Investors in Allegheny Energy no doubt breathed a collective sigh of relief last Tuesday after the company and its Allegheny Energy Supply Co. said that they have entered into agreements with lenders on new and restructured credit facilities totaling $2.4 billion.

Proceeds from the financing will be used to refinance existing debt and for general corporate purposes. The announcement effectively removes the cloud of possible bankruptcy that has been hanging over the Hagerstown, MD-based power company in recent months.

The new credit facilities at Allegheny Energy Supply will provide $470 million of additional funding and refinance $1.637 billion of existing debt and letters of credit including: (i) $895 million outstanding under revolving credit agreements (ii) $269 million outstanding under a synthetic lease for the Springdale generation project and (iii) $380 million of A-Note debt in the St. Joseph synthetic lease, which will be restructured and assumed by Allegheny Energy Supply. The majority of Allegheny Energy Supply’s restructured debt is secured by substantially all of its assets.

The new credit facilities at Allegheny Energy are unsecured and will refinance $330 million of existing debt and letters of credit.

The new facilities at Allegheny Energy Supply require repayments of $250 million in the fourth quarter of 2003 and $250 million and $150 million, respectively, in the third and fourth quarters of 2004. The new facilities at Allegheny Energy require repayment of $7.5 million each quarter. The facilities also have customary provisions requiring prepayments out of the proceeds of asset sales and debt and equity issuances.

“While our short-term liquidity needs have now been addressed, we must continue to concentrate on meeting our objectives for raising equity, selling assets, and further reducing costs in order to achieve long-term financial stability,” said Allegheny Energy Chairman Alan J. Noia. “In the coming months, we will be focused on these initiatives to improve our financial condition and strengthen our balance sheet.”

Allegheny Energy noted that it has already taken steps to reduce its cost structure, preserve cash and strengthen its balance sheet. Beginning in the third quarter of 2002, the company scaled back its wholesale energy trading activity, cancelled the development of several generating facilities, saving $700 million in capital expenditures over the next several years, reduced its workforce by approximately 10% and suspended the dividend on its common stock.

Meanwhile, Allegheny Energy on Tuesday detailed certain projections related to its future operating performance in a filing made at the Securities and Exchange Commission. The information was prepared for the company’s lenders as part of the restructuring and financing negotiations and includes balance sheets, income statements, and cash flow statements for Allegheny Energy and Allegheny Energy Supply.

The information includes a projection of 2003 and 2004 consolidated net income of $131 million and $125 million, respectively. Among other things, these preliminary projections give effect to the new and restructured credit facilities and assume that Allegheny Energy issues $330 million of 8% mandatory convertible debt in the third quarter of 2003 and $375 million of 8% mandatory convertible debt in the third and fourth quarters of 2004 to meet scheduled debt amortization. They do not include any assumptions regarding any sale of assets.

Analysts at Williams Capital Group last week said that the $2.4 billion in new and restructured credit agreements effectively eliminates bankruptcy risk for Allegheny until April 2005, when almost $1.6 billion of the consolidated facilities mature. At the same time, Williams Capital Group said that it was “pretty disappointed” with the cash flow and net income projections provided by Allegheny in the SEC filing.

“In our view, Allegheny’s earnings and cash flow estimates are unrealistically low,” wrote Williams Capital analyst Christopher Ellinghaus in a research note. “We believe that Allegheny’s projections, which exclude any potential asset sales and hence any additional debt amortization beyond mandatory amounts, represent worse case scenarios.”

In the SEC filing, Allegheny also forecasted basic earnings per share on a consolidated basis of $1 in 2003 and 96 cents in 2004. But those estimates are well off Thomson First Call’s earnings per share projection of $1.29 in 2003 and earnings per share of $1.51 in 2004. As a result, Wall Street hammered shares of Allegheny in Wednesday’s trading session. The stock plunged more than 32% to finish at $5.55 that day, but had recovered some ground at the week, with shares trading at $5.82 at one point on Friday.

Adding to investor concerns was the disclosure that Allegheny Energy has unearthed more errors in its financial statements and may have to restate unaudited financial data it released for the nine months ended Sept. 30.

“The company’s comprehensive review of its financial records is continuing,” Chief Financial Officer Bruce Walenczyk said in a webcast analyst conference Wednesday, as reported by Dow Jones Newswires. “Since the filing of unaudited financial statements for the period ending Sept. 30, 2002, the company has discovered additional errors.” Dow Jones noted that Allegheny hasn’t released audited third quarter earnings for 2002 or full year 2002 earnings due to the ongoing review.

Allegheny has determined that it will have to restate first and second quarter 2002 financial statements for AYE Inc. and certain subsidiaries, Walenczyk said, according to Dow Jones. In addition, the company anticipates that it will have to restate the financial data for the nine months ended Sept. 30, 2002.

Williams Capital lowered its 2003 and 2004 recurring operating earnings per share estimates for Allegheny to $1.04 from $1.38 in 2003 and to $1.15 from $1.89 in 2004. The research firm said that risk at Allegheny “remains considerable” given the remaining debt maturities from 2003-2004.

Also last week, Allegheny said that Allegheny Energy Supply signed a definitive agreement to sell its 83 MW share of the coal-fired Conemaugh Generating Station in Pennsylvania to UGI Development Co. for $51.25 million, subject to a $3 million credit in favor of UGI Development.

Allegheny Energy Supply acquired the 4.86% interest in the 1,711 MW plant, located near Johnstown, PA, in January 2001. The sale has been approved by the board of directors of each company and is subject to customary closing conditions and regulatory approvals. The companies anticipate closing the transaction as soon as all regulatory approvals are received. UGI Development is a subsidiary of UGI Corp.

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