Posted on 10/27/2003 10:46:19 AM PST by MeneMeneTekelUpharsin
NEW YORK, Oct 27 (Reuters) - Bankrupt energy trader Mirant Corp. (Other OTC:MIRKQ.PK - News) and Pepco Holdings Inc. (NYSE:POM - News) said on Monday they restructured two power supply contracts, avoiding a court battle over deals Mirant had threatened to try to cancel. Under the terms of the new agreement, Pepco Holdings' utility unit will pay an additional $60 million for electricity that Mirant will supply to its customers in Maryland and Washington, D.C.
"The agreement provides additional value to Mirant over and above the existing power supply contracts with Pepco while preserving the relationship with a key customer," said Lisa Johnson, president of Mirant's mid-Atlantic unit. Under the terms of the deal announced Monday, Pepco agreed to pay an average of about 4.0 cents per kilowatt hour for power under the contracts instead of the 3.4 cents under the original terms.
Pepco said the deal would not affect rates paid by the Pepco customers, which average 4.1 cents per KWh. However, Mirant said it will allow Pepco a pre-petition claim for $105 million to recover losses from the deal, although Pepco said it could not estimate the amount, if any, that the bankruptcy court would approve. Andrew Williams, chief financial officer of Pepco Holdings, said in the statement the agreement was beneficial to Pepco Holdings shareholders "because it removes uncertainty as to the price Pepco will pay for electricity supply, and it provides an opportunity to recover the value of the original contract through the bankruptcy proceeding."
Pepco has said in a previous government filing that canceling the two deals would cost it $150 million to buy replacement power. Under the new package, which must still be approved by the bankruptcy court and would be retroactive to Oct. 1, Pepco will pay Mirant $41.90 per megawatt hour during summer months and $31.70 per MWh during winter months in the District of Columbia until the contract expires in January 2005. For the Maryland supplies, Pepco will pay $46.40 per MWh during summer months and $28.60 during winter months until the contract expiration in July 2004.
In a separate dispute, Mirant has asked a bankruptcy court to void another set of money-losing "back-to-back" contracts it took on when it bought four power plants from Pepco in 2000. Those contracts require it to purchase power from FirstEnergy's (NYSE:FE - News) Ohio Edison unit and Panda Energy International. Pepco and the Federal Energy Regulatory Commission have challenged Mirant's efforts to cancel those contracts, and a U.S. District Court is expected to rule on whether the FERC or the bankruptcy court has jurisdiction in the case.
(Additional reporting by Matt Daily in Houston)
Granted, they may have had a hard time finding someone willing to contract with them, and it was an improvement over what Mirant would have been paid under the old contract, but the clear winner here was Pepco.
If this is true, it makes one wonder why they didn't just cancel the contracts. Perhaps the answer is twofold:
1. You premise that someone may not have been interested might hold water.
2. Or, Mirant possibly saw difficulty in getting the contracts cancelled or Pepco made it clear they were going to make it difficult to get them cancelled.
Your insight is always appreciated. Mirant has done far better than I ever thought they would under the circumstances and may very well pull out of this with the common have some value as opposed to none. More than likely, a substantial dilution will take place, but it might end up being something instead of nothing. No matter what happens, it will make for an interesting case study.
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