2007 Industry Report: Utilities

Companies fret about generations to come
By Frank Maley

Power Points

TREND: Customer demand for electricity in North Carolina is creeping closer to utilities' capacity to generate it.

OUTLOOK: Expect utilities to build more power plants in five to 10 years.

The state's biggest power companies spent the last few years tightening focus on electricity generation and distribution. Now they need to figure out how to keep the juice flowing to a growing population. "A lot of the companies like us are having the same experience," says Bill Johnson, chief operating officer of Raleigh-based Progress Energy. "If you look out 15 or 20 years, the infrastructure we need to build to serve customers is staggeringly large. We really have not built much for the last 20 years."

The state population is expected to grow 21% to 10.7 million by 2020. Progress and Charlotte-based Duke Energy have been selling assets to pay down debt and to build more plants to handle everyday demand, not just provide power when usage peaks. "We put the balance sheet back in good shape, so when we go out to raise capital, we do it on favorable terms." Johnson says. "We have a long-term plan here, and we will begin the execution of it in 2007."

Progress and Duke Energy are considering building nuclear reactors, which no U.S. utility has done in decades. Though construction costs are higher than for plants that run on carbon-based fuels such as coal, operating costs are much lower. Because it takes so long to get a plant approved and built, neither plans to open one before 2015. Executives expect Congress to enact stricter limits on carbon dioxide emissions, and Duke has been pushing to get the rules set. "We're making many billions of dollars of investments that are 30- to 50-year investments, and it would be helpful to know the regulatory regime as we make those investments," spokesman Tom Williams says.

Progress sold its natural-gas-production business to Dallas-based EXCO Resources in October for $1.2 billion. Duke bought Cincinnati-based Cinergy in April, adding about 1.5 million electricity customers, a 68% increase. Within three months, it announced that it would spin off most of the natural-gas business it acquired in a merger a decade ago. Houston-based Spectra Energy started trading publicly in January. Stockholders received half a share of Spectra for each Duke share. "Wall Street wasn't giving us the valuation we thought we deserved, so we split the company, " Williams says. In the six months after the announcement, Duke shares rose 17%.

Duke and Progress aren't the only power providers worried about future generating capacity. Raleigh-based North Carolina Electric Membership Corp., the nation's second-largest electric cooperative, has seen demand grow 2% to 3% annually the past five years. "We're going to have to look at generation sources in this state," says Nelle Hotchkiss, senior vice president of corporate relations. "We're having to look at how we're going to get that power to everybody in the state. A lot of folks are concerned that we're going to build more power lines and transmission substations."

The co-op's rate increases leveled off in 2006, aided by fuel costs that dropped steadily through the year. Much of its energy is produced by Progress, but it also generates its own. It expects to finish two peak-demand plants in Anson and Richmond counties this year.

Piedmont Natural Gas, the largest gas distributor in the state, struggled with volatile wholesale prices. Net income for the fiscal year ended in October slipped 4% to $97.2 million. As the calendar year ended, prices fell, and Piedmont dropped its rates. The company expects demand to increase earnings per share from $1.28 to at least $1.35 in fiscal '07.

San Antonio, Texas-based AT&T bought Atlanta-based BellSouth, the state's largest provider of local telephone service, for $67 billion in December. Change came swiftly for BellSouth's former North Carolina operations. President Krista Tillman retired five days after the deal closed. Cynthia Marshall, former senior vice president for regulatory and constituency affairs for AT&T California, succeeded her.