Friday, January 8, 2010

Lesson's and Comparisons about Natural Gas Supply between the U.S. and Britain: Britain Has only 65 Days of Gas Storage Remaining

January 8, 2010

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With Compliments of Mr. Miller's Office.

We nave received many inquiries regarding Mr. Miller's views on the U.S. Natural Gas market and storage. We draw natural gas investors attention to the BG transaction and Mr. Miller's rationale and vision for executing this natural gas production and supply transaction for Electricite de France in 2000.

Now that Britain has announced they have only 65 days remaining of natural gas in storage, the foresight Mr. Miller had at the time becomes apparent. This is but one of many large structured natural gas transactions Mr. Miller has conducted over his career to position a company and country to benefit from the coming supply/demand imbalances.

The attached information is provided for public interest only. Mr. Miller is on medical leave until mid 2010.

Monday - June 22, 2009


Southern California Edison (SCE) announced on May 15, 2009 that it will not pursue a refiling of its application with the Arizona Corporation Commission to build the Arizona portion of the Devers-Palo Verde No. 2 (DPV2) electric transmission line at this time. In addition, SCE will cease its current pre-filing activities at the Federal Energy Regulatory Commission for the project.

Several industry insiders pointed to Karl Miller, the senior energy industry veteran as weighing heavily on the decision and applying pressure on regulators and politicians to cancel the transmission line. Mr. Miller has been leaning heavily on the strategy the United Sates is taking towards its renewable energy sector. Many in the executives in the industry have stated that Mr. Miller is quickly becoming a dominant force in shaping the US energy policy, especially regarding renewable energy and transmission projects across the US.

According to the SCE, the Arizona portion of this transmission line would have extended from the Blythe, Calif. area to the Palo Verde Nuclear Generating Station 50 miles west of Phoenix, Ariz. The DPV2 project, a 270-mile, high-voltage, electric transmission line, was originally filed in Arizona in 2006.

Coincidentally, we wrote a feature article on March 20, 2009 about Mr. Miller, a twenty year commodity and energy industry veteran and globally recognized senior energy executive. It seems our timing was optimal, especially given Mr. Miller's rumored influence in the SCE California and Arizona transmission developments and other developing energy matters across the United States.

We investigated further as to why SCE, a powerful California utility would fold a project it so desperately tried to push through, one that many in the industry refer to a "black box" transmission project. Translated into simple English, this means that the public utilities across the United States have historically been able to bury significant cost at consumer's expense into transmission projects, which were virtually impossible for the ratepayers and public utilities commissions to decipher, almost at will.

Then came Mr. Miller, a veteran of PG&E, El Paso Energy, Electricite de France, Enron and Wall Street who has been very critical of the government and private sector approach to implementing and sustaining the renewable energy initiatives being undertaken by the new Obama administration, especially establishing a comprehensive energy production and carbon emissions strategy which needs to be implemented for the United States immediately.

Mr. Miller an energy industry icon seems to be an enigma to the Government and Utilities renewable energy activities, especially in the Western United States. Unlike other executives like T. Boone Pickens who has taken a very public approach to market his views on renewable energy solutions, primarily pushing wind parks, Mr. Miller has publicly called out SCE, SDG&E and PG&E, among other Utilities as being major offenders in the renewable energy and transmission industry problems. Mr. Miller is also encouraging the Utilities to curb their past practices and change their ways.

Perhaps it is because Mr. Miller knows, from inside experience, these Utilities like SCE are pursuing futile renewable energy efforts which are doomed for failure and will ultimately cost the consumer billions in unrecovered expenditures, similar to the stranded nuclear costs, which cost the United States consumers billions of dollars over the last thirty years.

We attempted to contact Mr. Miller in an attempt to interview him for this article, but were informed by his office that he is currently on medical leave and due to return until August 2009.

However, we found several recent public statements by Mr. Miller, which provide insight into his position on the renewable energy and transmission problems in the United States today and possible capital deployment plans for the future.

Mr. Miller was quoted on March 31, 2009 in the Financial Times as stating the following about the renewable energy sector in the United States:

"Investors like me will be waiting on the sidelines - during the short-term boom period and will look to step in and buy assets for pennies on the dollar when the renewable bust comes in a few years," Mr. Miller said.

By then, he said, the market would be littered with uneconomical renewable projects. As an investment model, he suggests, one need only look at the ethanol boom and bust of the past three years. "It was a clear demonstration that government handouts simply do not work."

Copyright The Financial Times Limited 2009

Mr. Miller was quoted on April 3, 2009 in the Daily Deal as stating the following about the SCE transmission projects:

There are plenty of critics of utilities and power producers incorporating renewable energy into their portfolios. Karl Miller, a former power plant executive and now a consultant in New York, is among them. He says the worst offenders are Sempra Energy, PG&E Corp. and Southern California Edison, which he claims are window dressing their renewable portfolio standards mandate as an excuse to jam through major transmission pork projects. He notes Sempra's Sunrise Power link, a $2 billion, 123-mile high-voltage line in Southern California's Sonoran desert, and Socal's major transmission projects to the Arizona border.

