Allegheny Energy

(AYE)

weathered a brutal pounding Tuesday, after it surprised investors with news of a credit default and lower earnings.

Shares of Maryland-based Allegheny plunged 49% -- slipping below $4 for the first time in more than a decade -- after the company announced that a credit downgrade issued last week had pushed it into technical default with its lenders. The default news blindsided investors who were reassured by Allegheny only last Tuesday that Moody's decision to cut its credit to junk would trigger no defaults or prepayment obligations.

A week ago, Allegheny expressed disappointment in Moody's action and boasted of confidence that it could maintain adequate liquidity. Nevertheless, the company's stock has been in freefall since then, tumbling from $13.85 to $7.52 even before Tuesday's surprise announcement. The stock sank to $3.80 in Tuesday morning trading.

Allegheny's news delivered a fresh blow to an energy-trading sector that's lost billions of dollars in market value since last year's collapse of Enron. Several of Allegheny's peers --

Duke

(DUK) - Get Report

and

El Paso

(EP)

among the largest -- set fresh 52-week lows in heavy trading Tuesday.

One fund manager, who asked to remain unnamed, said he'd lost all confidence in management teams throughout the troubled merchant energy sector.

"They're all liars," he declared in frustration.

Peter Cohan, a Massachusetts author and investment strategist, was particularly unnerved by Allegheny's about-face.

"Obviously, they knew they were in trouble last week," said Cohan, who has no financial stake in the stock. "The extent of the deception here is just off the charts."

Following last week's reassurance, Allegheny suddenly announced Tuesday that its refusal to post additional collateral -- required after Moody's downgrade -- had triggered cross-defaults under its principal credit agreement. The company remained optimistic, however, saying that it expects to resolve the current crisis.

"Allegheny Energy is in ongoing discussions with its bank lenders, with a view toward obtaining required waivers and additional funding," the company said in a prepared release Tuesday. "Allegheny believes that its underlying businesses remain fundamentally sound, and that it will ultimately be able to obtain the necessary liquidity to resolve its current situation."

In the meantime, Allegheny said it will continue to withhold additional collateral from energy trading counterparties until negotiations conclude with its lenders. The company also warned that it will miss earnings expectations both this year and next, promising to offer more concrete guidance by early November.

According to Thomson Financial First Call, the Street is currently expecting Allegheny to deliver earnings of $2.28 a share in 2002 and $2.19 a share in 2003.