Allegheny investors to vote on concession

They are asked to forgo priority in buying stock

March 06, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

After securing a highly anticipated refinancing deal with lenders to avoid bankruptcy, Allegheny Energy Inc. is turning to a crucial vote by shareholders tomorrow to help it raise cash through a private equity sale.

Investors will decide whether to amend the Hagerstown energy company's charter and give up their "pre-emptive right" to buy any new shares or convertible securities that Allegheny might issue.

A little more than a month ago, the company said several companies have expressed interest in buying securities convertible to Allegheny shares. However, negotiating a private sale - which can be cheaper and faster than other forms of financing - would be "extremely difficult" without dropping shareholder rights to shares, Allegheny said. In addition, Allegheny shares are trading down 87 percent from their 52-week high, closing yesterday at $5.66, down a penny.

Some shareholders have expressed concern about dilution of the company's stock, but analysts said Allegheny needed every opportunity to turn things around after a troubling year that included defaulting on key credit agreements, ratings downgrades and lowered earnings projections.

"Bottom line, it's an important vote for the company," said David B. Burks, an energy analyst at J.J.B. Hilliard, W.L. Lyons. "Given where the stock is now and lack of dividend, they'd have trouble raising capital right now. This is an alternative to that. Is it an ideal solution? No. But it will help them strengthen their position.

"The company needs all the options available to it," Burks said yesterday. "Should they not get the vote to go their way, it would close off an option for them and, in our opinion, weaken their long-term outlook."

Allegheny has been struggling since October, when two of its subsidiaries defaulted on about $1.3 billion in loans. Last week, subsidiary Allegheny Energy Supply Co. received a deal that will give it $470 million in additional financing and restructure $1.64 billion of existing debt, which was secured by substantially all its assets. Allegheny, the parent, will use the remaining $330 million to refinance existing debt and letters of credit.

Allegheny officials said they have already taken steps to reduce the company's cost structure and preserve cash by scaling back its wholesale energy trading business, canceling development of several generating facilities, saving $700 million in capital expenditures over the next several years, reducing its work force by 10 percent and suspending its dividend on common stock.

Sale of assets

Besides planning for the private equity offering, the company has been pursuing sales of several assets and examining ways to further reduce costs and improve operating efficiencies.

"If we would decide to sell equity in any form, we would carefully consider the effects on our current stockholders," said Debbie Beck, an Allegheny spokeswoman. "We will seek to adopt an approach that protects the value of our stockholders' existing investment in the company."

Not all shareholders are convinced. This week, Gabelli Asset Management Co. in New York said it intends to vote its clients' shares against the proposal to eliminate pre-emptive rights.

"We believe that Allegheny's shareholders, including our clients, deserve the protections afforded by the existing pre-emptive rights," according to a statement released by Gabelli, whose clients own 1.5 million shares of Allegheny.

But Institutional Shareholder Services, a Rockville provider of proxy voting and corporate governance services, has recommended a vote in favor of the proposal.

Noting the extreme rarity of pre-emptive rights among large companies, ISS said that "the company has been approached by potential investors interested in making equity investments, but given the existence of the pre-emptive rights, it will be difficult to negotiate and close a transaction."

"Many U.S. companies have taken steps to eliminate shareholders' pre-emptive rights," Institutional Shareholder Services added in its research report. "Such rights can impede large stock issues and, in the case of some companies, can be extremely expensive."

Which direction shareholders will go is largely anyone's guess, analysts said.

Shares broadly held

Allegheny is broadly held, with 494 institutional holders accounting for about 51 percent of its 126.6 million outstanding shares. Allegheny officers and directors own less than 1 percent of the shares.

"If it gets defeated, Allegheny would have to go to existing shareholders to raise money," said Terran Miller, executive director at UBS Warburg.

"It would be harder to do a convert deal with existing shareholders. It would reduce their optionality.

"So for shareholders, yes, you will suffer dilution if it passes. But the other side of that is that if you don't want to suffer dilution, you have to put up more money to buy more shares," Miller said.

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