Executive: Duke agrees to forebear but not forgive California receivables

Jan. 11, 2001—Duke Energy Corp. has agreed to forbear but not forgive receivables the company is owed for electric power sales in California, the president of its U.S. merchant generation unit confirmed in a conference call Thursday.

No proposal has been set in stone, but Jim Donnell, president of Duke Energy North America, said if certain conditions are met the big energy concern would forbear collecting receivables from financially strapped California investor-owned utilities, the California Independent System Operator, and California Power Exchange for a “very short period of time—weeks not months.”

The proposal is one that grew out of ongoing talks conducted in Washington, DC, among California Gov. Gray Davis, leaders of the state legislature, major generators, marketers, utilities, regulators, and Federal officials on how to rescue California from a debilitating electricity crisis.

Nailing down the details could still trip up a global settlement, Donnell said, especially with the number of parties involved. But if a deal comes to fruition, the company will require the same security that it would of any agreement of a similar size, Donnell said.

“One thing we have to have for shareholders is security of payment. Otherwise, we are no better off than if they [utilities] were in bankruptcy,” Donnell said.

Should either of the utilities actually file for reorganization under the U.S. Bankruptcy Code, Donnell said, Duke has taken “appropriate legal steps” in the event the company becomes a creditor. Under certain circumstances, Donnell said, a reorganization filing by the utilities might be positive for Duke, but “I would much prefer a workout” among the parties.

Donnell characterized settlement talks as still in the early stages with the investor-owned utilities trying to identify their needs, while the suppliers are attempting to craft a deal that “feeds those needs.” But given the utilities dire financial straits, he predicted an agreement in principle will be reached in the “very, very near term—no later than early next week.”

Duke owns or controls 3,300 MW in California, including the Moss Landing in Mooro Bay where a 750 MW unit unexpectedly tripped off line Thursday.

Defend rights
The company has repeatedly emphasized about 90% of the output of its California plants is sold forward to companies other than the investor-owned utilities. Donnell said because the plants’ output is under contract, Duke might not have much to offer the state from its own generating capacity as part of settlement during 2001.

But, he noted, the company is also a large gas and power trader and might have more to offer the state during coming years.

He characterized as “water under the bridge” Gov. Davis’s comments deriding out-state-generators as profiteers. Still, if the governor attempted to act on a threat of forced sale to the state of recently purchased California power plants, Donnell said, “We think there are rules and laws in place to prevent that. Confiscation from a legal perspective is not a viable option. We would vehemently defend our rights under the Constitution and the law.”

Donnell said Duke is willing to enter into power sales contracts without a fuel escalator clause because the company has the ability to hedge such purchases within its own portfolio. Although gas at the Henry Hub is presently selling for $6-$7/Mcf, between now and 2005, forward curves suggest prices will range in $4 range, Donnell said, which could become the basis on bilateral contracts.

He said the key to solving California’s problems will be coming up with a mix of short and long-term solutions .