Lessons learned from Cinergy's losses in commodity markets.
After a second summer of extreme weather, contract defaults and consequent financial losses to energy companies, the financial community and shareholders are holding utilities ever more accountable when it comes to managing risk, say analysts. Moreover, they're showing zero tolerance for failure.
On Aug. 10, Cinergy announced cash losses of $73 million after taxes, reflecting increased costs due to hot weather in late July and anticipated liquidated damage claims for failure to meet delivery obligations to several power marketers. The announcement drew criticism from stock analysts.
"We expect recent events will frustrate investors and create a stock overhang [for Cinergy], potentially for an extended time despite current discount valuation," according to a report from a stock analyst at Merrill Lynch & Co.
Cinergy held a meeting with analysts Aug. 11 in New York City, where the company insisted that planning couldn't and shouldn't revolve around a potential event with a 1 percent probability. But Wall Street did not seem to buy this explanation completely.
"We agree [to ignore low probabilities], but there are plenty of other players in this business (e.g., Enron) who have managed to navigate a number of price crises. ¼ Enron prides itself on being able to deliver electricity or gas anywhere in the U.S. on two hours' notice. Cinergy can't do that today, and we doubt they ever will be able to," says the Merrill Lynch & Co. stock analyst report.
Investors: Not Ready for Risk