In its continuing effort to reduce debt, the board of directors at cash-strapped Allegheny Energy Inc. voted yesterday to suspend the company's cash dividend on its common stock to save about $54 million in the current fourth quarter.
It is unclear whether the board will keep the dividend on hold in the first quarter next year, but it did say two months ago that Allegheny intended to reduce or suspend its current $1.72 annual dividend through at least the fourth quarter 2003.
Directors are expected to discuss the status of the dividend payment at each quarterly board meeting.
The cut is necessary to enhance cash flow, reduce debt and improve credit ratings, executives of the Hagerstown utility said yesterday.
"While our board of directors recognizes the importance of rewarding our shareholders with a consistent cash dividend, we believe this action is prudent and necessary," Chairman and Chief Executive Officer Alan J. Noia said in a statement.
"Our core businesses remain fundamentally sound, and we expect to work through our short-term liquidity needs in a timely matter."
Joan T. Goodman, an energy analyst at the Pershing division of Donaldson, Lufkin & Jenrette Securities Corp., said Allegheny's shareholders are going to be "very, very unhappy. But there's no way to avoid it."
"The opportunity really is now to cut the dividend so they can conserve cash," she said. "Generally, when a company cuts the dividend, the stock goes up. It's like a teeter-totter.
"It should be reflected in the stock price. There will be a lot of disgruntled shareholders selling in the first week or so, but eventually, it will go up. Once the debt is worked off, it'll be good, but you can say that about a lot of companies these days."
Shares of Allegheny gained 6 cents yesterday to close at $6.25 on the New York Stock Exchange.
Allegheny has been beset with financial problems after firing the head of its energy trading unit in September for alleged violations of the company's conflict-of-interest policies.
Since then, its credit rating has been downgraded to below investment grade, it defaulted on several key credit agreements and its stock price has plunged.
Allegheny is also embroiled in two legal disputes - one involving the acquisition of its trading unit and another over electricity supply contracts in California - that have hurt the balance sheet.
Other energy companies have also been forced to cut or reduce their dividend because of high debt levels and bad credit ratings, including Xcel Energy Inc. of Minneapolis, Dynegy Corp. of Houston and CMS Energy of Dearborn, Mich.
Allegheny has also taken several other steps to reduce its cost structure, preserve cash and strengthen its balance sheet.
It has reduced its reliance on the wholesale trading business, reduced pretax operating expenses, canceled the development of several power plants, saved $700 million in capital expenditures over the next several years and reduced its work force by 10 percent.
Allegheny said two of its subsidiaries have received month-long extensions on default waivers granted by lenders, giving the company more time to work out its financial troubles.