Merchant Plant Owners Report Third-Quarter Profits, Some Big Losses

By Published On: December 14, 2003

Most of the merchant power companies doing business in California reported third-quarter earnings this month, which were not a cause for much celebration. That is not, however, necessarily true for the portions of their business done within the state. In fact, since the energy crisis ended, California operations are producing reasonable, if low-yielding, results for the most part. In contrast, the rest of the country is still in the throes of various deregulation plans. In addition, there is the problem of overcapacity?as well as worldwide changes?that together seem to be throwing off the retail and wholesale sides of the business. Also affecting income are losses suffered after the crisis and the post-Enron meltdown of the trading business, from which companies are still licking their spreadsheet wounds. In addition, companies this year are also posting write-downs due to a raft of settlements with the Federal Energy Regulatory Commission. Those settlements, for the most part, allow companies that traded energy during the energy crisis to settle any pending FERC litigation over gaming charges. Following are some of the highlights: <b>Calpine</b> Despite the post-crisis market, Calpine?s California operations appear to be doing fair this year, but the company is severely leveraging its operations. ?We do look attractive? in California and some other parts of the West, Peter Cartwright, Calpine chair and chief executive officer, said. ?Other markets are challenged,? he added. Calpine reported it made $238 million in income this quarter, compared to $151 million last year. But the problem is that it is employing a strategy that has been described as ?drive-by? financing?that is, selling securities at very high premiums in order to raise cash to pay off existing debt. The company has finished about $2.1 billion in what it calls ?liquidity-enhancing? transactions this year. The premiums it has to offer to reap that cash are, however, at junk-bond level, thus engendering the need to raise more cash to pay off the interest. And the $2.1 billion is only what?s been completed. In total, the company has issued more than $4 billion in debt. Last week, Calpine offered $1 billion in new securities. It said it plans to use the proceeds to repay or purchase existing debt. For part of that, the return is reportedly almost 10 percent?comparable to the rate of return for California utilities through rates, but high on the open market. Calpine also agreed to have San Diego Gas & Electric buy the entire output of its Otay Mesa plant instead of attempting to finish building it as a merchant plant. If approved by the California Public Utilities Commission, the deal will allow Calpine to use the contract as security for funds to complete the barely begun 570 MW plant. <b>Reliant</b> After taking a $985 million write-down on its wholesale business, Reliant reported a loss of $791 million for the quarter, compared to earnings of $50 million this time last year. Reliant also noted a loss of $126 million for discontinued operations that included selling the Desert Basin plant to the Salt River Project at a $75 million loss. Its retired California plants, Etiwanda Units 1 and 2, were part of a $14 million write-off. Several California plants that were just announced as mothballed last week?Etiwanda Units 3 and 4, 640 MW; Mandalay Unit 3, 130 MW; and Ellwood, 54 MW?are not written off as they are not permanently retired. Instead, the change in function frees up liquidity and cost savings, according to Reliant spokesperson Richard Wheatley. Reliant also noted that it took a charge of $37 million related to the Federal Energy Regulatory Commission settlements. The company settled with federal regulators for most alleged gaming infractions for $50 million last month and an additional, smaller amount in August. <b>Duke</b> The Texas-based company admitted its projected earnings were higher than what materialized. Duke Energy posted earnings of $49 million, compared to $230 million last year. The decline was blamed on mild summer weather for its utility in the East and low ?spark spread??the difference between the cost of fuel and the selling price of power. The biggest write-off was associated with terminating turbine contracts and other power plant plans that were aborted, totaling $286 million this quarter. Other costs include a $71 million loss on sales this year, $105 million in severance payments to staff and management, and a $17 million settlement with the Commodity Futures Trading Commission. To help its bottom line, Duke sold $1.9 billion worth of assets, reporting $1.8 billion in liquidity at the end of September. Reflecting less action in the trading market, Duke took a $254 million charge ?due to the reduced scope and scale of Duke Energy Trading & Marketing?s business,? Robert Brace, chief financial officer, said. It did not take a charge on the Morro Bay plants that are in cold shutdown, according to Duke spokesperson Pat Mullen. Those should show up next quarter, he added. <b>Dynegy</b> Dynegy is creeping back to profitability this year, posting $5 million in income for the quarter, compared to a huge loss?$1.65 billion?last year at this time. After a failed attempt to acquire Enron when it was down and out, Dynegy admitted to using trading practices that distorted its bottom line. The company executed ?wash trades??a practice of trading equal amounts of energy that didn?t go anywhere but were recorded as an increase in sales volume. Reeling from those failures, Dynegy?s top management subsequently left the company last year. The loss for last year was posted at $2.8 billion following a second audit. <b>Mirant</b> Currently in bankruptcy, Mirant belatedly reported a $2.2 billion loss October 28 for its second quarter. While expecting a decline in its $1.62 billion in cash on hand, Mirant said it anticipates it will be enough to fund operations during bankruptcy. The company, which filed for bankruptcy protection in July, also said it would cut another 5 percent of its workforce. Officially, the company did not mention California operations in its release. It did note weather, terrorist activities, and changes in regulations?putting it at an increased risk. The company?s 10K earlier this year noted that about 37 percent of the company?s revenues for 2001 came through the California Department of Water Resources. But those contracts expired at the end of 2002. Last spring, chief executive officer Marce Fuller said she expected about $50 million less in revenue from California operations this year than last year. The Bay Area Air Quality Management Board has also been breathing down Mirant?s corporate neck to install expensive pollution-control equipment on at least four of its Pittsburg plants, and it had recently installed scrubbers on four other plants.

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