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Allegheny seeks OK to borrow money to avoid bankruptcy

July 18, 2003|by SCOTT BUTKI

scottb@herald-mail.com

Financially troubled Allegheny Energy Inc. on Thursday asked the U.S. Securities and Exchange Commission for permission to borrow $2.2 billion in secured and unsecured loans, saying a denial of the request could result in bankruptcy.

In the filing, the Hagerstown-based utility company asked for the go-ahead to borrow the money as part of the company's continuing efforts to avoid bankruptcy, spokeswoman Debbie Beck said.

"Failure to receive authorization to engage in financing in accordance with the financing authority sought in this amendment could result in the bankruptcy of Allegheny and/or AE Supply," the company said in the filing.

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Thursday's filing also asks the SEC for permission to issue up to $325 million in convertible trust preferred securities, which can be converted to shares of common stock at a time in the near future based on certain conditions, Beck said.

On June 23, the company said its common equity ratio had fallen below 28 percent, the level required under the Public Utility Holding Company Act of 1935. The ratio measures the equity portion of a company's total capital structure.

The company must get permission from the SEC before it can resume efforts to raise capital, company officials said.

If permission is denied, the company's options for dealing with its financial problems would be limited and one of those remaining options would be a bankruptcy filing, Beck said.

Allegheny Energy has said the common equity ratio change was the result of several factors, including the company determining its financial performance has been weaker than previously projected, a decline in the value of trading positions and write-downs related to project cancellations.

In the last year, the company has reduced its work force by about 10 percent through early retirements.

That and other actions came after three agencies downgraded Allegheny Energy's debt rating to "junk bond" status last year.

Moody's Investors Services on July 2 further downgraded Allegheny Energy's stock rating from B1 to B2. At the same time, Allegheny Energy Supply, its energy trading subsidiary, was downgraded from B1 to B3, according to an SEC filing.

Allegheny bought Global Energy Markets from Merrill Lynch for $490 million in March 2001. After Enron collapsed, so did the energy trading market.

"Beginning in 2002, the merchant power business suffered a number of setbacks," Allegheny Energy said in its filing. "Some markets, most notably California, have experienced interruptions of supply and price volatility.

"Merchant trading was negatively affected by the bankruptcy filing by Enron and liquidity issues at several other major market participants. In addition to their direct effects, these events have caused state deregulation to be delayed, discontinued and/or reversed. As a result, the demand for merchant power has not developed as expected," the company said in its filing.

"Additional capacity, coupled with lower than expected loads and a relatively weak economy, have led to reduced wholesale prices in several regional markets in which AE Supply owns, operates or contractually controls generation assets," the filing said.

Several officials have left the company since the beginning of the year.

In April, Allegheny Energy President and Chief Executive Officer Alan J. Noia retired following months of company problems, including the debt rating downgrading and the finding of flaws in its books.

Michael P. Morrell, the president of Allegheny Energy's energy trading company - a subsidiary responsible for the bulk of the company's recent financial losses - stepped down in May.

Allegheny Energy lost $334.4 million during the first three quarters of 2002. Allegheny Energy Supply accounted for $248.4 million of those losses, according to SEC filings.

Last week, Allegheny Energy Inc. named Jeffrey D. Serkes, former vice president and treasurer for IBM, as senior vice president and chief financial officer. He replaced Bruce Walenczyk, the energy company's former chief financial officer, who took early retirement June 1.

Allegheny shares fell 46 cents, or 6 percent, to close at $7.20 Thursday on the New York Stock Exchange

Allegheny Energy has about 1.6 million electricity customers and 230,000 natural gas customers in Maryland, Ohio, Pennsylvania, Virginia and West Virginia.

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