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Wings melted in Allegheny's wild ride to the sun, but all may not be lost

October 14, 2002|by TIM ROWLAND

If ever there were a time to get together and pull for the home team, this is it. Allegheny Energy, the Tri-State area's lone home-based entry in the Fortune 500, has absorbed several body blows this fall. It's become ensnared in contractual litigation with a Wall Street financier, seen its credit rating erode and its stock plummet, announced the suspension or reduction of dividends and even defaulted on loans.

"It's sad news," a local businessman said. "Not just financially sad, but emotionally sad for the community."

Speaking solely on the basis of community status, what Enron was to Houston, Allegheny is to Hagerstown. Everyone knows somebody who works there. CEO Al Noia is a familiar face around town. Everyone has watched the company grow into a national player from its sleepy old Potomac Edison days. Plenty of old Hagerstown money is bound up in Allegheny stock, once the perfect investment for a conservative community - a boring, slow-growth company that under old regulations was guaranteed to turn a profit and for which dividends were regular as rain.

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But with deregulation came new opportunities - and no one seemed to believe that the outcome of a new opportunity can be bad as easily as it can be good.

In fact, the greatest opportunity of all seemed to present itself a summer ago, when California began to go dark. Demand seemed to be the order of the day, and a number of generating companies rushed for the door of opportunity - and all slammed into each other on the sill.

Mighty financial commitments were tendered, and lines of credit were tapped as companies - Allegheny included - scrambled to build the turbines that would hum a smooth flow of power to the West Coast and a smooth flow of cash back to the East.

Meanwhile, the corporate culture of utility companies was simultaneously changing and staying the same. Horizons were expanding - Allegheny, for example, was free to dabble in everything from natural gas to fiber optics - but old, conservative business models and executive styles didn't always translate.

Traditional, button-down utility execs were being called upon to adopt the Enronesque disco chains of the Street's wildest playboys.

Enron, the energy Jezebel that started it all, and Allegheny have rubbed elbows a few times. Two years ago, Allegheny agreed to buy three Midwestern generating plants from Enron for $1 billion, a move Noia at the time called a "pivotal step in our plan to transform from a regional generating company to a national energy supplier."

In its quest for the ring, Allegheny also paid nearly a half-billion dollars for Global Energy Markets, a high-stakes energy trader that, amid great fanfare, it grandly renamed Allegheny Energy Global Markets. In court papers, Allegheny is now saying it was duped into paying too much for GEM because its sale price was inflated by smoke-and-mirror Enron trades.

But Enron and Allegheny fundamentally are not of the same mold. Allegheny has assets, sells a product and makes money, whereas Enron...

Still, I can't help but believe traditional power companies weren't struck with a certain Enron envy - they saw, or thought they saw, the paper energy brokers spinning power into unbelievable wealth and said "Me too!"

They would keep selling electricity to their traditional home and business customers under regulation, but would then spin off new, unregulated companies to build plants and sell the power to whomever (California?) would offer the highest price. These companies would buy and sell power and futures on the open market and make their own fortunes, because investors would clamor to buy up their stock offerings.

Haven't read much about California blackouts lately, have you?

And the stock market - well, you know.

Debt floated to meet demand that no longer exists is now weighing heavily on company shoulders. High debt and lower-than-expected earnings are driving down share prices on the traditional side of the model, never mind the more speculative half, which is hopelessly sullied by Enron, et. al.

Even with all that in mind, it's probable that the reports of Allegheny's death are greatly exaggerated. Creditors are likely to favorably renegotiate Allegheny's debt, and for that we can thank - the poor economy.

Banks have a lot of headaches out there right now, loans extended to companies that don't have much in the way of either profits or hard assets to back them up. (See technology, telecommunications).

Allegheny has both assets (generating plants) and cash flow. I may be proved horribly wrong, but I can't see that banks can afford to get too testy with a company that makes money.

Will Allegheny be bought out? Perhaps, but someone would have to agree to take on an awful lot of debt.

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