The merchant energy sector is starring in another summer horror show.

The latest version casts Allegheny ( AYE) and Mirant ( MIR) in the roles previously filled by Dynegy ( DYN) and Williams ( WMB).

While the plot may be numbingly familiar, it does offer a few new twists. The starring companies are still racing to escape the bankruptcy monster -- but Allegheny already has used up a lot of cool tricks to dodge bankruptcy once, and Mirant has decided to stop running and just play tough guy instead.

So far, the market has had mixed reviews. Investors panicked at a surprising new bankruptcy warning from Allegheny late Monday, pushing the stock down 6.6% to $8.70 at midday Tuesday. But they weren't quite as alarmed at the latest bankruptcy chatter surrounding Mirant: After receiving a fresh credit downgrade from Standard & Poor's late Monday, Mirant was down 3.1% at $2.48 at midday Tuesday.

Still, investment strategist Peter Cohan is bracing for another hairy ride. And he points out that last summer's hero remains missing from the current merchant energy saga: "While Dynegy and Williams managed to squeak through with help from bottom-fisher Warren Buffett, Allegheny and Mirant appear to be stuck," said Cohan, who has no investments in the merchant energy sector. "This leads me to believe that Allegheny and Mirant may have a lot harder time escaping with their lives."

But Blaylock analyst Lasan Johong is holding out for another happy ending. He is convinced that Allegheny's new CEO will find a way to pull the company out of its current fix. And he's almost certain that Mirant will escape bankruptcy as well. "Let me qualify this by saying that I can't account for people doing stupid things and being totally irrational," said Johong, who owns no stock in either company. Still, Johong admits that he's probably the only analyst who still recommends buying Mirant shares. He doesn't formally cover Allegheny.

Familiar Scene

To Allegheny investors who were looking for a relatively smooth ride until 2005, Monday's after-market bankruptcy warning came as a nasty surprise. Just four months ago, Allegheny had finally snagged the elusive financing that was supposed to carry the company through this year and next. Now, seemingly out of the blue, Allegheny is in danger once again.

Under public utility laws -- and the company's own financing terms -- Allegheny is required to maintain a common equity-to-capital ratio of at least 28%. But recent writedowns, coupled with the company's lagging performance, have pushed Allegheny below that threshold. So Allegheny is again at the mercy of those who could pull the plug.

The company is now seeking help from the Securities and Exchange Commission -- which must approve all utility offerings -- and its own lenders to dodge another crisis.

"Without these authorizations," Allegheny announced Monday, "the company has very limited flexibility to meet expected liquidity requirements or to address contingencies. ... If the company were unable to secure its liquidity position through the steps it is currently pursuing, it would be required to review other alternatives, including the possibility of seeking protection under the bankruptcy laws."

To some -- especially investors who suffered through Allegheny's first race against time -- the company's urgent dialogue carries a familiar ring. But the dark foreshadowing, offered last time around by cautious critics, is gone. It has instead become reality.

In an exclusive late last year, TheStreet.com raised questions about whether Allegheny really qualified for all the financing it was seeking. Specifically, it warned that Allegheny faced writedowns that -- if taken promptly -- would slash its borrowing power. The company nevertheless moved forward and inked a $2.4 billion financing deal. "That's how much we think we need to address our liquidity issues," Allegheny explained at the time.

But late Monday, Allegheny revealed that asset writedowns and poor operating results have put the company in jeopardy. As predicted by some, Allegheny wound up writing down the value of some trading and power assets. And in a clear surprise to others, it fell short of hitting financial targets that were once viewed as modest.

Williams Capital analyst Christopher Ellinghaus had said in February, "We are somewhat perplexed at what appears to be very conservative ... projections. Management can restore hope in the company's financial prospects if they provide rosier guidance." Instead, Allegheny has only managed to disappoint.

"As previously announced," Allegheny reminded Monday, "the company's financial performance in early 2003 has been substantially weaker than earlier projections."

One energy fund manager, looking at both Allegheny and Mirant, said simply: "It's not pretty. That's for sure."

Happy Ending?

Right now, Mirant investors are the tougher bunch to scare. The really frightened ones have already fled. And the rest seem willing to stomach the ride. Blaylock's Johong, for one, doubts they'll meet with disaster in the end. "I think Mirant's chances of Chapter 11 have gone down, not up ... although I know that would come as a shock to most people," he said.

Certainly, S&P has taken a different view. Late Monday, the ratings agency slashed Mirant's credit to a deep-junk CC -- and warned of a possible cut to D -- after reviewing the company's desperate financing strategy. Mirant has asked both its bondholders and its bankers to approve a prepackaged bankruptcy plan in case an out-of-court restructuring plan falls through. And S&P warns that the bankruptcy plan, requiring fewer votes of approval, would be the easier one to push through.

But Johong believes that Mirant will ultimately win its current game of hardball. He insists that all parties will come out ahead by resolving the crisis out of court. And he gives Mirant an 80% chance -- at worst -- of dodging bankruptcy. "I'm assuming that everyone is playing a perfect chess game and making moves that are perfectly logical," he admitted. "But it would be mind-boggling to think they would do something as stupid as Chapter 11."

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