Allegheny Energy’s efforts to right its financial ship got a big boost Wednesday after FERC issued an order allowing Allegheny Energy Supply Co. LLC to assign a wholesale power sales agreement and two related trade confirmations with the California Department of Water Resources (DWR) to a recently created subsidiary. The Commission also approved a market-based rate tariff filed by the new subsidiary, Allegheny Trading Finance Co. (ATF).

However, the company said Thursday it was forced to cut its quarterly dividend at least the fourth quarter of 2003 to increase its financial flexibility and improve cash flow. The dividend cut is one of many actions the company has taken to preserve cash and strengthen its balance sheet. “While our board…recognizes the importance of rewarding our shareholders with a consistent cash dividend, we believe this action is prudent and necessary,” said CEO Alan J. Noia. “Our core businesses remain fundamentally sound, and we expect to work through our short-term liquidity needs in a timely manner.”

Allegheny Energy already has scaled down its wholesale energy trading business and cancelled development of several generating facilities, saving $700 million in capital expenditures over the next several years. It also has cut its workforce by 10%. It intends to borrow up to $2 billion on a secured basis and is continuing to work with its bank lenders to ensure the long-term financial health of the company.

The FERC order allowing Allegheny Energy Supply to assign the power sales agreement and trade confirmations to ATF will further help the company meet its current cash requirements.

Allegheny Energy Supply said that in order to meet its current cash requirements, it needs to “maximize its financial flexibility via a financing subsidiary to engage in financing transactions.” The financing subsidiary will allow Allegheny Energy Supply “to attract capital when and as necessary in the immediate future to meet its current liquidity needs.”

But the California Electricity Oversight Board (CEOB) told FERC in November that the proposal was an attempt to insulate both the power supplier and the new subsidiary “from market risk to the detriment of California consumers.”

“If the Commission approves this requested assignment and market rate tariff request, the board has serious concerns that these actions will represent a tacit endorsement by the Commission of the model in which the seller counterparty in all long-term contracts is a thinly capitalized single-asset corporation with no other assets but revenues from the contract itself,” the CEOB said. Under such a scenario, the buyer would have “no real remedy in the event of [a] seller’s default or termination.”

The board also pointed out that the contracts proposed for transfer are some of the contracts at issue in the CEOB’s ongoing litigation to reform California’s long-term contracts. If FERC approves the requested assignment and market rate tariff, ATF “may immediately use the existing contracts with inflated prices as a source of financing,” the board warned. This financing may “significantly impair” FERC’s ability to order reformation of the Allegheny Energy Supply contracts if the Commission finds for the complainants in docket EL02-62, the board said.

But FERC on Wednesday gave its stamp of approval to both the contract transfer proposals, as well as the market-based tariff and related code of conduct filed by ATF.

Notwithstanding the CEOB’s concerns regarding the increased risk associated with assigning the contracts to a single-asset entity, “we see no evidence that ATF will be less able than AE [Allegheny Energy] Supply to fulfill the contractual commitments that are being transferred to it” from Allegheny Energy Supply, FERC said.

The Commission pointed out that the master sale agreement between DWR and Allegheny Energy Supply has been amended to permit its assignment to an entity with a credit rating of BBB or better by Standard & Poor’s rating group and Baa2 or better by Moody’s Investor Services for a long-term unsecured senior debt.

Thus, the parties to the contracts at issue have already allocated the risk of assignment and DWR did not protest the assignment to ATF, the Commission said. Moreover, the transfer does not foreclose the parties to the DWR contracts from pursuing whatever remedies they are afforded if ATF attempts to abrogate any responsibility under the contracts, the agency said. “We find therefore that the proposed transaction will not adversely affect rates or the Commission’s regulation.”

Allegheny Energy recently disclosed that Allegheny Energy Supply and its Allegheny Generating Co. subsidiary received extensions on waivers from bank lenders under their syndicated credit agreements through the end of the year.

Allegheny Energy in early November said that it would delay the release of its third quarter earnings and anticipated delaying the filing of its 2002 third quarter 10-Q. Earlier in the third quarter, after identifying miscalculations in business segment information included in its second quarter 10-Q, the company said that it initiated a comprehensive review of prior period financial statements and identified additional errors. This comprehensive review had not been completed as of early November (see NGI, Nov. 11).

In addition, Allegheny Energy said that it is studying the valuation of its energy trading portfolio, in light of market conditions, and goodwill for potential impairment as required by the Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” Allegheny Energy “continues to work with its independent accountants to conclude this comprehensive review and will provide more information as soon as it is available,” the company stated.

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