"Utilities are signing checks they can't cash, which means that utilities are signing contracts with every Tom, Dick and Harry developer for wind, solar and biomass projects to meet their renewable standards mandates," he says. "The problem is almost all of the 'contracts' are for projects that are not constructed, have no firm transmission or have other major flaws and challenges. While there are legitimate efforts to make advancements towards green/renewable generation strategies, I'm afraid the majority of it is simply window dressing. I truly believe it is going to be the next boom and bust industry in the U.S. Economy."

Miller thinks utilities and power generators should instead be investing in clean-burning, natural gas-fired power generation that can be brought on line as soon as the "green/renewable bust occurs" and the country panics due to lack of sufficient base load generation.

"Renewable technology and infrastructure support are simply not there yet and will take many years and hundreds of billions of dollars in venture capital to advance," he says. "Government handouts won't work -- never have and never will, in any industry."

Copyright The Daily Deal 2009

Given the sensitivity of the renewable energy and transmission initiatives in Washington and at the State level across the country, it was difficult to find anyone credible or senior enough to go on record formally discuss the problems the industry is facing.

However, we did speak to several industry executives who know Mr. Miller including one who has worked for Mr. Miller in the past. to gain some insight into how one senior energy executive might have such a substantial influence over a major multi-billion dollar project like the California/Arizona transmission line, and other such projects, tagged as "pork" by Mr. Miller.

The industry executive we spoke with told us, "Mr. Miller knows virtually everyone in the industry, he knows the assets, and knows the infrastructure.

He is an industry pioneer, having been a leader in the deregulation of the US; Scandinavia, Australian, and UK electricity markets and probably has the largest Rolodex in the industry. He studies a market, determines the best course of action and goes out and executes on that action plan. He is notorious for being patient and waiting for the less experienced players to make mistakes, and then jumps in full force with capital".

"He has done this for years, during every boom and bust cycle. He also has tremendous access to capital, in good and bad markets. His philosophy is capital must always be a phone call away. To watch him work when he is in full transaction mode is amazing. I have never seen him get turned down when he makes the call, capital always shows up, it’s just usually winds up being horse trading on terms of the money".

Others industry consultants advise that when you sit across the table from Mr. Miller on a transaction or technical issue, you better have an army of engineers on hand, and even that won’t save you from his wrath. Many consultants have seen him take transmission grid operators, the purported industry experts, apart at the seems in meetings. The Utility engineers do not want to be in a room with Mr. Miller when he is developing or planning a power plant. He will tell them the price of a circuit breaker, a transmission line upgrade and why their numbers are off or inflated.

On the finance side of matters, one of Mr. Miller's former bankers cited how he "chews investment bankers up, especially those trying to pitch energy assets with hockey-stick revenue projections". "You usually get five minutes with Mr. Miller; he listens, runs the numbers in his head, then gets up and tells you good luck or send me a term sheet."

Some say he learned this trait from years of having to deal with the short fused private equity and hedge funds that were initially very tough on Mr. Miller in his early years. Now it is Mr. Miller who demands brevity in meetings, even if it is not his money being deployed. Everyone at the meetings knows that Mr. Miller will control the assets being pursued for capital and give him this respect. Those who have worked for Mr. Miller all confirm that he will not pursue a deal unless he controls the assets, credit and the commodity risk. This seems logical, given Mr. Miller's prior trading and risk management background.

The executive went on to say, "If Mr. Miller likes or wants certain assets, he usually picks up the phone and makes a direct call to the owners. He is also known for sending a one to two page bid letter directly to Company boards saying I will buy your assets or portfolio at a set price, cash, backed by XYZ. He is not afraid to chase assets on an unsolicited basis, and was rumored to be the largest private bidder for power generation assets in for many years, albeit at highly discounted prices. If he does not get his price, he walks. He is not greedy and he is very disciplined according to competitors. It does not seem to bother him if he goes a year without closing a transaction. But when he does close a transaction, historically it's highly profitable, sometimes off the charts".

Case in point a former European colleague recalled when Mr. Miller closed the largest natural gas transaction in Europe during 2000/2001 while managing EDF's European non regulated business. He purchased several producing natural gas fields in the North Sea from BG International, purchased all of the pipeline transportation to the German border and also purchased the sizable natural gas supply contracts to the German utilities.

Mr. Miller structured the transaction as a reverse-compensation deal, whereby BG paid EDF a substantial sum of money to take the deal. Mr. Miller knew the value of the position, but convinced BG it was a loser and would not do the deal unless BG paid him to take on the purported liabilities.

Actually, Mr. Miller correctly concluded that the UK was going to convert from being a natural gas exporter to a natural gas importer and controlling domestic production and the pipeline capacity was going to be a hugely profitable asset to own. He could purchase the natural gas he needed to supply the German Utilities on the European continent and from the Norwegians cheaper than shipping his UK supply all the way to the German border.

Mr. Miller flew to Paris, convinced EDF management of the strategy that they needed to be in the natural gas and oil related markets, secretly negotiated major guarantees for the transaction and closed what became a windfall transaction for EDF, not to mention establishing them in the natural gas market.

