Capping a nail-biting day for Allegheny Energy investors, the Maryland-based power company last Tuesday offered up good news for its shareholders. Allegheny said that based on substantial progress made in negotiations with lenders, two of its subsidiaries received extensions on waivers from bank lenders under their credit agreements through the end of this month.

Allegheny previously announced that the subsidiaries — Allegheny Energy Supply Co. LLC and Allegheny Generating Co. — had received waivers, which extended through Jan. 14, from their bank lenders with regard to certain covenants contained in their credit agreements. These waivers have now been extended through Jan. 31.

Allegheny and its subsidiaries are continuing discussions with bank lenders under these and other facilities, as well as with other lenders and trading counterparties, regarding outstanding defaults, required amendments to existing facilities, and additional secured financing.

Allegheny also reiterated that if it is unable to successfully complete negotiations with these lenders, including arrangements with respect to inter-creditor issues, it would likely be obliged to seek bankruptcy protection.

Shares of Allegheny have been on somewhat of a roller-coaster ride in recent weeks. The stock fell 1.53% to $9.65 last Tuesday, no doubt reflecting nervousness on the part of Wall Street as to whether this latest round of waiver extensions would come through for the company. The stock had dipped to $9.52 by Friday morning.

But the stock earlier in the month vaulted more than 15% after the Wall Street Journal reported that the troubled power company was closing in on an agreement with its creditors that would remove the threat of bankruptcy. Shares of the company were also boosted after several investment firms upgraded their ratings on shares of Allegheny (see NGI, Jan. 13).

Later in the week, Standard & Poor’s (S&P) lowered its corporate credit ratings on Allegheny and its subsidiaries to ‘BB-‘ from ‘BB’ and maintained a CreditWatch with negative implications on the ratings. The ratings affect about $5 billion in Hagerstown, MD-based Allegheny’s outstanding debt.

“The downgrade is based on Standard & Poor’s expectation that Allegheny’s consolidated funds from operation to interest coverage will be closer to ‘2x’ coverage for 2003 and 2004, substantially weaker than previously anticipated,” S&P analyst Tobias Hsieh said. “This is largely due to higher interest costs associated with likely refinancing actions and other restructuring charges.”

The rating remains on CreditWatch negative because the company still has not completed its negotiations with the lenders on the terms of a new credit facility that is intended to address the current liquidity crisis.

But Williams Capital Group analyst Christopher Ellinghaus recently said that Allegheny is closing in on a resolution of the “critical liquidity issues” that have brought the company close to bankruptcy and decimated its stock. Ellinghaus has initiated coverage on shares of the company with a “buy” recommendation.

“We believe [Allegheny Energy] is very close to completing multiple new bank credit lines for roughly $2 billion that will enable it to meet its liquidity needs through 2005,” wrote Ellinghaus. “We believe this fresh infusion of liquidity will give Allegheny time to restructure its wholesale operations, while also providing time for commodity energy market fundamentals to recover.”

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