New chief of Pittsburgh-area utility places nearly $600 million bet on future
By Len Boselovic, Pittsburgh Post-Gazette -- Dec. 19
As head of one of the oldest companies in a metropolitan area heavily populated by senior citizens, it's no wonder 44-year-old Morgan K. O'Brien frequently gets advice from his elders about how to turn around Duquesne Light.
"He said: 'Look around this room. You're the youngest guy here,'"
O'Brien recalls. "I was like 'Wow, that will keep me up at night.'"
That age issue was resolved with relative ease. O'Brien started a training
program with Community College of Allegheny County that graduated its first
class of electrical distribution students in May.
Resolving an issue raised by O'Brien's elders at a shareholders meeting in
June 2002 has been more problematic. Blood pressure and heart rates ran high and
Duquesne's stock was tumbling to a 10-year low following the utility's decision
to slash its dividend 40 percent.
A sheep-faced O'Brien had to explain why he broke his promise not to cut the
quarterly payout some shareholders relied on.
One 64-year-old shareholder, speaking for other seniors in the crowd, told
O'Brien: "You should be hung from the highest branches."
Trouble was, Duquesne was no longer the stodgy, dependable company the
retirees had trusted. Mesmerized by the late '90s love affair with tech stocks,
previous management wagered much of the $1.7 billion Duquesne received from
selling its generating plans on water companies, e-commerce and alternative
energy ventures. The misbegotten strategy looked good at first but quickly went
sour with the tech bubble in 2000.
Over the next two years, Duquesne's shares tumbled 77 percent from their
March 2000 high of $48.50.
Cutting the quarterly dividend from 42 cents to 25 cents helped clean up the
costly diversion.
"It was one of the toughest decisions we had to face," a humbled
O'Brien told shareholders at the 2002 meeting.
Two years later, the safety of Duquesne's dividend is again in question.
Synfuel-related tax credits -- late '80s federal incentives to develop
alternative energy -- that generate nearly 40 percent of Duquesne's annual
earnings will expire at the end of 2007. Unless those profits are replaced, the
utility may not make enough to cover its current dividend.
Last week, O'Brien unveiled his plan for coming up with a new pot of money at
a meeting with analysts in New York. And he made a promise that sounds
uncomfortably familiar to shareholders.
"We are committed to the dividend," he said. "The business
plan is really designed around sustaining that dividend."
His plan centers on Duquesne's renewed commitment to its core business:
delivering electricity to 588,000 residential and business customers in Western
Pennsylvania. O'Brien says the company will invest $570 million over the next
three years to upgrade and expand Duquesne's aging transmission and distribution
network.
Near the end of the period, Duquesne will ask the state Public Utility
Commission for permission to earn a profit on its investment by raising the
rates it charges for delivering power to homes, offices and plants. Those rates
last went up in 1987.
Based on the PUC's Dec. 2 decision in a case involving Allentown-based PPL
Corp., O'Brien forecasts a 2008 increase in Duquesne's transmission and
distribution rates could replace the tax-related profits and then some. Similar
treatment would allow Duquesne's transmission and distribution business to earn
an estimated $84 million to $88 million annually, equal to what the utility
expects to earn this year from all of its businesses, O'Brien said.
"There's a big opportunity to increase earnings from where we are
depending on how we're treated," he said.
Analysts say the plan, which sticks to the basics of what utilities have
historically done, makes sense but is not without risk.
Regulators are encouraging utilities to upgrade and expand their transmission
and distribution networks, hoping to avoid a repeat of the blackout that
crippled parts of the East Coast and Midwest in August 2003. California had
similar problems earlier.
If regulators don't provide incentives to utilities for improving their
networks, "at some point we're going to be as capacity constrained as
California was a couple years back," says analyst Ivan Feinseth, who
follows Duquesne for investment research firm Matrix USA.
Fitch Ratings' Rob Hornick says that although PPL received a favorable
ruling, the question is whether regulators will feel the same way three years
from now when Duquesne seeks a rate increase. "It's a doable plan [but] it
has a certain amount of regulatory risk," Hornick says.
A.G. Edwards analyst Neil Kalton says the ambitious plan calls for Duquesne
investing an average of $190 million annually, about 2.5 times more than it
spent annually in the previous three years.
"Whether the commission [PUC] will be on board for such a sizable
increase over this time frame is not clear yet," says Kalton, who has a
sell rating on the stock. "There are concerns they'll be able to get all of
this done and get it recognized in rates."
Earlier this year, the PUC rejected Duquesne's six-year plan for rates
customers would have paid for electricity, adopting instead a three-year plan
that takes effect Jan. 1.
One of Duquesne's strongest backers was Gov. Ed Rendell, who vented his
frustration with the PUC at a press conference at Duquesne's 7th Avenue
headquarters in September. If the governor is re-elected, four of the PUC's five
commissioners will have been appointed by Rendell by the time Duquesne takes its
case to Harrisburg.
While the regulatory and political climate can change a lot over the next
three years, analysts aren't completely discounting the relationship between
Rendell and Duquesne. "It doesn't hurt," Kalton says.
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