Cinergy Corp. said yesterday it expects to take a $57 millionafter-tax charge ($0.36 per share) on July earnings because it hadto pay exorbitant prices in the wholesale market to maintaindeliveries during a period of peak demand in late July. The chargealso includes $16 million to settle damage claims related toCinergy’s defaults on several power marketing agreements.

It was the first public announcement by the company sincereports surfaced last week that it defaulted on multiple powerdelivery contracts with wholesale marketers. Yesterday Cinergy CEOJames Rogers stressed that the company is “committed to meeting allof our obligations in the market all of the time” but faced”extraordinary circumstances” in late July, including record heat,record peak demands and major transmission constraints into theregion.

Cinergy said electric demand in its tri-state service territorypeaked at 10,858 MW July 22 and reached 10,811 MW July 30. The July30 power sendout level would have been 1,000 MW greater andblackouts almost certainly would have occurred, Cinergy said, if ithad not curtailed interruptible customers and power marketers andaggressively called for voluntary conservation.

“We made the decision to meet human needs and avoid the severescenario of rotating blackouts that others experienced during theheat wave,” said Rogers. “We chose to maintain service to ourcustomers in Ohio, Indiana and Kentucky as well as our wholesaleobligations such as municipals, while curtailing service to somepower trading customers.”

On July 30, facing $9,000/MWh power prices in the wholesalemarket and near record demand for power in its territory, Cinergysent out force majeure notices to eight marketers. Force majeure isa legal protection invoked when unforeseen events make itimpossible for a company to fulfill a contractual obligation. Somecritics have suggested it was a case of “price majeure” rather thanof force majeure because power was available, just at very highrates. Cinergy has denied such charges and said it intends toreimburse the power marketers for the cost of non-delivery.

Among the marketers affected were Williams, Enron and Unicom. AnEnron spokeswoman said “At this time we have no problem withCinergy. We feel confident they will fulfill all of theircontractual obligations both current and future.” However, othershave 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 inwhich Cinergy defaulted. Aquila Energy said Cinergy also defaultedon several of its contracts on July 23 and 29 without sending outforce majeure notices. A Cinergy spokeswoman confirmed that, sayingthe situation was not “compelling enough” to declare force majeure.Aquila is in the process of settling with the company for “a littlemore than $1 million” but intends to continue doing business withCinergy.

However, Cinergy’s problems already have had seriousrepercussions in the financial markets. Standard & Poor’s saidit currently is evaluating Cinergy’s business profile, “which couldbe adversely affected by insufficient credit standards andexcessive risk at its trading unit.” Investment ratings on thecompany were downgraded by several prominent analysts, includingEdward Jones analyst Robin Diedrich and Steve Fleishman of MerrillLynch. Fleishman suggested it would be wise for the company toconsider exiting the marketing business altogether. But that isunlikely to happen, said Cinergy spokeswoman Angeline Protogere.She said a wholesale marketing operation is essential with thecompetitive changes taking place in the power industry and thediverse needs of its customer base.

Rogers indicated, however, that Cinergy will make changes tomake sure the situation does not recur. “In an embryonic,competitive market, the risks and costs of meeting unprecedentedpeaks are difficult to predict,” said Rogers. “Volatility relatedto serving peak obligations should decline over time as contractsexpire, customer choice is implemented, new generation isconstructed in the Midwest and the market matures. Clearly ourmission now is to aggressively pursue a combination of alternativesto mitigate the risk of meeting our obligations during times of’super peaks’ like we experienced in July.”

Protogere said a number of potential solutions already aremoving forward, including additional power generation in theregion, customer choice in Ohio and the formation of a Midwestindependent system operator. Cinergy has a request for proposalsfor 1,000 MW of power to be added this year. In addition, DukeEnergy is building a 1,300 MW merchant power plant in Ohio, andIndiana has approved construction of another 1,700 MW ofgeneration.

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