Allegheny Energy Supply Co. LLC and Allegheny Trading Finance (ATF) last week said that they have completed the sale of an energy supply contract with the California Department of Water Resources (CDWR) and associated hedge transactions to J. Aron & Co., a subsidiary of the Goldman Sachs Group, for approximately $354 million.

The Allegheny Energy subsidiaries said that much of the adjustment from the estimated sale price of $405 million announced on July 28 was attributable to contracts with one counterparty, valued at $38.6 million, which were removed from the sale by mutual agreement of the parties. Changes in the mark-to-market value of the remaining contracts at closing and a reduction in the number of remaining trades assumed by J. Aron accounted for the rest of the adjustment.

The proceeds to Allegheny Energy Supply from the sale of the CDWR contract and associated hedge transactions will be applied, in large part, to fund the termination of Williams and Las Vegas Cogeneration II tolling agreements and certain related hedging arrangements. Allegheny has obtained from its creditors authorization to deposit the remainder of the proceeds into a cash collateral account instead of using those funds to redeem secured debt as otherwise required by the company’s borrowing facilities.

“The completion of this sale is a major step in strengthening our financial position,” said Paul Evanson, Allegheny Energy’s CEO. “The closing effectively achieves our goal of exiting the Western energy markets, thereby significantly reducing our financial risk profile. We will now focus our trading on optimizing our core generation assets.”

Allegheny said that 20% of the proceeds of the CDWR contract sale and associated hedges will be held in escrow. The escrow will be subsequently delivered to Allegheny Energy Supply when the Securities and Exchange Commission approves a parent guarantee by Allegheny Energy Supply to back up ATF’s obligation to indemnify J. Aron or when ATF is merged into Allegheny Energy Supply. The escrow is expected to be released before the end of the year.

CDWR previously had given its okay to the Hagerstown, MD-based Allegheny Energy subsidiaries’ sale of their renegotiated 10-year power deal that last June was reduced in price and volumes. The buyer was on an approved list of credit-worthy buyers that CDWR reviewed, said a Sacramento-based spokesperson for the state agency.

When the contract was originally negotiated between the state agency in the midst of the western wholesale energy market crisis, Allegheny stepped in and bought a supply deal that Morgan Stanley had executed with CDWR, an agency spokesperson said. The original contract was 1,000 MW over 10 years at an average price of $61/MWh.

Since then, CDWR reworked the deal with Allegheny to lower its volume in 2005 to 750 MW, and then raise it to 800 MW for the rest of the contract (2006-11). Volumes stay at the 1,000 MW level until 2005, but the price drops yearly by $1/MWh from now through 2006, and after that it stays at $58/MWh, according to the CDWR spokesperson.

“Just like they would be concerned if our roles were reversed, we wanted to make sure the contract was sold to an investment-grade buyer,” said the CDWR spokesperson, who noted that the renegotiations in June reduced the overall value of the contract from $4.2 billion to $3.4 billion.

Citigroup served as Allegheny’s financial advisor for the transaction.

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