After a lengthy financial review, Allegheny Energy reported a $334.4 million net loss (or $2.67/share) for the first nine months of 2002 and found that accounting errors will force it to restate first and second quarter earnings. But the company faces even greater hurdles going forward. Its financial difficulties continue to grow and if arrangements cannot be worked out with lenders, Allegheny admitted it may have to seek bankruptcy protection.

The company said it would release third quarter earnings data when the comprehensive review has been completed and will issue restated financial statements for the first and second quarters of 2002 as soon as possible thereafter.

Allegheny said the loss stemmed from a reduction in the market value of its energy trading portfolio to reflect changes in valuation model assumptions and market conditions. It also was the result of workforce reduction expenses and the cumulative effect of an accounting change related to the adoption of the Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.”

For the nine-month period, Allegheny reported an after-tax $217.6 million ($1.73/share) reduction in the market value of its energy trading portfolio. The cumulative effect of the accounting change related to the adoption of SFAS No. 142 was a $130.5 million ($1.04/share) after-tax reduction. And workforce reduction expenses totaled $62.6 million ($0.50/share) after taxes.

The company also took a $31.4 million ($0.25/share) charge related to generation plant cancellations, a $22.9 million ($0.18/share) charge related to an impairment of unregulated investments, and an $11.9 million gain on a Canaan Valley, WV, land sale. The cumulative effect of the accounting change related to SFAS 133 was a $31.1 million ($0.26/share) charge.

The company said it is in discussions with banks, other lenders and trading counterparties regarding outstanding defaults, needed amendments to existing agreements, and obtaining additional secured financing. In October, it received authorization from the Securities and Exchange Commission (SEC) to borrow up to $2 billion on a secured basis, but additional approvals are still needed before it can implement this refinancing.

Subsidiaries Allegheny Energy Supply Company LLC and Allegheny Generating Co. have received loan payment extensions through Dec. 31 on waivers from bank lenders, and the company continues to negotiate with these and other lenders, including the St. Joseph County generating facility lenders, concerning its financial obligations. If it is unable to complete negotiations, including arrangements with respect to inter-creditor issues, Allegheny said it would “likely be obliged to seek bankruptcy protection.”

The company is actively taking steps to reduce its cost structure, preserve cash and strengthen its balance sheet, including reducing its reliance on its wholesale energy trading business, significantly reducing pre-tax operating expenses in 2002, canceling the development of several generating facilities (saving $700 million over the next several years), reducing its workforce by 10% and suspending the dividend on its common stock. The company won an important ruling from a FERC administrative law judge (ALJ) last week that preserves its existing power supply contracts with Nevada Power. The ALJ dismissed a complaint against Allegheny that was made by the Nevada utility, concluding that Nevada Power had failed to show that modification of the long-term contracts was in the public interest. The notional value of the contracts is estimated to be $31.4 million. The judge also said that the Nevada utilities failed to prove that the dysfunctional California energy spot market materially affected forward markets in the Western region during the energy crisis of 2000-2001.

“This decision by the administrative law judge is definitely positive news for the Company and for the power industry as a whole,” said Michael P. Morrell, President, Allegheny Energy Supply. “It confirms for the financial markets that the FERC judge understands the importance of contract sanctity.

“Allegheny is hopeful that the Nevada Power decision is a harbinger of future FERC rulings respecting the sanctity of contracts,” Morrell added.

The full Commission still must rule on the Nevada case, however, and Allegheny also is still awaiting a FERC decision the validity of its contracts with the California Department of Water Resources.

Allegheny also is under pressure to complete asset sales or issue equity. Meanwhile, there is ongoing litigation with Merrill Lynch regarding the Allegheny Energy Global Markets acquisition in which Merrill Lynch is claiming $115 million plus interest; the company has filed counter-claims against Merrill Lynch. Other outstanding issues include trading counterparties’ current and future demands in settlement of terminated trades and collateral in respect of ongoing positions. In total, it means a difficult road ahead for the Hagerstown, MD-based energy company.

Allegheny shares fell 14% Thursday to $7.14 and another 8% to $6.38 by mid afternoon on Friday. Its shares are down significantly from a 52-week high on the New York Stock Exchange of $43.86.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.