Following critical reviews by two major investment houses, Hagerstown, MD-based Allegheny Energy last week announced it is slashing its expected 2002 earnings guidance and is executing plans to reduce operating and capital expenditures for the rest of the year and beyond, including the cancellation of a combined 1,168 MW of planned generation in Arizona and Indiana and the elimination of about 10% of its workforce, or 600 jobs. Having already eliminated eight positions from its energy marketing and trading division in the second quarter, officials with Allegheny Energy last week weren’t ruling out the possibility of further cuts from that part of company as part of the overall head count reduction.

Allegheny expects 2002 earnings per share to be in the range of $2.50 to $2.70, a far cry from its prior guidance of $3.60 to $3.70 per share. The revised guidance excludes the $.10 after-tax gain on the sale of property at Canaan Valley, WV, which was recorded in the first quarter. The revised figure was even less than the $2.90 prediction of Morgan Stanley analysts last week, who put Allegheny at the top of a list of 11 utilities with fall-offs in estimated earnings.

Earlier Merrill Lynch Global Securities lowered its ratings on Allegheny to “neutral” in the intermediate and long term, from its previous “buy” and “strong buy” respectively, citing a poor market for its Midwest power generation assets, lower earnings from trading, and problems with its contract with California’s Department of Water Resources.

Allegheny said the components of the adjusted earnings guidance are $1.15 to $1.20 from the energy delivery and services business and $1.35 to $1.50 from the generation and marketing business. The generation and marketing business includes $1.25 to $1.35 from provider of last resort contracts and the sale of excess megawatts into the wholesale market and $.10 to $.15 from trading activities, including the sale of electricity from the peaking facilities in the Midwest.

A weak wholesale market, milder-than-normal weather, and reduced economic activity have all contributed to less-than-ideal operating conditions for Allegheny and the energy industry in general, said Chairman Alan J. Noia.

Allegheny is canceling 1,080 MW of generation planned for La Paz, AZ, and 88 MW of combustion turbine generation planned for St. Joseph, IN, reducing capital expenditures by approximately $700 million over the next several years.

In a conference call with the investment community last Monday, executives at Allegheny were asked whether the company was reducing head count at its trading operations significantly. In response, Mike Morrell, a senior vice president at Allegheny, pointed out that eight positions in the company’s marketing and trading division were eliminated in the second quarter.

“To put that into perspective, marketing and trading consists of about 41 people now in origination and trading, and about 88 support people, including plant dispatchers, fuel procurement, power and gas schedulers and administration,” Morrell went on to say. With respect to potential staff reductions at the company, the Allegheny official said that “marketing and trading will be carefully reviewed, especially in light of the current and expected wholesale markets and our reduced generation growth prospects, to see if further reductions in marketing and trading staff or activity are warranted.”

Meanwhile, an Arizona Corporation Commission (ACC) spokesperson said that “there was neither sadness nor rejoicing” at the ACC in response to the news that Allegheny Energy was canceling plans to build the La Paz facility. She noted that the commission has given its blessing to 14 power generation projects in the state, including La Paz, since 1998. “Several of those projects are under construction right now as we speak,” she told NGI. No one expected they would all be built.

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