Allegheny makes deal to sell Calif. energy contract

July 29, 2003|by JULIE E. GREENE

Allegheny Energy Inc. reached an agreement to sell its California energy supply contract to a division of investment banking firm The Goldman Sachs Group for $405 million, the utility announced Monday.

Selling the 11-year contract, originally estimated to be worth $4.5 billion, will give the financially struggling utility some much-needed cash.

The deal is expected to be complete by the end of the year, the same time a $250 million loan payment is due from Allegheny's energy trading subsidiary, Allegheny Energy Supply Co., according to a company statement.

This and Friday's announcement that Allegheny was issuing $300 million through convertible trust preferred securities, are "clearly good news for the company because obviously liquidity had been their biggest near-term challenge," said David Burks, a utility analyst with Hilliard Lyons Inc. in Louisville, Ky.


"This goes a long ways toward meeting their short-term immediate needs and hopefully, reduces the risks on future earnings and volatility," Burks said.

"Maybe some of the talk about potential bankruptcy can be put on the back burner," Burks said.

Allegheny Energy's stock rose 9 percent or 74 cents per share on Monday, closing at $8.79 on the New York Stock Exchange.

J. Aron & Company, a division of The Goldman Sachs Group, is buying the California Department of Water Resources contract and associated hedge transactions, according to an Allegheny Energy news release.

Allegheny Energy spokespeople could not be reached for comment.

The sale's proceeds will be used to reduce debt, improve liquidity and pay the cost of reducing the company's financial exposure to energy trading, the release states.

The sale price for the contract could go up or down based on changes in the mark-to-market value at closing and on the number of trades to be assumed by J. Aron, the release states.

The sale must be approved by regulators and a majority of Allegheny's bank lenders, the release states. The sale also is subject to customary closing conditions.

Allegheny was embroiled in a dispute over the California contract for more than 15 months as California officials tried to get the Federal Energy Regulatory Commission to void or restructure the contract because energy prices were much higher when it was signed in March 2001 during an energy crisis.

On June 10, when Allegheny and California announced a settlement agreement, Allegheny Energy Supply spokeswoman Janice Lantz said selling the California contract could help make an amortization payment or two on the $2.4 billion financing deal the company got in February that helped Allegheny avoid bankruptcy.

The FERC approved the settlement of the restructured California contract on July 11, according to the FERC's Web site.

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 has said.

Market conditions lowered the contract's worth to $4.2 billion before the settlement, Lantz has said.

Under the settlement, Allegheny Energy Supply was to 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.

Once restructured, the contract's value would be $3.4 billion, according to a statement from the California governor's office.

Allegheny signed the long-term contract to provide power to California shortly after completing a deal to buy Merrill Lynch's energy commodity marketing and trading unit, Global Energy Markets.

The financial status of Allegheny and several other companies in the energy trading business were ailing in the wake of the Enron collapse.

Allegheny has scaled back its energy trading operations, canceled development of some generating facilities and announced a year ago an offer of early retirement to approximately 600 of its 6,000 workers. About 650 employees chose to take early retirement, company officials have said.

Standard & Poor's issued a bulletin Monday stating the California contract sale was positive news for Allegheny's liquidity, but did not affect S&P's rating or outlook for Allegheny.

"Allegheny has many other significant near-term challenges and the outlook on the company is likely to remain negative until it can bring its financial statement filings up to date and exhibit the financial strength to meet its bank loan convenants and upcoming debt maturities," the S&P Bulletin states.

Burks agreed that Allegheny is not out of the woods yet.

"There's still a lot of work to do to strengthen their balance sheet and have regular audited financials released to be able to give the financial community a sense of what's the underlying earnings power of the company going forward on a longer-term basis," Burks said.

Allegheny has yet to release its annual report for 2002 because company officials haven't finished reviewing records after finding errors.

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