Adding to the bevy of legal and financial challenges faced by Harrisburg, Pa., the company that operates the capital city's debt-laden incinerator sued the city Tuesday because of $1.9 million in skipped loan payments.

Covanta Energy had provided the city a $22 million loan to fund improvements to the incinerator. But Harrisburg has skipped the last three payments on the loan this year, said Jim Klecko, a Covanta vice president.

The suit was filed in the Court of Common Pleas in Dauphin County.

Klecko said the lawsuit serves to protect the company's interests and asks for payments of the missed obligations.

The legal action comes after Mayor Linda Thompson's application to a state program for distressed municipalities Friday. Still, "we're going to hope for the best" that the city can work out its financial difficulties, Klecko said.

Asked to respond to the suit, Thompson's spokesman Chuck Ardo said, "We are looking forward to developing a plan to meet all our financial obligations."

Harrisburg is already being sued by Dauphin County; bond insurer Assured Guaranty Municipal Corp., a unit of Assured Guaranty Ltd. (AGO); and bond trustees TD Bank and M&T Bank Corp. (MTB) over $19 million in skipped bond payments related to the failed revamp of the incinerator. Covanta was first hired in 2007 to complete the upgrades and bring the facility to full operations.

The incinerator's debt load is $288 million, over four times the city's annual budget. But efforts to deal with that and a $4.5 million budget deficit have been stymied by political squabbling. The city of 47,000 averted a general obligation bond default Sept. 15 thanks to the state accelerating $3.6 million in funds slated for pensions and fire protection to cover that payment.

-By Romy Varghese, Dow Jones Newswires; 215-656-8263; romy.varghese@dowjones.com
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