Credit default by Allegheny jolts shares

49% tumble by stock of Hagerstown utility leaves it at record low

Earnings warning issued

Growing crisis may mean bankruptcy, analysts say

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

Continuing its downward spiral, Allegheny Energy Inc. admitted yesterday that it is in default on some credit agreements after the troubled Hagerstown energy company declined to post additional collateral with several trading firms.

Struggling with a credit crunch, a weakened wholesale energy market and problems associated with its trading business, the Hagerstown utility also warned yesterday that it would lower its guidance for this year's and next year's earnings per share.

Shares of Allegheny plunged $3.72, or 49 percent, on the New York Stock Exchange yesterday to close at an all-time low of $3.80 a share. Trading volume was an all-time high 12,674,400 shares.

The earnings revision and defaults follow Moody's Investors Service's downgrading of Allegheny's credit rating last week to below investment grade, triggering collateral calls from "counterparties" that do business with Allegheny Energy Supply, an Allegheny subsidiary.

Allegheny said it is continuing discussions with its bank lenders in an effort to obtain waivers and additional financing, but analysts said the worsening financial crisis could send the company into bankruptcy.

"If they could come to terms with the banks and get letters of credit that would allow them to post collateral with trading partners, they could make it into next year all right," said Craig Shere, equity analyst with Standard & Poor's Investment Advisory Services LLC.

"But I'm not sure what assets they could post. Allegheny's got money due the first quarter and due in June next year. There's a possibility that they could go into bankruptcy. It's not certain.

"Hedging positions they took for the California electricity supply contracts have consumed a lot of cash flow this year," Shere said. "That, combined with the worsening operating performance and the cash calls resulting from the credit downgrade, has resulted in a desperate situation."

Allegheny officials declined to identify the trading parties and said it would reveal firm figures for earnings guidance at its third-quarter earnings conference early next month.

The company said it would not post additional collateral with counterparties until it concluded discussions with its banks.

A wave of credit downgrades has hurt several of the nation's top energy companies by forcing them to promise cash or other assets as collateral for long-term contracts.

"We're working through this, and we're hoping to come out on the other end in better shape," said Cynthia A. Shoop, Allegheny's vice president of corporate communications. "We believe that it's in the best interest of all our constituents to not go [the bankruptcy] ... route. We're doing everything we can to avoid [bankruptcy].

`Adequate cash'

"We do have adequate cash on hand to operate our businesses."

Allegheny's 1.5 million electricity customers and 230,000 natural gas customers in Maryland, Ohio, Pennsylvania, Virginia and West Virginia should not be affected, she said.

Allegheny, like many other U.S. energy companies, has been hit hard by troubles in the energy industry, including Enron Corp.'s collapse, the California power crisis and trading schemes.

The energy-trading unit that Allegheny bought for $490 million last year from Merrill Lynch & Co. Inc. is exacerbating its problems.

On Sept. 5, Allegheny fired the head of its trading unit for violating company's conflict-of-interest policies.

And Allegheny filed a $1 billion lawsuit against Merrill Lynch last month for fraud and breach of contract.

Allegheny claims that Merrill Lynch used "wash" or "round-trip" trades to artificially inflate the trading unit's revenue and trading volume, which made the business more attractive for sale.

Allegheny is also seeking to enforce a $4.5 billion contract with California to supply the state with electricity over a 10-year period.

The company has moved to improve its balance sheet by trimming its work force, reducing capital spending by about $700 million over the next several years and reducing its reliance on wholesale energy trading.

Allegheny is also looking at issuing $400 million to $600 million in equity in the fourth quarter this year to improve liquidity.

Sale of assets weighed

The utility also is exploring the sale of assets to improve its cash crunch, although the company has revealed nothing specific about the sale.

"It appears to us that [Allegheny] will not be able to sell enough equity to please the rating agencies and restore its investment grade ratings," said Thomas E. Hamlin, a Wachovia Securities analyst in a review of the power sector.

"Thus, we believe management will be forced to renegotiate its [California] contract, seek a buyer for noncore assets, or even sell the total business."

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