Thanks to Enron, utilities’ status as good investments fade
(Editor’s note: This is the second story in a three-part series)Thanks to Enron, utilities have taken a major hit in terms of their stature as good investments. Allegheny Energy’s present problems are just one example of that.
“Utilities used to be good investments. That has changed. When the government allowed deregulation it allowed some of these companies to go down that were not well managed,’ said Bruce Georgi of Parker/Hunter Inc. in Pittsburgh.
“We have been saying for years. It’s a whole new ball game for utilities, not just the energy companies but telephone companies, too,’ Georgi said.
Among Allegheny Energy’s regulated utilities, doing business as Allegheny Power, is West Penn Power Co., serving 600,000 customers in Pennsylvania, including Fayette, Greene and Washington counties. It employs about 2,000 people in the Pittsburgh region.
From his point of view, Georgi explained what happened to Allegheny Energy.
“In layman’s terms, they defaulted on their loans and did not make the payments they needed to make. That happened a couple of weeks ago. The rating agency, Moody’s, took a look at the company and ranked them on their ability to make payments and stay afloat. They downgraded them.
“That made their bonds look very suspect,’ George said.
“In the past few days they have gotten some lines of credit and it looks much more likely they will survive, more likely than it did a week or so ago.’
With its stock price rising little by little, Georgi said the markets have looked more favorably at Allegheny Energy. “They said they will also cut their dividend up to 50 percent from where it is now. That is good because it’s more money they can use to meet their payments.’
But Georgi said Allegheny Energy’s problems are typical of the energy industry today.
“There is a lawsuit going on between Allegheny Energy and Merrill Lynch. This is a situation where any company that has energy interests is getting lumped in with that Enron mess.
“You look at some of these companies out there right now and the energy situation is just terrible. I am looking at it from a client’s point of view.
Larry Horan, director of research for Parker Hunter in Pittsburgh, said most analysts have been negative on Allegheny Energy lately as a recommended stock buy.
“The description of the business and its financials made it look like a risky proposition.’
But Horan agreed with Georgi that Allegheny Energy’s problems are not unique.
“A lot of them (energy companies) got involved in energy trading. It’s like a house of cards. You pull one out and the whole lot will come down.
“Enron is not around to deliver on its contracts. That’s the problem. Part of the Enron story is that a lot of traders in the last few days of Enron were trying to match buyers with sellers.
“But let’s say you bought power from a generation company the same day you were selling it to the user, although both sides of the contract there is Enron, selling the energy and buying the energy.
“There were a lot of very smart, honest, hardworking people in the final days before they got fired (from Enron) trying to match buyers and sellers by taking Enron out of the middle,’ Horan said.
That mess affects investors, he said, who were looking for quick returns.
“A lot of people buy a utility stock for the dividend but they should be buying it for a fixed return. Usually high dividend payers don’t grow. The stock should appreciate by being driven by growth and earnings,’ he said.
Horan feels there will be some consolidation in the energy business. “Some companies will be buying the assets of other companies at fairly low prices.
“But I’m not an expert on the industry. I rely on outside research to fill in the gaps. But most of the time we have been burned by outside coverage.
“Enron’s a good example. The analysts recommended it all the way down to when they filed for Chapter 11 bankruptcy and said there was still value in the company.’