Warning again that a bankruptcy filing is "likely" if it isn't able to restructure $1.7 billion in debt, Allegheny Energy Inc. said yesterday that it will restate first- and second-quarter results because of accounting errors discovered during a comprehensive review of the company.
In an ominous sign of what might be expected when the review is completed, the Hagerstown energy company filed an unaudited financial report yesterday with the Securities and Exchange Commission that showed a net loss of $334.4 million, or $2.67 per share, for the nine months that ended Sept. 30.
The company had originally forecast earnings of $2.50 to $2.70 per share for the year.
Allegheny, which defaulted on key credit agreements three months ago, also warned in the filing that if it is unable to successfully complete negotiations with its lenders, it would likely be forced to seek bankruptcy protection.
Allegheny, which has debt of about $5.1 billion, suspended its dividend this month to conserve cash.
"It's no secret," said Cynthia A. Shoop, Allegheny's vice president of corporate communications. "We've been very open about disclosing information regarding our financial situation. For those who haven't been following along, this gives people an idea of where we stand.
"It's very important to note, however, that we are working very diligently to improve our financial performance and to achieve the new financing. We're doing everything we can."
On May 2, Allegheny reported earnings of $101.6 million, or 81 cents per share, for the first quarter of this year - a decrease of 12.9 percent compared with the corresponding period a year earlier. Then - blaming weak wholesale energy markets, a bad economy and unplanned outages at its generating plants - Allegheny reported July 30 a net loss of $32.3 million, or 26 cents per share, for the second quarter.
The company said it will not release third-quarter earnings or revised financial statements until the review is completed.
Shares of Allegheny fell $1.38, or 16.6 percent, yesterday to close at $6.90 on the New York Stock Exchange.
"The key disappointment here is that they haven't reached an agreement for secured financing yet," said energy analyst Jeffrey Gildersleeve with Argus Research. "The market was anticipating an announcement soon. That's why the shares rallied last week. They continue to work with their banks and lenders, and presumably, they're working out the details of a secured-financing package.
"They still have time, until Dec. 31, under the credit waivers. Or, they could get another extension. But there are a lot of moving pieces at the company right now, and numerous uncertainties that are reflected in the share price. As time goes on, the risks and concern grows."
Like many other energy companies this year, Allegheny has been pummeled by the downturn in the economy, trading and accounting scandals, and the collapse of the capital markets. Allegheny's credit rating was downgraded to below investment grade in October, which led to the credit defaults.
In the past year, the utility has taken steps to strengthen its balance sheet by reducing its reliance on the wholesale trading business; lowering pre-tax operating expenses; canceling the building of several power plants; saving $700 million in capital expenditures over the next several years; and cutting the work force by 10 percent.
But critical to its financial stability are a number of factors, including:
The successful completion of asset sales or the issuance of equity.
A satisfactory conclusion to its $4.5 billion contract to supply power to California, which the state has refused to honor because of allegations of energy companies manipulating prices during the state's power crisis.
The resolution of litigation with Merrill Lynch & Co. Inc. regarding the trading unit acquired from the investment bank.
A resolution with its trading partners in regard to current and future business and collateral.
In yesterday's SEC filing, Allegheny took net charges of $453 million, or $3.61 per share, related to the revaluation of its energy trading portfolio, accounting changes, work force reductions, plant cancellations and impairment of unregulated investments.
Excluding those items, Allegheny said its nine-months earnings were $118.7 million.
"We keep finding out more and more," Gildersleeve said. "It'll be nice to have some closure on the accounting issues. We continue to believe that potential write-downs may be required in the future regarding these businesses.
"But there is a good incentive for the banks to keep Allegheny running because they know they'd get repaid faster than going through the courts in a bankruptcy."