June 25, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF
Financially strained Allegheny Energy Inc. could be headed for even rougher times, analysts said yesterday, after the Hagerstown company revealed late Monday that its equity level has fallen below requirements set by federal regulators.
Allegheny, which saw its shares fall nearly 9 percent yesterday, had said that it would sell assets and possibly issue new securities to stabilize its finances. But now that its equity level has dropped below 28 percent, Allegheny must seek permission from the Securities and Exchange Commission to pursue any additional financing.
Some analysts questioned whether the asset sales or SEC approval would come in time to protect the company from further financial troubles.
Allegheny has not released a financial report since the second quarter of last year.
"I see potential for a lot of additional things happening that are not necessarily good before the asset sales get off the ground," said Craig Shere, an energy analyst at Standard & Poor's Investment Advisory Services who has a "sell" rating on Allegheny's shares. "They could issue their earnings reports, and it could be pretty bad. If that happened, they could announce they're in breach of the bank covenants they entered into to get their refinancing.
"It's a race to see what good or bad things can come first," said Shere, who has no affiliation with the company and does not own any of its shares.
Allegheny desperately needs to raise cash in the next several months to make payments on $2.4 billion in loans it received this year to avoid bankruptcy. Its first debt payment of $250 million is due Dec. 31.
The company's stock price plunged 14 percent in early trading yesterday before climbing back to finish the day at $8.48 a share, down 83 cents on the New York Stock Exchange.
Allegheny has been in a bind since fall, when its debt ballooned to more than $5 billion, several subsidiaries defaulted on their credit agreements and its credit ratings were cut to below investment grade.
The utility barely avoided bankruptcy in February after securing the refinancing deal with its lenders. A short time later, it won shareholder approval for a plan to raise cash by selling stock privately.
Things seemed to improve for the company after that.
New CEO hired
Allegheny hired a new chief executive, Paul J. Evanson of Florida Power & Light Co., this month.
It also settled a contentious dispute with the state of California over a 10-year energy supply agreement, freeing Allegheny to sell that contract to pay off debt.
Fitch Ratings raised its credit rating slightly to "Rating Watching Evolving," and Allegheny's stock price hovered near $10 a share.
But weaker than expected financial performance this year, according to Allegheny, and the rising price of natural gas has forced the company to reduce the value of its trading positions, including its valuable California contract.
What that means is that when Allegheny's credit ratings were downgraded last year, some of its power trading parties canceled agreements with the company. That forced Allegheny to purchase power on the volatile spot market to cover its energy supply contract in places like California.
As prices continue to rise for natural gas, which is a major fuel used to produce electricity, Allegheny has found itself spending more for energy - decreasing profits on some of its long-term contracts. The company also said it expects to record expenses to write down the value of previously announced project cancellations.
That has contributed to the drop in Allegheny's equity-to-total-capitalization ratio, a guideline that helps determine how much stock a company can issue and how much debt it can have on its books, said Cynthia A. Shoop, vice president of corporate communications.
"We are facing difficult times, and we continue to take the steps that are prudent to help us improve our financial situation," Shoop said. "We're doing everything we can to move forward."
How quickly management achieves that will determine Allegheny's fate, analysts said.
"Everything is execution, execution, execution," said Mona Yee, director of Fitch Ratings. "Any delay in any of this would put them in a precarious liquidity position. Without any external help, their internal cash generation capability will not be sufficient to meet the amortization schedule."
Believes in company
Chris Ellinghaus, an energy analyst at Williams Capital Group, said he believes the company will pull through.
"It's a real bummer," said Ellinghaus, who does not own any shares of the stock and has rated the stock a buy. "They need more money, but I think they will get it."
