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Allegheny Energy in default on loans

October 09, 2002|by PEPPER BALLARD

pepperb@herald-mail.com

Hagerstown-based utility holding company Allegheny Energy Inc. said Tuesday it was in default on some of its loans after it failed to post additional collateral following a credit downgrade.

Allegheny also said that because of continued weakness in the wholesale energy market, fiscal 2002 and 2003 earnings will be lower than expected.

Moody's Investor Service last week downgraded the company's credit rating to "junk" status. At the time, Allegheny said that Moody's action wouldn't trigger any defaults or prepayment obligations under its debt agreements.

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Allegheny spokeswoman Cynthia Shoop said the company's energy trading parties asked for more collateral from Allegheny based on the downgrade and the financial risk to the trading partner.

"We told them 'we'd like to work with you but we're making the decision not to pay that extra money right now,'" Shoop said.

She said the company instead has decided to "conserve the cash to run the business."

Allegheny is continuing to trade and did pay some extra collateral to a few unnamed counterparties, Shoop said.

Allegheny has entered talks with lenders to try to obtain default waivers and extra funding.

Shares of the company plummeted on the news. They closed at $3.80 on the New York Stock Exchange, down $3.72, or 49 percent, on heavy volume. The day's weakest level of $3.25 was a new 52-week low. Allegheny's prior low of $7.52 was set Monday.

Shoop said she doesn't comment on stock prices.

In July, Allegheny stood by its 2002 earnings outlook of $2.50 to $2.70 a share, and its 2003 forecast of $2.60 to $2.80 a share. Analysts surveyed by Thomson First Call are looking for the company to earn $2.28 a a share this year and $2.19 a share in 2003.

"We continue to believe our business is fundamentally sound and that we'll work through these issues and bolster our performance," Shoop said.

Allegheny, like most of the power industry, has been forced to cut capital spending and lay off employees because of weak earnings due to poor power prices, among other factors.

"Basically they can't pay their bills," said Lance Nigh, president of the local chapter of the Utility Workers Union of America.

Shoop said the company is paying its bills and has adequate cash on hand to run the business.

Nigh, a lineman for the company, said after the company offered about 650 nonunion employees stock options and early retirement plans in July, he and other employees at the utility holding company are worried about their jobs.

"They're going to have to trim the fat somewhere - I'm guessing they're going to have to make layoffs," he said.

Shoop said the announcement will have no effect on the approximately 5,700 employees' jobs. She said about 300 workers have taken early retirement since the offer was made and the remaining 350 will stagger their retirements through December.

She said the company is working on ways to improve its financial situation by scaling back operating expenses by $45 million, canceling several power plant construction programs that reduces capital expenditures by $700 million and by selling some of the company's generating assets.

Nigh said there is little communication between company executives and workers. He said the UWUA has ideas on how to save the company money.

"Nobody knows what's going on," he said.

Allegheny's utility division provides electricity and natural gas to about 1.7 million customers in Maryland, Ohio, Pennsylvania, Virginia and West Virginia.

Shoop said, "We don't anticipate any effect on our customers."

Last month, Allegheny filed a lawsuit against Merrill Lynch & Co., alleging that Merrill inflated revenue of an energy-trading unit through a series of so-called wash trades with Enron Corp. before the business was sold to Allegheny in 2001.

The lawsuit was filed the day after Merrill filed suit in federal court seeking to collect the $115 million that Allegheny allegedly owes the firm as part of the deal.

The Associated Press contributed to this story.

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