Allegheny Energy ( AYE) has some serious unfinished business to address before it can close the books on its worst-ever year. The Maryland-based utility faces a year-end deadline to negotiate a critical refinancing package with its lenders. If successful, Allegheny should have enough money to carry it through a possible turnaround year. If not, the company could very well become the first major energy trader since Enron to seek Chapter 11 bankruptcy protection. Allegheny, which has bought time with two bank waivers already, remains cautiously optimistic. "Allegheny Energy and its subsidiaries are continuing discussions with their bank lenders -- and are optimistic that they will reach an agreement that provides the necessary liquidity and funding for both near- and long-term financial flexibility," the company told investors after being granted a second extension by its banks. Analysts tend to believe Allegheny's lenders will come through. But some bondholders, pointing to strict borrowing limits in an Allegheny bond indenture, are already crying foul. Shares of Allegheny rose 22 cents, or 3.1%, to $7.25 on Friday. The stock has lost roughly half its value over the past three months, and is down 80% for the year.
More ominously, Allegheny also admitted that only its lenders could save it from likely bankruptcy. Even so, Standard & Poor's said Allegheny was just as likely to secure the financing as it was seven weeks earlier, when bank defaults, credit downgrades and dividend cuts hammered the company's stock. And most observers believe Allegheny can renegotiate its financing if lenders are willing to interpret its balance sheet sympathetically. "We think this will occur as the SEC has authorized $2 billion of asset coverage -- and lenders are unlikely to bankrupt an otherwise ongoing business," Lehman Brothers analyst Dan Ford wrote late last month. Some critics nevertheless question whether Allegheny's existing bond indenture entitles the company to $2 billion worth of new secured financing, even if the bankers are willing to extend it. "We're not sure that financing is even allowable," said a utility fund analyst who asked to remain unnamed. "We've calculated a borrowing capacity of about $1.2 billion."
In its latest quarterly report, Allegheny Energy Supply listed $6.3 billion worth of assets on its balance sheet. Simple math would therefore indicate that the division is entitled to pursue at least $1.89 billion of the $2 billion in secured financing it's currently seeking. But Allegheny critics are calling the reported value of those assets, which have remained static throughout serious industry changes, seriously overblown. Contacted this week, Allegheny pointed to its second-quarter report -- filed nearly five months ago -- for the most comprehensive, up-to-date asset valuations the company has available. But the company said it didn't even consider the value of its assets when deciding to pursue $2 billion in fresh funds. "That's how much we think we need to address our liquidity issues," Allegheny spokeswoman Debbie Beck said.
"I don't even know if they're sellable," one critic said. "But I definitely know they're not worth $1 billion." These three assets -- the trading portfolio, trading business and peaking plants -- account for 27% of Allegheny Energy Supply's reported assets, critics argue. If their values were written off entirely, critics say, the company would see its secured borrowing power drop from $1.89 billion to $1.2 billion. Even with $1.6 billion in secured financing -- the midpoint between the most bearish and bullish targets -- Allegheny still would face challenges, analysts say. "Liquidity remains tight for next year, and we expect sources of cash to equal uses," Deutche Bank analyst Jay Dobson wrote in early December. "Even with the refinancings, Allegheny remains a high-risk company with little room for operating error." Both Dobson and Ford have neutral ratings on the stock.