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Despite a Summer Struggle, Cinergy Will Stay in Supply Business

Despite a Summer Struggle, Cinergy Will Stay in Supply Business

After a July power price spike forced it to default on several sales agreements with marketers and led to a $73 million net loss that month, Cinergy Corp. seriously considered quitting the supply business altogether (See NGI Aug. 9, Aug. 11). But CEO James E. Rogers said last week the company's board of directors has unanimously decided Cinergy should stick with it as the industry moves to a competitive environment.

"The board and management carefully weighed all options, including exiting the supply business, and concluded that we have obtained the size, scale, and skills necessary to be a successful player in the region," said Rogers. "Our supply business is a major contributor to the corporation, accounting for 70% of our revenues and over half of our profits. Our strategically positioned, low-cost assets already make us a major competitor in our region."

The board's unanimous decision came after a three-month review during which it examined Cinergy's supply obligations, supply capabilities, regional market dynamics, and supply industry evolution.

The board also recognized, however, that in the future management might wish to sell portions of its supply business, given regulatory approvals, and branch out of its territory to acquire customers and assets in order to diversify its supply portfolio.

"As our regulated business evolves into a competitive supply business, we must design a new model that places a premium on a profitably balanced portfolio," Rogers said. "In this vision of the supply business, the power trading function is an integral part of the balancing of supply and demand that will allow the company to stabilize earnings in the future."

Cinergy came under a lot of pressure from Wall Street to exit marketing and trading following its decision to default on several agreements with power marketers in order to maintain deliveries to its regulated customers during the July demand peak.

"The net loss that we took in July was $73 million and $57 million of that was for [serving] the long-term, full-requirements power contracts with municipals and RECs [during a period of peak power prices]. We had $16 million that was related to the contracts [with marketers that] we paid liquidated damages on," said Cinergy spokesman Steve Brash.

"The primary issue that we faced last summer was during the super peak we were short. And already we have reached an agreement with Duke that will add 700 MW of supply for us next year (see NGI, Oct. 11). We also have 700 MW of call options contracts that expire at the end of this year so that [will be gone next summer]. And we are working on a number of demand-side arrangements with customers that we hope will pick up another couple hundred megawatts, which would pretty much bring us in line with what our shortfall was last year. With the combination of all of the different approaches that we're using we're looking to have probably in the neighborhood of a 1,650 MW [increase in supply] compared to last [summer]." Brash would not reveal the total cost of the added supply capacity. He also said the company is negotiating with its full-services customers to see if there are better ways to manage supplies during peak periods.

In addition, Cinergy has significantly changed staffing within its power marketing and trading division. In total, there are 23 new staff members, two new executives and two executives who have moved over from other positions within the company.

"We are building a stronger team with a tighter focus and are confident we can make our supply business successful," Rogers said. Brash indicated Cinergy is changing its marketing and trading focus from being more volume oriented to being more value oriented.

Cinergy's operating companies, Cincinnati Gas & Electric and PSI Energy, serve more than 1.4 million electric customers and 470,000 gas customers in Indiana, Ohio and Kentucky. Cinergy's energy system comprises 11,000 MW at 14 baseload stations and seven peaking stations. Its gas distribution system is connected to six interstate pipelines.

Rocco Canonica

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