What befell Allegheny Energy?

October 21, 2002|by ANDREW SCHOTZ

The sky was blue in Allegheny Energy's world in July 2001 when Chairman Alan J. Noia announced the latest venture - a split creating two independent companies.

Noia said the move was about "unlocking shareholder value." Allegheny Energy Supply - Allegheny Energy's unregulated generation and wholesale energy division - was growing faster than the rest of the company.

Allegheny Energy stock closed at $42.65 that day.

Six months later, Allegheny Energy, which is based in Hagerstown, canceled its planned initial public offering for the spinoff company. The energy market no longer seemed right.


Not long after, the industry was turned on its ear when energy giant Enron fell apart amid sweeping allegations of fraudulent trading and accounting.

"The environment has absolutely changed," Michael Morrell, the president of Allegheny Energy Supply, said Friday. "The economy collapsed. The Twin Towers collapsed. Enron collapsed."

For Allegheny Energy, a record-setting year of earnings in 2001 was history.

The company, which is in default of some of its credit agreements, hopes to cut costs, sell deregulated assets and raise capital. It has begun reducing its 6,000-strong work force by 10 percent through early retirement buyouts.

The energy supply division is trying to get permission from the U.S. Securities and Exchange Commission to borrow up to $2 billion.

Meanwhile, three agencies downgraded Allegheny Energy's debt rating to "junk bond" status. The company plans to cut or reduce dividends to shareholders through at least the fourth quarter of 2003.

The delivery side of the business, Allegheny Power, continues to serve customers in Maryland, Pennsylvania, West Virginia, Virginia and Ohio, who have not been affected.

After months of sliding, Allegheny Energy's stock dipped to $2.95 on Oct. 9. It closed at $4.90 on Friday.

Apparently, consumer confidence has teetered on the verge of collapse, too.

What went wrong?

Changing business

Lance Nigh, president of Utility Workers Union of America, Local 102S, which represents 23 Allegheny Energy employees in Williamsport, wrote pointedly in a recent letter to the editor: "We're buying power plants, we've bought an arm of Merrill Lynch for $500 million to sell our power supply, and we even entered into a contract to sell power to California.

"Ding, Ding, Ding, tell us what we've won, Johnny! A fast trip to the poor house!"

In interviews last week, Nigh and other union officials preferred to focus blame on the changing nature of the energy business in Maryland and other states.

"From our perspective, the deregulation of the electricity industry was a big mistake," said William Sterner, president of System Local 102, which includes 17 smaller bargaining units including Nigh's. "Electricity, from our opinion, is too vital a commodity to be deregulated to be bought and traded like soybeans and pork futures. ... Electricity is unlike any other commodity or energy source in that it cannot be stored."

"Deregulation is nothing more than a shell game," Nigh said. "Maybe Allegheny did hop on the bandwagon, thinking there was money to be made. It just didn't happen like it did on paper."

"The whole idea that electricity can be traded on an open market is a flawed concept," Sterner said.

Morrell disagreed that deregulation caused Allegheny Energy's problems.

"Even if I did, it just didn't matter," he said. "Deregulation was not created by the unions or by Allegheny Energy. It was created by the customers. ... They think it's a better way. It's called competition."

Technically, electric service competition exists in Maryland, but realistically there's none - not yet, anyway. Industry officials and observers agree it's not likely to happen at least until price caps are removed, starting in 2004 for Allegheny Energy. The caps for Allegheny's residential customers are scheduled to be lifted in 2008.

Growth, and risks

In 2000, Allegheny Energy spokeswoman Cynthia Shoop credited deregulation for speeding up the company's growth. Allegheny had just announced plans to build a 1,080-megawatt natural gas-fired generating plant in Arizona. That same year, the company bought three other generating plants in the Midwest.

Third-quarter operating earnings were up almost 10 percent from the previous year.

Last week, neither Maryland Energy Administration Director Frederick Hoover Jr. nor Maryland People's Counsel Michael Travieso, a consumer advocate, would pin Allegheny Energy's woes on deregulation.

"You can make a connection, but I don't believe that one caused the other," Travieso said. "Allegheny was very strong before deregulation. They had a lot of assets and were perceived as a strong utility.

"They didn't stay the same company. They chose to enter into some riskier businesses, one of which was energy trading. They lost hundreds of millions of dollars."

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