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Strategy for strong balance sheet -- Duke's wind business

Duke Energy, one of the largest electric power companies in the US, has transformed itself into a medium-sized wind player through two small acquisitions in the past 15 months. In June it paid $240 million for Catamount Energy, a wind project developer based in Vermont, a year after buying Tierra, a Texas developer that joined the fold in May 2007. Both will operate under the name of Duke Energy Generation Services (DEGS), the North Carolina utility's deregulated arm.

Duke had been combing the market for a medium-sized wind developer but found it could create better value by purchasing two smaller companies instead. Now, in addition to a combined pipeline of more than 5000 MW of potential projects in about a dozen states, DEGS expects to have 500 MW of wind power online by the end of the year and start bringing another 300 MW online annually. The company's Wouter van Kempen compares the strategy favourably with that of DEGS' nearest competitors. "I think we have gotten to a similar position for an amount of money that is significantly less," he says.

Catamount, formed in 1992, has focused on wind development since 2001. It co-developed and co-owns the 500 MW Sweetwater project in Texas, and maintains 1750 MW of development interests in several states and the UK. Catamount will retain its 14 staff.

The company formerly known as Tierra has been busy with three projects this year. Happy Jack, a 30 MW project near Cheyenne, Wyoming, and Ocotillo, a 60 MW development in Howard County, Texas, are both up and running. Notrees, a 90 MW West Texas facility, will be finished late this year or early next -- with a second phase at 60 MW already planned for 2009.

"Our stated goal is to build up to 300 MW a year," van Kempen says. "Some years it may be a little bit more, some years it may be a little bit less. But we feel very good that we'll be able to deliver all of it." He says turbine supply will not be a problem for a company like Duke. "We believe that, for what we want to build in 2009, those turbines are available for us," Van Kempen says. "Most of them are available because we took a long turbine position. And for 2010, we believe there are still opportunities to get turbines."

In the current market, with a question mark hanging over the extension of wind's federal production tax credit (PTC), Van Kempen sees advantages in Duke's strong financial position. "If you're an independent developer without a balance sheet that needs to go to a bank to get a turbine loan, then go to a bank to get a construction loan, then go to the bank to get tax-equity financing and other things taken care of -- that's not a good market when the PTC is not extended," he says. "Not a lot of banks are signing up loans these days for those types of people."

For at least the short term, sooner or later the PTC will continue, he believes. "It's a matter of time -- not a matter of if, but a matter of when. But, given the balance sheet of our parent company, we have the opportunity to continue with what we want to do and continue to put our plans in place for building out in 2009."

Catamount will retain its 14 employees and its hometown office in Rutland, Vermont. The former Tierra is still based in Austin, Texas. "It makes a very good combination," Van Kempen says. "If you look back at where we were 15 months ago, we went from nothing to doing two transactions and creating a business that is very meaningful and exciting."

Duke supplies and delivers energy to some four million customers. The company owns more than 37,000 MW of generating capacity in the Midwest and the Carolinas, along with 4000 MW in Latin America.

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