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Duke Energy Plans To Sell Moss Landing Power Plant: Other Facilities Part of Deal; Effect on Desalination Projects Unclear

Posted on: Tuesday, 10 January 2006, 09:00 CST

By Virginia Hennessey, The Monterey County Herald, Calif.

Jan. 10--Duke Energy announced Monday it plans to sell the Moss Landing Power Plant and most of its other power plants to a subsidiary of LS Power Equity Partners for about $1.5 billion.

Representatives of two entities that have proposed desalination projects attached to the Moss Landing Power Plant said it is too early to determine how the sale might affect those plans.

The sale includes all of Duke Energy's power plants outside the Midwest, including the Morro Bay, Oakland and Chula Vista power plants. In a prepared statement, Duke said it anticipates a one-time, pre-tax gain of $330 million. Duke expects the complete sale of its Duke Energy North America (DENA) holdings to bring net proceeds of more than $500 million.

The sale is anticipated to have minimal "cash tax impact" on the corporation, said the statement, and will have no impact on ongoing earnings since the assets to be purchased are classified as discontinued operations. The company had transferred most of its DENA portfolio to Barclays Capital in November.

Duke's stock closed at $27.85 Monday, up 0.06 points on the New York Stock Exchange.

"Completing the exit from DENA's business is a major objective for 2006," said Paul Anderson, chairman of the board and chief executive officer of Duke Energy. "This agreement to sell DENA's entire fleet outside the Midwest puts us well on our way only nine days into the year."

The transaction, which requires approval from the Federal Energy Regulatory Commission, is expected to close before June.

LS Power is a 15-year-old private firm that owns and manages at least 10 independent power facilities across the country. It recently bought a $22 million gas-fired plant in Pennsylvania, and is building a coal-fired plant in Alabama, and a combination coal-fired plant and wind farm outside of Ely, Nev.

LS Power did not disclose how much each plant in the deal with Duke is worth.

Duke, the troubled, North Carolina-based power company, announced in September that it planned to sell its power plants in the western and northeastern United States, plants owned by the DENA subsidiary. DENA agreed last year to refund $207 million to western states after it was accused of overcharging for electricity in 2000-01.

Around the same time, LS Power announced that it had raised $1.2 billion from a variety of endowments, foundations, pension plans and corporations for power-generating purchases.

Rising natural gas prices have also reduced plant profitability. The Moss Landing plant, the largest power plant in California, burns natural gas to run turbines to produce electricity.

Anderson said in September that without the sale of the plants, the subsidiary would lose money in 2006.

In 2004, Duke had to sell plants in the Southeast for less than it cost to build them.

When Duke acquired the Moss Landing facility in 2002, the company said it had invested $1.5 billion in the Moss Landing plant alone.

The sale raises questions for proponents of two proposed desalination projects in Moss Landing, both of which plan to desalinate water that first runs through the power plant's cooling system. LS Power's willingness to cooperate with such a venture was unclear Monday.

Catherine Bowie, spokeswoman for California American Water, which hopes to build its desalination plant on Duke property in Moss Landing, said Cal Am learned of the sale on Monday and has had no discussions with LS Power regarding the desalination proposal, called the Coastal Water Project.

Cal Am does not yet have a lease or contract allowing it to place either its pilot plant or the main desalination plant on the Duke property.

"Right now, we are focused on the environmental review of the (desalination project) and will wait until the appropriate time to begin discussions with the new owners," Bowie said in an e-mail. "To the extent this news may hasten the process of initiating lease negotiations with the new ownership, we are pleased. But as we've stated before, the Coastal Water Project will continue to move forward... regardless of the status of Duke's sale."

Cal Am's application to the county to operate a pilot desalination plant on the power plant property has been in limbo because Duke has not yet met environmental mitigation efforts required when it was allowed to remove some oil-storage tanks from the site in 2000.

A competing desalination project is proposed for Moss Landing by Pajaro-Sunny Mesa Community Services District and Poseidon Resources. The partners have a 98-year lease for property at the former National Refractories site, but hope to use the power plant's cooling-system water as well.

Peter MacLaggan, vice president of Poseidon, said he was unfamiliar with LS Power and had had no discussions with the group regarding the desalination proposal. While access to the power plant's system is preferable, he said, the National Refractories site has its own intake and outfall system to the bay.

Like Cal Am, Poseidon is awaiting a county permit to begin operation of its pilot desalination plant, MacLaggan said, though that permit is not tied to Duke's mitigation requirements. MacLaggan said the company and Pajaro-Sunny Mesa are about to hire a contractor to produce the project's environmental impact report.

Poseidon prefers to use the power plant as a water source, MacLaggan said, because warmer water is easier to treat. The company can avoid additional environmental impact if it doesn't use the intake system on the National Refractories site. Any damage to marine life caused by the intake of Duke's cooling system would have occurred already when the water gets to the desalination unit.

"It's too early to say," how the sale will affect the project, he said. "Although we continue to plan projects that include linkage to the Duke facility as well as a stand-alone project... we would face less environmental scrutiny if the (intake) is already permitted and mitigated on their part."

Herald Business Editor Marie Vasari and the San Luis Obispo Tribune contributed to this report.

Virginia Hennessey can be reached at 646-4355 or vhennessey@montereyherald

.com

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Copyright (c) 2006, The Monterey County Herald, Calif.

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Source: The Monterey County Herald (Monterey, Calif.)

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