Shares of Allegheny Energy jumped more than 15% on Friday after the Wall Street Journal reported that the troubled power company is closing in on an agreement with its creditors that would remove the threat of bankruptcy looming over Allegheny in recent months. The stock also became too hard to resist for investors after several investment firms upgraded their ratings on shares of Allegheny.
In early Friday afternoon trading, the stock was up more than 15%, or $1.28, to $9.79, albeit a far cry from the stock’s 52 week high of $43.86.
According to the Journal story, representatives of Allegheny and major creditor groups in recent days have agreed on a “framework” for an agreement. Under the deal, existing lenders and bondholders would infuse about $470 million into the company, resolving Allegheny’s liquidity difficulties. In return, creditors would get collateral on approximately $1.7 billion of existing credit, which is currently unsecured.
However, Allegheny and its creditors have yet to hash out final terms for the new financing, the Journal reported, and if final details can’t be pulled together, Allegheny and its unregulated subsidiary are expected to file for Chapter 11 protection. “That’s something we all want to avoid, along with the company,” the Journal quoted one creditor as saying.
Shares of Allegheny were also boosted at the end of the week by ratings upgrades issued by Goldman Sachs and Credit Lyonnais. Goldman Sachs raised its rating on the company to “outperform” from “in-line,” while Credit Lyonnais upgraded Allegheny from “hold” to “add.”
The Journal story dovetails with a recent report issued by Williams Capital Group analyst Christopher Ellinghaus stating 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.”
While Ellinghaus acknowledged that a successful liquidity infusion doesn’t resolve all of the company’s immediate issues, “it should effectively eliminate the bankruptcy risk priced into the stock.”
In perhaps another sign that a new credit agreement is imminent, Allegheny on Wednesday proposed to strip its shareholders of a right that the company says is restricting its ability to raise much needed capital as it scrambles to avoid slipping into bankruptcy.
Allegheny wants to eliminate so-called “preemptive rights” for its shareholders. Those rights, included in the company’s charter, prevent Allegheny from issuing, without shareholder approval, a private placement of common equity or hybrid “equity-like” debt securities that may dilute exiting shareholders.
“The recent credit crisis in the energy sector has highlighted the importance of maintaining maximum flexibility to raise capital from any source,” Allegheny said in a filing made at the Securities and Exchange Commission. The company said the preemptive rights serve as a “significant impediment” to any private sale of equity securities for cash to institutional or strategic investors. “Such issuances of equity can be especially important in times like these when both Allegheny and the capital markets, at least for energy companies, are under great stress.”
Allegheny has been approached by several well known firms that have expressed an interest in making equity investments in the company, primarily through Allegheny’s issuance of debt securities convertible into common stock or debt securities with warrants to buy common stock of Allegheny. “Unless the current preemptive rights provision in the charter is eliminated, however, negotiating and completing a private sale of equity or right to acquire equity would likely be extremely difficult,” Allegheny said.
Ellinghaus sees the Allegheny proposal in a very positive light. “We believe that Allegheny’s filing prepares the way for a potential private placement in the first quarter subsequent to the announcement of a new bank credit agreement that will provide roughly $2 billion in new liquidity,” wrote Ellinghaus in a research note issued Thursday.
“We also believe the timing of the offering presages an imminent announcement of the completion of the bank credit agreement,” the analyst said. “Otherwise, a private placement would not seem likely given that a bankruptcy filing would inevitably follow a failure to complete the bank financing.”
Allegheny Energy earlier this month said that its subsidiaries, Allegheny Energy Supply Company LLC and Allegheny Generating Co., have received extensions on waivers from bank lenders under their credit agreements through Jan. 14, 2003. As the company noted earlier this month, 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.
In December, after a lengthy financial review, Allegheny Energy reported a $334.4 million net loss (or $2.67/share) for the first nine months of 2002 and found that accounting errors will force it to restate first and second quarter earnings. The company said it would release third quarter earnings data when the comprehensive review has been completed and will issue restated financial statements for the first and second quarters of 2002 as soon as possible thereafter.
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