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Allegheny, Calif. agree to settlement

June 11, 2003|by JULIE E. GREENE

julieg@herald-mail.com

Allegheny Energy and the state of California have agreed to a settlement concerning an energy contract that, with federal approval, would allow the utility to shop the contract and use the revenue to help pay off debt, an Allegheny official said Tuesday.

The California Department of Water Resources (CDWR) was trying to get the Federal Energy Regulatory Commission (FERC) to void or restructure the contract because energy prices were much higher when it was signed in March 2001 during an energy crisis.

The two sides continued to discuss possible remedies even though California officials filed complaints with the FERC in February 2002 and the CDWR filed a lawsuit in January in the Superior Court of California in Sacramento County over the contract, said Allegheny Energy Supply spokeswoman Janice Lantz. Allegheny Energy Supply is Allegheny Energy's energy trading subsidiary.

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Those complaints and the lawsuit will be withdrawn if the FERC approves the settlement, CDWR spokesman Oscar Hidalgo said.

At one point, the contract was estimated to have a $1.3 billion book value for Allegheny Energy and be worth $4.5 billion over its 11-year term, Lantz said.

Market conditions have lowered the contract's value, but Allegheny officials think selling the contract could help pay off a significant amount of the $2.4 billion financing deal the utility got in February, Lantz said.

Under the settlement, Allegheny Energy Supply would reduce the volume of electricity supplied and the price for off-peak hours beginning next year, according to statements from Allegheny and the California governor's office.

The contract's worth had fallen from $4.5 billion to $4.2 billion before the settlement because of market conditions, Lantz said.

Once restructured, the contract's worth would be $3.4 billion, the statement from the California governor's office said.

If the settlement were effective Tuesday, based on market conditions it was estimated the book value of the contract would decrease by approximately $160 million to $190 million, Lantz said.

Lantz said she expects the FERC to take 30 to 45 days to decide whether to approve the settlement.

Allegheny Energy's stock dropped 78 cents Tuesday, closing at $8.33.

Settlement will help lift uncertainty about the contract that Allegheny officials stated in an October 2002 FERC filing was "inflicting significant financial harm" on the utility and its energy trading subsidiary.

Lifting that uncertainty should help Allegheny sell the California contract as it continues to scale back its energy trading business, Lantz said.

Allegheny officials think selling the contract could help make an amortization payment or two on the $2.4 billion financing deal the company got in February that helped Allegheny Energy avoid filing for bankruptcy, according to Lantz. One amortization payment is about $250 million, she said.

Lantz said the company continues to face challenges.

Allegheny officials expect that earnings and cash flow results, when released, will be lower than anticipated. In February, the company projected earnings per share of $1 in 2003 and 96 cents in 2004, according to a filing with the U.S. Securities and Exchange Commission.

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