shareholders have been denied their collective sigh of relief.
After holding their breath through months of financial negotiations, Allegheny investors found themselves gasping Wednesday at how bleak the future might be. They skipped celebrating Allegheny's new $2.4 billion financing package -- which prevents an instant bankruptcy -- and instead agonized over the projections used to get the deal done.
In forecasts provided to its lenders, Allegheny predicted that profits will fall well short of expectations through 2004. The company estimated that 2003 earnings will come in at $1 a share and 2004 earnings will come in at 4 cents less than that. Adjusted for dilution related to Allegheny's new financing plan, those numbers would drop to 91 cents and 67 cents, respectively.
Prior to Allegheny's disclosures late Tuesday, analysts were projecting earnings of $1.29 this year and $1.51 next. Shares of Allegheny plunged $2 to $6.25 early Wednesday and fell even lower, dropping more than 30% to $5.62, after a conference call stirred up additional concerns.
Christopher Ellinghaus, an analyst at Williams Capital, had hoped to see the call swing Allegheny's stock in the opposite direction.
"We are somewhat perplexed at what appears to be very conservative -- projections," Ellinghaus wrote in a research note ahead of the call. "Management can restore hope in the company's financial prospects if they provide rosier guidance."
The company did reveal at least some incentive for providing cautious forecasts. The new financing requires it to deliver at least 75% of the EBIT (earnings before interest and taxes) that it projected for the bank group. And management admitted that its forecasts are "pretty conservative." But it did not back away from them and paint an upside picture as analysts had hoped.
Instead, the company seemed to rattle the market with its comments. It revealed "additional accounting errors" that will continue to delay financial reports that are already past due and could require additional restatements. It also found itself fielding worried questions about the company's exposure to soaring natural gas prices.
"They have no idea of the true commodity risk the firm currently faces," said Karl Miller, an industry critic whose firm specializes in acquiring and managing distressed energy assets.
Allegheny's refinancing package -- which triggered the conference call -- took a back seat in Wednesday's discussions. The company secured the financing by pledging nearly all of its unregulated assets as collateral and laying out a plan that relies on asset sales and equity issuances to meet debt payments as they come due.
Devil May Care
After examining the deal, Miller declared that Allegheny had "sold its soul to the devil" in order to buy itself more time.
"The banks now effectively own Allegheny Energy Supply," said Miller, who has no position in the company. This is "just another short-term solution to a long term problem."
Allegheny investors seemed particularly concerned by two planned convertible offerings that could significantly dilute their shares. The company plans to issue the first round of securities in the third quarter and the final round a year later. Together, the two offerings are expected to raise $705 million that the company can use to pay down debt.
Despite its drawbacks, the financing package dramatically lessens Allegheny's bankruptcy risk until 2005. And analysts generally viewed terms of the deal as acceptable.
Allegheny itself celebrated the long-awaited financing deal as a victory for the company that will allow it to rebuild itself and move on.
"This is an important milestone for Allegheny Energy as we work to restore the financial health of our company and refocus our core businesses," CEO Alan Noia said in a prepared statement Wednesday. "We appreciate our lenders' support."