By Patrick Fitzgerald 
 

The North American subsidiaries of Norwegian construction company Kvaerner ASA (KVAER.OS) and German engineering firm Foster Wheeler AG (FWLT) are suing Longview Power LLC to block the troubled West Virginia power plant from drawing on $59 million in disputed letters of credit.

Foster Wheeler North America Corp. and Kvaerner North American Construction Inc. sued Longview Wednesday in U.S. Bankruptcy Court in Wilmington, Del. They're asking Judge Brendan Linehan Shannon for an injunction blocking Longview from "taking any action to demand and draw" on the letters of credit pending the resolution of an arbitration case over the matter, according to Foster Wheeler's lawsuit.

The two companies, along with Siemens Energy Inc., a unit of Siemens AG (SI), have been involved in a long-running arbitration fight with Longview over problems tied to the plant's allegedly faulty design and construction.

The three contractors helped build the private-equity-backed plant, which cost more than $2 billion. Longview has blamed its financial problems, in part, on persistent operational problems at the plant stemming from the work of the contractors.

Lawyers for Longview say the letters of credit are the property of the estate and the company need the cash to fund its bankruptcy case. Longview said it would likely breach cash-balance covenants with its lenders if it is unable to draw on the letters of credit.

The contractors say the letters of credit were assigned to them, and that Longview is trying to circumvent the arbitration proceedings by finding a safe haven in bankruptcy court.

Judge Shannon previously agreed to let Longview uses its lenders' cash to stay open but that preserved the status quo with respect to contractors' concerns over the letters of credit and the arbitration proceeding. He's scheduled a hearing on the dispute for Oct. 7 in Wilmington.

Longview, a 700 megawatt coal-powered plant located in Maidsville, W. Va., is the largest privately funded project in West Virginia history. It began operations in December 2011, providing power to the Pennsylvania, New Jersey and Maryland markets.

But the plant has been plagued by extended outages forcing it to operate at about two-thirds of capacity.

In addition to Longview's complaints about the plant's design and construction, the company has also been hurt by a drop in wholesale electricity prices caused by the growth in liquid natural gas. That drop has made it impossible, Longview says, for the company to service its $1.2 billion in debt.

First Reserve Corp., a $23 billion energy-focused private equity firm based in Greenwich, Conn., pumped about $1 billion in equity into the project. Longview Power owes lenders, led by Citigroup (C), about $1.2 billion, including $557 million of debt that matures in February 2014.

Legal and financial advisers had been working on an out-of-court restructuring since November with a group of more than 50 lenders, according to Akin Gump Strauss Hauer & Feld's Ira S. Dizengoff, a lawyer for the so-called steering committee of lenders.

But Longview wasn't able to strike a deal before an interest payment was due last month, forcing the plant and its West Virginia coal-mining partner Mepco Holdings LLC to file for bankruptcy. The company says it's confident that it can reach a deal with its lenders on the terms of a Chapter 11 plan in the near future.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)

Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com

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