After months of negotiations and setbacks, Allegheny Energy Inc. said yesterday that it nailed a crucial $2.4 billion refinancing deal with its lenders to ease growing concerns that the Hagerstown energy company would be forced into bankruptcy.
Under the deal, subsidiary Allegheny Energy Supply Co. will receive $470 million in additional financing and refinance $1.64 billion of existing debt, which will be secured by substantially all its assets, according to a report filed with the Securities and Exchange Commission as the markets closed yesterday.
Allegheny, the parent, will use the remaining $330 million to refinance existing debt and letters of credit, the filing stated.
"This is obviously positive," said Craig Shere, an energy analyst at Standard & Poor's Investment Advisory Services. "When the option is bankruptcy, this is better than the alternative. The million dollar questions are: Where will shares trade in the morning, and what kind of financing costs and share dilution will be involved in this?
"But clearly, this is better than not having a deal," Shere said. "They were in default on things they couldn't repay. It's just that simple. Now, you're looking at the prospects of financial stability."
Shares of Allegheny rose 44 cents yesterday to close on the New York Stock Exchange at $8.20 and continued rising in the aftermarket.
The completion of the deal gives Allegheny time to restore financial order after months of chaos that started in September when it fired the head of its energy-trading unit for alleged violations of the company's conflict-of-interest policies.
Since then, a steady flow of bad news has battered Allegheny, which has 1.5 million electricity customers and 230,000 natural gas customers in Maryland, Ohio, Pennsylvania, Virginia and West Virginia.
That same month, Merrill Lynch & Co. Inc. sued Allegheny for failing to buy out the investment firm's remaining 2 percent equity stake in the trading unit that Allegheny purchased in March 2001 for more than $490 million. Allegheny countersued, accusing Merrill Lynch of falsely inflating revenue and trading volume at the business to make it more attractive for sale.
On Oct. 1, Moody's Investor Services downgraded Allegheny's credit rating to below investment grade. Two subsidiaries, Allegheny Energy Supply and Allegheny Generating Co., defaulted on several key credit agreements a week later and its stock price plunged by almost 50 percent.
With $5.1 billion in debt, Allegheny moved quickly to reduce its costs and preserve cash to strengthen its balance sheet. Starting in the third quarter of last year, the company scaled back its energy trading activity, canceled the development of several generating facilities, saved $700 million in capital expenditures over the next several years, reduced its work force by 10 percent and suspended the dividend on its common stock.
But the key to its survival, Allegheny warned several times in recent months, would require a successful refinancing deal with its lenders.
Under the new credit facilities, Allegheny Energy Supply will be required to repay $250 million in the fourth quarter of this year; $250 million in the third quarter of 2004; and $150 million in the fourth quarter of 2004, said Chairman and Chief Executive Officer Alan J. Noia. The parent company will repay $7.5 million each quarter under the new facilities.
"While our short-term liquidity needs have now been addressed, we must continue to concentrate on meeting our objectives for raising equity, selling assets and further reducing costs in order to achieve long-term financial stability," Noia said.
The company is pursuing sales of some generating facilities, gas distribution and other regulated assets such as contracts and tolling agreements, said Cynthia A. Shoop, vice president of corporate communications.
Allegheny is examining the possibility of a private equity sale. It also could issue $330 million in 8 percent mandatory convertible debt in the third quarter of 2003 and $375 million in 8 percent mandatory convertible debt in the third and fourth quarters of 2004, according to the report filed with the SEC.
"This is all good in terms of avoiding bankruptcy," said Chris Ellinghaus, an energy analyst at Williams Capital Group. "But I'm still trying to figure out what it means in the long run. Their income projections are very, very low, which is a little disappointing. If it means they'll have zero earnings over the next few years, that wouldn't make me too happy."
Allegheny projected in its filing that consolidated net income for 2003 and 2004 would be $131 million and $125 million, respectively. Annual net income was $258 million in 1999.