Allegheny sells $405m of energy supply contract to Goldman Sachs

Allegheny Energy yesterday took a step towards reducing its exposure to energy trading by selling an energy supply contract to a subsidiary of Goldman Sachs for $405 million.

The Maryland-based energy company said its Allegheny Trading Finance unit has signed an agreement to sell its energy supply contract with the California Department of Water Resources (CDWR) and associated hedge transactions to J Aron & Company, a subsidiary of Goldman Sachs. But the the sale price is subject to adjustment based upon both changes in the mark-to-market value at closing and the number of trades to be assumed by J Aron. Proceeds from the sale will be used to reduce debt and improve liquidity, as well as to fund the cost of continuing to reduce the company's financial exposure to energy trading, Allegheny said.

Allegheny struggled to avert a bankruptcy filing despite securing $2.4 billion in bank financing earlier this year. Last week, it received regulatory approval to complete a $300 million financing and borrow as much as $2.2 billion under its existing credit facilities.

The sale is subject to customary closing conditions, approval by a majority of Allegheny's bank lenders and regulatory approvals. The companies anticipate closing the transaction by the end of the year.

Allegheny recently renegotiated the contract with the CDWR, which now will provide up to 800MW of electricity in the remaining nine years of the 11-year contract. The renegotiated contract settlement was approved by the US Federal Energy Regulatory Commission on July 11, 2003, and is anticipated to become final and unappealable on August 10, 2003.

Allegheny built up a sizeable energy trading unit after acquiring Merrill Lynch’s global energy markets (GEM) business in March 2001 for $490 million. Merrill Lynch is currently suing Allegheny for breach of contract over $115 million the bank said it is owed as a result of the sale. Allegheny launched a counter suit against Merrill Lynch for fraudulent inducement and breach of contract in September 2002 related to its purchase of Merrill Lynch’s GEM group.

Allegheny’s complaint against Merrill Lynch, filed in the New York state supreme court, alleges that the US investment bank made false and misleading representations concerning, among other things, GEM’s internal controls and infrastructure, its historical revenues, trading volume and growth rate, and the qualifications of some of its personnel.

Neither company would comment on the current state of legal proceedings, although some market participants expect the parties to settle out of court.

Since legal proceedings started, Allegheny has moved to reduce its exposure to energy trading, downsizing the department and, in April, relocating its trading business to Pennsylvania from New York.

Last week, energy company Mirant filed for Chapter 11 bankrupcy protection following months of effort to restructure its business.