Allegheny Turns DWR Contract to Asset, Exits State

By Published On: October 11, 2003

Allegheny Energy sold its long-term peaking contract with the Department of Water Resources (DWR) to Goldman Sachs September 15. The final sale allowed the Maryland-based power company to close up shop in California?and not look back. “No ma?am, the company is not interested in California,” said Allegheny spokesperson Janice Lantz. The company?s allegiance from now on will be primarily to its Midwestern business, where it has generation, she added. DWR is not concerned about the contract sale to Goldman Sachs. According to DWR spokesperson Oscar Hidalgo, the state pre-approved the reassignment. The company battled California over its efforts to renegotiate its contract while simultaneously trying to stay out of bankruptcy. In January, DWR sued Allegheny for attempting to assign contract provisions to a new subsidiary, and because of concerns over whether Allegheny?s could perform the contact given its financial troubles. To satisfy the lawsuit, the 1,000 MW peaking deal was finally renegotiated in June to less capacity and a lower off-peak cost?although it still has the same duration, through 2011. The renegotiation saved the state $836 million, according to Hidalgo. The problem with the contract for Allegheny, other than becoming a political football, was that it didn?t have any of its own local generation and developed the contract when wholesale prices were high. To satisfy DWR?s contract provisions, Allegheny, in turn, contracted with Williams for the generation for 1000 MW from three of William?s facilities. ?We could have used it to serve peaking demand, but the prices were such that it was never used much,? said Lantz. In other words, the cost of energy from the Williams ?tolling? contract was high enough that the company would not be able to profit. Allegheny would have had to purchase the fuel to run the plants on top of the payment to Williams for delivery. Around the time DWR sued Allegheny and the company was considering seeking bankruptcy protection, Allegheny claimed the DWR contract was a protected asset and should be considered on the plus side of the ledger. The contract, which DWR estimated to cost the state $4.4 billion over 10 years, was seen by Allegheny as an asset, much as a power plant would be considered an asset on the balance sheet. But neither regulators nor the financial community bought into this rather novel approach. But, ?the sale of the CDWR contract? and placing $300 million in preferred trust securities, ?improved our financial position substantially,? Lantz said. The energy contract, negotiated during the energy crisis, was sold for $354 million. The revenues are mostly earmarked to pay for terminating the Williams Energy Marketing & Trading agreement.

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