Balance Sheet Worries Pummel Adelphia Communications

Updated from 12:38 p.m. EST

Shares in Adelphia Communications (ADLAC) plunged Wednesday afternoon as concern grew about the company's borrowings and its relationship with a struggling spinoff.

The balance sheet worries overshadowed a strong earnings report for the operator of cable TV systems. For the fourth quarter ended Dec. 31, Adelphia reported revenue of $950 million, up from $804.6 million a year earlier. Earnings before interest, taxes, depreciation and amortization -- a common media industry financial yardstick -- grew to $395.3 million, up from $275.9 million in the fourth quarter of the prior year.

As the first quarter closes, the company said it's expecting a big jump in the pace at which it adds customers for digital video and high-speed connections to the Internet, both of which are high-margin products that Adelphia and other cable operators are mining for money, as growth in basic cable customers slows to a trickle.

After briefly spiking up 6% in morning trading, Adelphia's shares dropped sharply throughout the afternoon. They were down 12% at midafternoon, off $2.49 to $17.90.

Offsetting good news from cable operations -- such as the company's assertion that it had reduced sales and marketing costs for the foreseeable future, to a level significantly lower than where they've been in the past -- was the disclosure that the telco startup Adelphia Business Solutions (ABIZ), a majority-owned subsidiary that the company spun off in January, has filed for Chapter 11 bankruptcy protection. That appears to leave Adelphia on the hook for all or part of a $500 million bank credit facility of ABIZ's that Adelphia guaranteed, and perhaps for other financial transactions involving the company that couldn't be immediately clarified.

Spindown? Adelphia spinoff founders

Asked about the $500 million bank credit facility and Adelphia's ABIZ-related liability, Adelphia Chief Financial Officer Tim Rigas, a member of the Rigas family that controls the company, responded, "We, along with other borrowers, will have to figure out what it all means. ... At this point in time I can't give you much more clarity to that."

Also on the company's conference call, Merrill Lynch high-yield analyst Oren Cohen pressed Adelphia for further disclosure about the $2.3 billion of off-balance sheet borrowings that Adelphia says it's made in co-borrowing arrangements with managed entities, in addition to the $14.6 billion in net debt on the balance sheet.

As Adelphia confirmed on the call, the only assets it has revealed that are backing up that debt are properties including 300,000 cable subscribers. On a back-of-the-envelope basis, that leaves about a billion dollars in off-balance sheet debt for which the collateral -- and Adelphia's responsibility -- are unknown.

Adelphia's response was that "substantial" assets other than the 300,000 subcribers were backing up the off balance-sheet debt, but the company wouldn't disclose what they were. "We'll continue to review the level of detail beyond what we've provided today," said Rigas.

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