Speaking on the basis of anonymity, another former colleague recalled one instance in 2006 when Mr. Miller was in the process of acquiring and commissioning several power plants in California. Mr. Miller had correctly concluded that State of California had fallen asleep at the wheel regarding their electricity capacity reserves and Mr. Miller was attempting capitalize on this by buying up every quick start peaking power plant and viable project site he could. Mr. Miller was the first investor to go back into California and purchase power plants since the energy crisis of 2001, at that time.

The Wall Street banks refused to back him as they were afraid of California politics and contract law and the recent crisis which almost bankrupted the State, so he went to private capital, convinced them of the strategy, raised the money and bought the power plants.

During this process, Mr. Miller ran into difficulty with the California Public Utilities Commission and the CAISO/Grid Operator over permitting and contract issues over several of the power plants he had purchased. After all efforts to resolve the matters failed, Mr. Miller flew to Sacramento, found out where Governor Schwarzenegger was having lunch and immediately went to the restaurant where he was dining to discuss the matter in person with the Governor, unannounced.

As the story goes, Mr. Miller pulled the Governor aside, made it clear that California was in desperate shape; Schwarzenegger was only recently elected because the former Governor Gray Davis had failed at dealing with California's electricity and gas problems, and the governmental bureaucracy at the CAISO and CPUC was threatening his future tenure as Governor.

Mr. Miller warned the Governor that the State of California had no meaningful electricity reserves, irrespective of what the grid operator reports said for the summer of 2006 and needed to take immediate action. If there was a heat wave, any major fires or major power plant outages, the Governor would be directly blamed for the potential blackouts and any collateral damage.

According to Mr. Miller's colleague, "then the Governor and Mr. Miller had a few private words and both departed. Needless to say, Mr. Miller got his power plants commissioned and contracted and California did have a heat wave and multiple fires during the summer of 2006". Schwarzenegger was saved as Governor having been warned by Mr. Miller to have the CAISO take other preventative measures. We doubt Governor Schwarzenegger or Mr. Miller will ever acknowledge that such a conversation ever took place.

According to other industry sources, there is simply no way to ignore Mr. Miller when wants a deal done or has a view on an industry matter. If you try and close door on him, he will simply kick it in carrying a big stick.

Mr. Miller is known for being very persuasive, while others would call him a pit bull. But one thing is clear, he is at least to date, rarely if ever wrong about an energy transaction. If Mr. Miller is buying, others are following and vise versa, if Mr. Miller is selling, others are following as well.

One of Mr. Miller's former colleagues stated, "He plays chess mentally twenty four hours a day. He is always ten moves ahead and has solid economic goals when he makes a move. I have never seen him chase a transaction or push a political position that did not have exponential returns or had a logical rationale. He is very covert in his actions and many times the market does not even know that it is Mr. Miller buying or selling certain assets with capital partners".

"The man has a nose for making money and knows how to manage risk, manage the politics and he has tremendous power over the national media. They are very loyal to him due to the many years of relationship, he talks straight to them, knows the energy industry and usually right on almost all commercial issues. If CNN, Bloomberg, CNBC, Financial Times, etc want a straight, unbiased private view on the industry, they call Mr. Miller and have done so for years. Mr. Miller shy's away from television media".

Perhaps Mr. Miller's tough business traits come from his early years of working in the commodity pits and the commodity fraternity in North Carolina, where he and a handful of other senior industry executives have been educated including the likes of John Mack, Dick Jenrette, Julian Robertson, Paul Tudor Jones, and William Harrison, to mention a few.

Mr. Miller is rumored to have started working in the commodity pits when he was in his early twenties in New York, and learned at a very young age how to be humble, start at the bottom, take a beating by tough traders, come back the next day like nothing had happened and eventually become a winner.

One industry attorney commented, "If you don't know Mr. Miller and he or any of his financial backers shows up at the your office or board room, you can be assured he has a well thought out agenda, he has a wallet full of money, given the strong support he maintains from Private Equity and Hedge Funds, and you better listen to him. He does not do random; everything he does has a purpose. He is a combination of Ann Rand and Sun Zu, an absolute capitalist and a competitor who knows when to hit and run. If he hits you, it's probably already too late to defend yourself."

One of Mr. Miller's former attorney's we spoke to put it bluntly, "he is relentless, you will earn your fees working for him, and if you cross him on a deal or he feels you wronged him in business or personally, he will hunt you down, make life painful for you, however long it takes. The man is an avid hunter and remembers everything and everybody. He invited me to go hunting with him in North Carolina a few years ago and my wife would not let me go, citing how Dick Cheney accidentally shot one of his hunting partners".

We can only anticipate where and when Mr. Miller is going to show up again in the energy sector, when he returns to the market from medical leave. One thing is for sure, with the poor state of the United States economy, flawed economics of the renewable energy sector, there will be a large heap of distressed energy projects and companies for Mr. Miller, given his influence and knowledge should be well positioned.

One can only wonder how much Mr. Miller will accomplish when he is healthy.

We will continue to follow him and the unfolding events in the renewable energy and transmission industry

Disclosure: Long U.S. Energy Companies

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