per share, in 2004. Analysts had expected earnings of $1.29 per share this year and $1.51 per share in 2004.
Allegheny has been struggling since October when Moody's Investor Services downgraded its credit rating to junk. Two subsidiaries, Allegheny Energy Supply and Allegheny Generating Co., defaulted on key credit agreements a week later and the shares plunged by almost 50 percent. Under the new refinancing deal, Allegheny Energy Supply will receive $470 million in additional financing and refinance $1.64 billion of existing debt, which will be secured by substantially all its assets. Allegheny, the parent, will use the remaining $330 million to refinance existing debt and letters of credit.
During a conference call yesterday, Chairman and Chief Executive Officer Alan J. Noia and his management team reiterated that the refinancing will allow Allegheny "to proceed to the next phase to our financial recovery."
"We've been operating now in a very abnormal environment," Noia said. "After we were downgraded, the roof caved in on us. The new bank facilities will allow us to get back to normal operations." Noia pointed to efforts to repay debt, such as yesterday's announcement that Allegheny Energy Supply had signed an agreement to sell its 83-megawatt share of the coal-fired Conemaugh Generating Station in Johnstown, Pa., for about $51.3 million. It recently sold two energy businesses to Constellation Energy Group Inc. for $22.3 million.
Management also reminded investors that Allegheny has taken steps to reduce its costs, including canceling the development of generating facilities, saving $700 million in capital expenditures over the next several years, reducing its work force by 10 percent and suspending its dividend.
The company is exploring the sale of a number of other assets.
But an important issue still hanging over Allegheny is its $4.4 billion electricity supply contract with the California Department of Water Resources. Legal wrangling has prevented Allegheny from selling that contract to raise money.
The CDWR sued Allegheny last month, claiming that Allegheny breached its contract, and sought to terminate the deal because of the company's "declining financial condition," and because it transferred the contract to a new subsidiary without approval.
Allegheny countered with a claim filed Friday with the California Board of Control seeking monetary damages for the state's "bad-faith actions." Company executives accused California yesterday of orchestrating a campaign to escape the contract since energy prices began falling in late 2001. California has sought to void power contracts it signed that year, claiming that companies such as Allegheny falsely inflated prices to take advantage of the state during its energy crisis.
"California is not above the law and is not exempt from paying for the harm it wrongfully causes," Michael P. Morrell, president of Allegheny Energy Supply, said yesterday in a statement. "Its bad-faith actions appear to be designed to create financial instability at the company, a condition California then planned to use to walk away from a valid contract."
Allegheny has yet to release results for 2002 and first-quarter results of this year. Executives warned yesterday that it is likely that first- and second-quarter earnings for 2002 will have to be restated because of errors discovered during the review.
"It just seems like a lot more uncertainties were raised than solutions," Craig Shere, an energy analyst at Standard & Poor's Investment Advisory Services, said after the conference call. "A lot depends on how much dilution they will enter into immediately. Are shareholders going to be diluted out of existence? That's as good as going bankrupt. You've got real assets and a real business, but you don't know what it will generate. You don't know what the assets will be worth to a third party. You don't know when they could be sold."