Calif. sues Allegheny over power contract

Company denies breach of electricity-supply deal

January 31, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

The California Department of Water Resources has sued Allegheny Energy Inc. over its $4.4 billion power supply contract, alleging that the Hagerstown energy company breached the terms of the agreement as a result of its deteriorating financial situation.

In the lawsuit, filed Wednesday in the Superior Court of California, the agency claims that Allegheny violated contract provisions when it transferred its 10-year contract to supply electricity to the state from a troubled subsidiary, Allegheny Energy Supply Co., to a newly formed subsidiary, Allegheny Trading Finance Co.

The power-buying agency for California is asking the court to declare the power contract "automatically terminated without notice due to the bankrupt financial condition" of Allegheny Energy Supply. Allegheny Generating Co. and Allegheny Energy Supply have defaulted on credit agreements, but are not in bankruptcy.

Yesterday, Allegheny officials called the lawsuit "disturbing" and accused the state of blatantly trying to break the contract.

"This is a transparent attempt by the CDWR to escape its financial obligations and injure our shareholders, employees, and the company," Michael P. Morrell, president of Allegheny Energy Supply, said in a statement. "Allegheny will explore every avenue available to it to respond to the suit and to hold the CDWR accountable for any losses resulting from a complaint that is nothing more than an attempt to renegotiate a contract that is already fair to both parties."

Transferring the contract to Allegheny Trading Finance would have given the company more financial flexibility to either sell the contract or use it for security in the future, said company spokeswoman Janice D. Lantz, adding, "It was to meet the needs of our current cash situation."

The lawsuit comes as Allegheny is struggling to negotiate with its banks to restructure about $1.7 billion in debt after its two subsidiaries, including Allegheny Energy Supply, defaulted on several key credit agreements in October. Allegheny has received four waivers from its lenders, the last of which expires today.

The company has repeatedly warned that if it cannot resolve its credit issues soon, it will be forced into bankruptcy.

"This is going to hurt them," said Joan T. Goodman, an energy analyst at the Pershing division of Donaldson, Lufkin & Jenrette Securities Corp. "The first two years of business with that contract was at a loss. If California is able to break that contract, it's going to hurt them. They're spending so much money on legal fees. Instead of focusing on how to do more business or improve their business, they have to figure out what to do in the courts."

The CDWR has been trying for more than a year to renegotiate or void $43 billion in long-term contracts that the state signed with several energy companies at the peak of its energy crisis in 2001. The state has accused energy companies of illegally inflating power prices during the crisis.

California officials filed a complaint with the Federal Energy Regulatory Commission to have the contracts reworked or thrown out.

Morrell said yesterday that Allegheny has continued to negotiate with California pending a FERC ruling.

"In Allegheny's opinion, the filing of this lawsuit at this time is a show of bad faith on the part of the state of California," Morrell said. "By its action, the CDWR is now attempting an `end run' around the Federal Energy Regulatory Commission because it fears the commission will confirm the validity of the contract. We find it particularly disturbing that California is challenging an assignment of the contract that the FERC has found to be proper and `in the public interest,' a finding which California did not appeal."

"The CDWR is well aware that Allegheny has met, and will continue to meet, all of its obligations under the terms of the contract," Morrell said.

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