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Despite a Summer Struggle, Cinergy Will Stay in Supply Business
After a July power price spike forced it to default on severalsales agreements with marketers and led to a $73 million net lossthat month, Cinergy Corp. seriously considered quitting the supplybusiness altogether (See NGI Aug. 9, Aug. 11). But CEO James E.Rogers said last week the company’s board of directors hasunanimously decided Cinergy should stick with it as the industrymoves to a competitive environment.
“The board and management carefully weighed all options,including exiting the supply business, and concluded that we haveobtained the size, scale, and skills necessary to be a successfulplayer in the region,” said Rogers. “Our supply business is a majorcontributor to the corporation, accounting for 70% of our revenuesand 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 reviewduring which it examined Cinergy’s supply obligations, supplycapabilities, regional market dynamics, and supply industryevolution.
The board also recognized, however, that in the futuremanagement might wish to sell portions of its supply business,given regulatory approvals, and branch out of its territory toacquire customers and assets in order to diversify its supplyportfolio.
“As our regulated business evolves into a competitive supplybusiness, we must design a new model that places a premium on aprofitably balanced portfolio,” Rogers said. “In this vision of thesupply business, the power trading function is an integral part ofthe balancing of supply and demand that will allow the company tostabilize earnings in the future.”
Cinergy came under a lot of pressure from Wall Street to exitmarketing and trading following its decision to default on severalagreements with power marketers in order to maintain deliveries toits regulated customers during the July demand peak.
“The net loss that we took in July was $73 million and $57million of that was for [serving] the long-term, full-requirementspower contracts with municipals and RECs [during a period of peakpower prices]. We had $16 million that was related to the contracts[with marketers that] we paid liquidated damages on,” said Cinergyspokesman Steve Brash.
“The primary issue that we faced last summer was during thesuper peak we were short. And already we have reached an agreementwith 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 expireat the end of this year so that [will be gone next summer]. And weare working on a number of demand-side arrangements with customersthat we hope will pick up another couple hundred megawatts, whichwould pretty much bring us in line with what our shortfall was lastyear. With the combination of all of the different approaches thatwe’re using we’re looking to have probably in the neighborhood of a1,650 MW [increase in supply] compared to last [summer].” Brashwould not reveal the total cost of the added supply capacity. Healso said the company is negotiating with its full-servicescustomers to see if there are better ways to manage supplies duringpeak periods.
In addition, Cinergy has significantly changed staffing withinits power marketing and trading division. In total, there are 23new staff members, two new executives and two executives who havemoved over from other positions within the company.
“We are building a stronger team with a tighter focus and areconfident we can make our supply business successful,” Rogers said.Brash indicated Cinergy is changing its marketing and trading focusfrom being more volume oriented to being more value oriented.
Cinergy’s operating companies, Cincinnati Gas & Electric andPSI Energy, serve more than 1.4 million electric customers and470,000 gas customers in Indiana, Ohio and Kentucky. Cinergy’senergy system comprises 11,000 MW at 14 baseload stations and sevenpeaking stations. Its gas distribution system is connected to sixinterstate pipelines.
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