New boss has incentive to work magic at Allegheny

December 31, 2003|By JAY HANCOCK

FRIDAY is Paul J. Evanson's big day. He gets options to buy 1.5 million shares of Allegheny Energy and, by my calculation, Allegheny stock units worth about $25 million.

Evanson is Allegheny's new boss. As of Friday his pecuniary interests, as the compensation consultants like to say, are aligned with those of his shareholders. The question is how he will pursue them.

His company, owner of Allegheny Power, is an embarrassment. Run into the ground by then-CEO Alan J. Noia, Allegheny stopped paying dividends on common stock a year ago, ending a string of more than 50 years of regular payouts.

Moody's Investors Service cut Allegheny's credit rating three times last year as Noia's experiment with deregulated energy sales exploded in his lap. Then Moody's downgraded Allegheny again in July - after Noia "retired," after a brush with bankruptcy, after Evanson arrived on a charger with a $6.3 million signing bonus and after things were supposed to be improving.

The 2002 financial results had to be restated, owing to numerous inaccuracies, and the company got around to disclosing its 2003 first-half results only a few days ago.

What a tale they told. Interest payments - largely on debt tied to soured investments - vacuumed up more than one-fifth of Allegheny's $1.1 billion first-half operating revenue. Not surprisingly, the top item in Evanson's in-box is to shrink Allegheny's $5.75 billion debt.

He's stretching. Allegheny, based in Hagerstown, sold its disastrous California power-supply contract to Goldman Sachs. But Allegheny took a huge bath in California, suffered another loss on the June sale of its stake in Pennsylvania's Conemaugh Generating Station and will take another big loss if it succeeds in selling Mountaineer Gas Services of West Virginia. (It has already written down a chunk of its Mountaineer investment, acknowledging that it overpaid.)

Now Evanson is talking about possibly selling core operations, which means one of the coal-fired electricity plants that represent Allegheny's heritage. Last summer, the company said it was considering selling and leasing back property at its Hagerstown headquarters.

Allegheny is even giving away assets, donating 740 acres to the nonprofit Canaan Valley Institute in West Virginia.

Too bad it has no profits to deduct the gift against. Allegheny lost $290.3 million in the six months ending June 30. It still hasn't disclosed results for the third quarter, but they aren't likely to be hugely improved.

Allegheny's auditor, PricewaterhouseCoopers, says there is substantial doubt about the company's ability to avoid bankruptcy. This warning is partly a formality, based on technical defaults involving Allegheny's delayed financial statements that no sane lender would use as a reason to call a note.

Certainly the stock market is not thinking bankruptcy. Allegheny closed yesterday at $12.95 a share, its highest point in more than a year and more than three times its low of $3.80, reached in October 2002. (In May 2001 the stock was nearly $55.)

Evanson has talked about selling new stock in about a year or so and restoring the common stock dividend as early as 2007. But it is too soon to declare Allegheny a buy. There are no certified third-quarter financial statements. Its first-half operating performance is obscured by asset sales, the liquidation of trading positions and other one-time events.

The nation still has too many electricity generators, which casts doubt on Allegheny's ability to get a good price on plant sales or increase generation profits. And the debt problem is huge: Almost $600 million comes due next year and some $1.7 billion comes due in 2005.

Perhaps the most amazing aspect of Allegheny's implosion - seen only in retrospect - was the laxity in financial reporting under the previous regime.

The company understated the cost of gas purchases and worker-compensation liabilities and overstated results from trading operations, among other items. Evanson is replacing two-thirds of Allegheny's 120-person accounting group.

"There was really no cash management to speak of in the company," Evanson said at an industry conference a couple of months ago.

That is a devastating comment, and it will provide a nice background serenade for the appearance of Allegheny's proxy statement in a few months. Among other things, the proxy will detail the golden parachutes Noia and other departed executives got for messing up the company. Watch this space.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.