Allegheny plans to cut 600 positions

Energy company halts plans to build 2 plants

It predicts lower profits

Prices, weather, economy noted as action is taken

July 09, 2002|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Allegheny Energy Inc. said yesterday that it will slash 600 jobs and cancel two power plant construction projects as weak energy prices, mild weather and a slow economy take a toll on earnings.

The Hagerstown-based energy company, which owns utilities in Maryland and four other states, said its annual profit will fall substantially below the $3.60 to $3.70 a share that was originally expected. Allegheny dropped its earnings expectations by about 30 percent, to $2.50 to $2.70 a share. Last year, the company earned $3.73 a share.

Allegheny made its earnings revision and cutbacks at a difficult time for energy companies. Companies including Texas-based Williams Cos. and Dynegy Corp. have taken similar steps.

While merchant energy companies were pounded by the Enron debacle and recent admissions that some engaged in sham energy trades to inflate revenue, investor wariness in the industry has spread to integrated utilities such as Allegheny, which have traditional delivery companies that offer more stable revenue along with riskier trading operations.

"The power industry, more specifically the nonregulated industry, is undergoing extreme pressure right now," said Jeffrey Gildersleeve, an energy analyst with Argus Research. "Weak power prices and over-leveraged balance sheets have combined to give these companies a lot of trouble. I think the market definitely expected an earnings cut, but Allegheny's cut was a lot deeper than expected.

"The more volatile and unpredictable earnings are, the less investors are willing to support that company ... the more wary they become of management," Gildersleeve said.

Allegheny's stock price sank $2.08 to close on the New York Stock Exchange at $23.95, its lowest level in two years.

Company executives said earnings also were hurt by unexpected outages at Allegheny's Midwest power plants. The cost of buying replacement power was $30 million.

During a conference call with analysts yesterday, Chief Financial Officer Bruce Walenczyk said Allegheny will immediately reduce pretax operating expenses by $45 million for the remainder of this year. A breakdown of those numbers includes about a $15 million spending decrease in its transmission and distribution business, $21 million in its supply business and up to $7 million in corporate services.

Those reductions will include spending for advertising, outside consultants, development and new hires, Walenczyk said.

Allegheny also will save about $700 million over the next several years by canceling plans to build a 1,080-megawatt plant in La Paz, Ariz., and a 88-megawatt plant in St. Joseph, Ind.

Job cuts from early retirement plans and normal attrition will save about $5 million this year and $40 million to $50 million a year thereafter, he said.

"We've worked pretty hard getting our hands around the balance of 2002 ... essentially re-forecasting what we expect from June to December," Walenczyk said. "We're confident with our ability to hit these numbers. We do believe Allegheny continues to have a strategy that will lead to success."

Last week, a Merrill Lynch analyst cut his rating on Allegheny to near-term neutral from buy and long-term neutral from strong buy. A J.P. Morgan analyst cut his 2002 earnings estimate for Allegheny to $3 a share from $3.65, and to $3.40 a share from $3.90 next year.

Yesterday's earnings revision led other analysts to question Allegheny's strategy for the future. Allegheny is planning to sell $400 million to $600 million in common shares or convertible securities this year. Allegheny also said it expects energy trading to contribute only 10 to 15 cents a share this year, down from the 45 to 50 cents it previously expected.

Wachovia Securities analyst Tom Hamlin asked during the conference whether there would be a review of Allegheny's generation and trading operations, and "whether you want to be in this type of business ... or whether you plan on getting out."

Michael P. Morrell, president of Allegheny Energy Supply, which handles energy marketing for Allegheny, replied, "We will not be developing any further plants at this time. ... But let's not talk about us getting out of the generating business. We are very good at that."

Morrell said his company has reduced its trading activity and cut eight positions in the second quarter. Forty-one traders and 88 support staff are in the marketing and trading business.

"Marketing and trading will be carefully reviewed to see if further reductions are warranted," he said.

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