Allegheny Troubles Could Help State

A unit of Allegheny Energy Inc., short of cash and seeking to borrow $2 billion, filed an emergency petition Tuesday with federal regulators, asking them to uphold a long-term energy contract with California.

By removing uncertainty over the contract, the Federal Energy Regulatory Commission will make it easier for Allegheny Energy Supply Co. to sell or securitize the $4.4 billion, 11-year contract and raise cash, company officials argue in the federal filing.

Allegheny’s desperate situation raises the possibility that the state will get what it seeks -- an overturning of Allegheny’s power contract. Should the company file for bankruptcy protection, the state could nullify the agreement, said Erik Saltmarsh, chief counsel of California’s Electricity Oversight Board.

For that reason, Saltmarsh said, state officials are not alarmed by Allegheny’s desperate condition. “We’d rather have an unreasonable contract go away than keep an unreasonable contract,” he said.

Many of the nation’s energy companies have plummeted in value, troubled by scandal, collapsed prices and reluctant lenders. But among the 29 companies with which California signed long-term power accords last year, Hagerstown, Md.-based Allegheny is the first to experience such serious financial trouble that the state has demanded assurances it can fulfill its contract.

Last week the company asked for an extension on providing such assurances. And Tuesday it filed the emergency motion with FERC.

Six months ago state regulators asked FERC to overturn dozens of long-term power contracts, including one with Allegheny. The state said the contracts should be nullified because they were signed when energy companies were illegally manipulating the state’s energy market in the spring of 2001.

FERC has set a hearing on the issue for Dec. 2, with a decision expected in February 2003.

Allegheny’s motion asks FERC to quickly dismiss California’s challenge to its contract because it is “inflicting significant financial harm” on the company and its parent.

Allegheny’s stock has fallen nearly 57% in the last month, losing 10 cents on Wednesday to close at $5.70 on the New York Stock Exchange. That’s down from its 12-month high of $43.86.

Earlier this month, Allegheny Energy disclosed that it is in technical default under its principal credit agreements and those of its subsidiaries. According to Standard & Poor’s credit-rating service, the company has $5 billion in outstanding debt, with $230 million in cash and available credit lines on Sept. 30.

Wall Street credit-rating agencies downgraded Allegheny because of the uncertainty over the contracts, which in turn has scared away potential lenders, wrote Allegheny President Michael P. Morrell, in a signed statement to FERC.