Cinergy Corp. CEO James Rogers told analysts recently the company may exit the power supply business altogether, including nonregulated trading and marketing, and regulated sales, as a result of the huge losses suffered in the power market in July (see NGI, Aug. 9). Cinergy’s board intends to make a decision on the matter this fall. The company also plans to consider spinning off its generation business into a separate subsidiary.

Experiencing record heat and power demand on its system and exorbitant power prices in the hourly wholesale market in late July, Cinergy cut interruptible customers, declared force majeure on power marketing agreements with eight marketers and called for voluntary power usage reductions. The drastic measures were required, Rogers said, in order to prevent blackouts from occurring in Cinergy’s territory. He blamed part of Cinergy’s problems on restricted access to Columbus, OH-based American Electric Power Co.’s (AEP) transmission system.

Cinergy took a $57 million loss, or $0.36/share, because of the cost of maintaining deliveries to core wholesale customers with power purchased on a market that registered $9,000/MWh. In addition, its defaults on power marketing agreements are expected to costs the company $16 million, or $0.10/share, in settlement charges.

Force majeure is a legal protection invoked when unforeseen events make it impossible for a company to fulfill a contractual obligation. Some critics have suggested it was a case of “price majeure” rather than of force majeure because power was available, just at very high rates. Cinergy has denied such charges. In any case, Cinergy will have to reimburse the power marketers for the cost of non-delivery.

Among the marketers affected were Williams, Enron and Unicom. An Enron spokeswoman said “At this time we have no problem with Cinergy. We feel confident they will fulfill all of their contractual obligations both current and future.” However, others have said they will be hesitant to do business with the company, particularly during peak demand periods.

Apparently the afternoon of July 30 wasn’t the only period in which Cinergy defaulted. Aquila Energy said Cinergy also defaulted on several of its contracts on July 23 and 29 without sending out force majeure notices. A Cinergy spokeswoman confirmed that, saying the situation was not “compelling enough” to declare force majeure. Aquila is in the process of settling with the company for “a little more than $1 million” but intends to continue doing business with Cinergy.

Cinergy’s problems, however, already have had serious repercussions in the financial markets. Duff & Phelps, Standard & Poor’s and Moody’s Investors Service all said they were considering possible downgrades for the company and would be evaluating its business profile. Cinergy’s investment ratings were downgraded by several prominent analysts, including Edward Jones analyst Robin Diedrich and Steve Fleishman of Merrill Lynch. Fleishman suggested it would be wise for the company to consider exiting the marketing business altogether.

For the time being, Cinergy will remain in marketing and trading and will look for ways of mitigating the risks involved, such as adding generation and shedding some long-standing sales agreements that were at below-market rates, the company said. If it decides to exit power marketing, its regulated sales business to 1.4 million customers in Ohio, Indiana and Kentucky will have to go with it, said spokeswoman Angeline Protogere.

“The supply business, we believe, is intrinsically linked with trading. We necessarily have to trade power to serve customers. If [we] can’t fix these problems, [we] may look at exiting the business entirely. But say we made a decision to do that. We still have our foot in the regulated world. It would take two to three years to be able to exit that business because we would have to have regulatory approval,” she noted.

Rocco Canonica

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