Allegheny Energy Inc. received crucial permission from the Securities and Exchange Commission yesterday to sell $325 million in securities as the utility continues its struggle to avoid bankruptcy.
The SEC also said the Hagerstown energy company's subsidiary, Allegheny Energy Supply Co., could borrow up to its $2.2 billion limit, even though the utility's "common equity ratio" has fallen below requirements set by federal regulators.
Allegheny has warned in recent weeks that if it were unable to secure new financing, its Allegheny Energy Supply subsidiary would be unable to conduct business - possibly forcing the company to seek bankruptcy protection.
"They are in pretty bad shape," said Christopher R. Ellinghaus, an energy analyst with Williams Capital Group. "You would definitely only do this if you were pretty desperate. I think they probably already have the financing lined up, they just needed approval to do it. It will give them a lot of much- needed breathing room."
Allegheny, like many other energy companies, aggressively pursued a national strategy to expand its energy trading business and sell power across the country. Those plans fell apart when the energy market collapsed, leaving Allegheny with debt levels that had ballooned to more than $5 billion.
In the fall, several Allegheny subsidiaries defaulted on their credit agreements, and the company's credit ratings were cut to below investment grade.
To turn things around, the company reduced its reliance on wholesale energy trading, trimmed its work force and canceled a number of power plant projects. It also suspended its dividend payments on its common stock.
Allegheny barely avoided bankruptcy in February by securing a $2.4 billion refinancing deal with its lenders. A short time later, it won shareholder approval for a plan to raise cash by selling stock privately.
But the company still needs money quickly to make its first debt payment of $250 million due Dec. 31.
Allegheny has said that rising natural gas prices and its weak financial performance this past year have contributed to its problems. Although the company is selling various assets, it might not happen soon enough to meet Allegheny's immediate needs.
Last month, Allegheny had to apply for a waiver from the SEC to sell securities because its equity-to-debt ratio had fallen below 28 percent - a guideline set by the SEC to determine the company's ability to repay debt.
"As a matter of regulatory policy, the commission has generally favored a minimum consolidated common equity component of 30 percent for registered holding companies," yesterday's SEC order stated.
"The commission has recognized, however, that special circumstances may warrant a lower equity component. ... Applicant's inability to engage in the financing transactions could lead to the bankruptcy of either company or both.
"In these circumstances, it seems appropriate to permit applicants to attempt to solve their short-term liquidity crisis rather than relegate them to liquidating or reorganizing their business in bankruptcy," the SEC said in its approval.
The company has yet to release financial statements for the final two quarters of 2002 and the first quarter of this year.
A comprehensive review of company finances has yet to be completed, but Allegheny has said that preliminary findings have shown accounting errors in previous earnings statements that were issued for the first two quarters of 2002.
"We're pleased the SEC has approved our request and we will continue to take the steps that are appropriate to strengthen our financial condition," said Cynthia A. Shoop, Allegheny's vice president of corporate communications.
Ellinghaus, who has a buy rating on the stock, said he believes the company will be successful, although it will not be easy.
"I believe that they'll be able to turn things around, particularly if they get this financing done fairly soon," Ellinghaus said. "It will give them a decent amount of time to restructure the company."
Shares of Allegheny fell 10 cents yesterday to close on the New York Stock Exchange at $7.52.