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Today's IssueAlertSponsors:=20
[IMAGE] The CIS Conferencec provides utility management personnel unequaled insight= =20 and current information on Customer Relationship Management (CRM),=20 E-Commerce, Technologies and Marketing. Fifty-four sessions conducted by=20 utility industry representatives will focus on issues facing the industry.= =20 Over 100 companies will exhibit the latest technologies and services.=20 Former President George Bush is our Honored Keynote Speaker www.cisconference.org=20 e-ProCom Europe for Utilities and Energy e-Business Conference & Exhibition= =01)=20 May 22-23, 2001, Amsterdam, The Netherlands e-Commerce/e-Business/Integrating the Digital Utility/ Pan-European=20 attendance from the major utilities and energy players can be found at the= =20 e-ProCom Europe: for Utilities & Energy e-Business. Call 31-346-590901 or= =20 email jhh@synergy-events.com or visit our web site at:=20 www.e-procomseries.com.=20 [IMAGE] In an exclusive SCIENTECH PowerHittersinterview, Jeff Sterba, CEO of Public= =20 Utility of New Mexico (PNM), shares some keys that have helped the small=20 company find success in the wholesale power market. He also looks at issues= =20 affecting deregulation both in New Mexico and across the country. Read the= =20 questions Sterba was asked at: www.scientech.com [IMAGE] [IMAGE] April 18, 2001 Are T=02=15Businesses Superfluous for Trading Operations? by Will McNamara=20 Director, Electric Industry Analysis [News item from Power Finance & Risk] Vertically integrated power company= =20 Dynegy is likely to sell its electricity distribution business within the= =20 next few years to focus on its more profitable energy generation and tradin= g=20 activities, predict analysts familiar with the company. Anatol Feygin, seni= or=20 equity analyst at J.P Morgan in New York, says a sale of Dynegy's=20 transmission and distribution assets could fetch the company close to $1=20 billion.=20 Analysis: There are two different ways to evaluate the speculation that=20 Dynegy may be looking to sell its transmission and distribution (T&D)=20 business. From a company-specific perspective, such a strategy would make= =20 sense for Dynegy, as it would allow the company to focus more exclusively o= n=20 its trading and marketing operation, which has experienced truly spectacula= r=20 growth over the last year. Although Dynegy has refused to deny or confirm= =20 reports that it is planning to sell its T=02=15assets, the company's financ= ial=20 numbers clearly build a case for such a move. In addition, Dynegy's potenti= al=20 restructuring could very well be part of a larger trend in which those=20 companies that place a high priority on their generation business see littl= e=20 value in remaining in the highly regulated and low-profit T=02=15market.=20 To be clear, Dynegy's T=02=15subsidiary is Illinois Power, based in Decatur= , Ill.,=20 which serves more than 650,000 natural-gas and electric utility customers i= n=20 a 15,000-square-mile area across Illinois. Dynegy acquired Illinois Power= =20 when it completed its merger with Illinova in February 2000. At the time,= =20 Dynegy maintained that a primary value of the acquisition was Illinois=20 Power's T=02=15operations and the fact that they would allow Dynegy to gain= a=20 foothold in the Illinois market. Of course, Dynegy also gained approximatel= y=20 4,929 MW of generation that Illinois Power had previously structured in an= =20 unregulated subsidiary. Nevertheless, if Dynegy is planning to sell its=20 T=02=15operation, the sale would include Illinois Power and would represent= a=20 dramatic strategy turnaround for the company.=20 Let's look at the unique reasons why Dynegy might be considering such a mov= e.=20 It's rather apropos that word begins to circulate of a sale of the company'= s=20 T=02=15business at the same time that Dynegy releases its 1Q 2001 report, i= n which=20 its earnings more than doubled. As it has in the past few quarters, Dynegy= =20 reported remarkable numbers, including a 73-percent increase in its earning= s=20 that resulted primarily from wholesale natural gas and electricity sales.= =20 Dynegy's recurring net income in the first quarter rose to $137.5 million o= r=20 41 cents per diluted share from $79.4 million or 26 cents in 1Q 2000.=20 First-quarter revenues rose to $14.2 billion from $5.3 billion. Dynegy=20 reportedly produced and sold 26.1 million megawatt hours of electricity in = 1Q=20 2001, which represented a 19-percent increase over the same period in 2000.= =20 Dynegy continues to discount the role that California sales played in its= =20 earnings, despite the fact that it owns about 2,800 MW of capacity in the= =20 state (including joint ventures). Due to its presence in the state, Dynegy= =20 (along with a handful of other power suppliers) continues to be singled out= =20 as having gained a financial windfall from the California energy crisis. Ye= t=20 even without California, cold weather in the Midwest during 1Q 2001 also=20 benefited Dynegy (along with other natural gas and power producers such as= =20 Enron and Duke). Looking nationally, Dynegy has ownership stakes in about= =20 13,000 MW of generating capacity and is on its way toward the goal of ownin= g=20 or controlling 70,000 MW by 2005.=20 Consequently, it seems fairly clear that wholesale marketing and trading is= =20 where Dynegy is making most of its money. It only makes sense that the=20 company would want to invest its existing capital resources (and any funds= =20 gained from selling its T=02=15assets) into growing this part of its busine= ss. In=20 contrast, in general T=02=15operations typically only bring a return of equ= ity of=20 about 10 percent, given the fact that they are still heavily regulated by= =20 FERC. When 73 percent of its earnings are coming from wholesale operations,= =20 it is a no-brainer that Dynegy would move further and further into this=20 market. Moving forward, Dynegy's business most likely will become more abou= t=20 managing its power sales and exchanges on its still-new trading platform=20 (Dynegydirect), and less about operating a distribution system. =20 As noted, I think Dynegy's business model fits into what appears to be a=20 growing trend among companies heavily focused on generation and trading.=20 First, over the last year there has been a slew of companies that have=20 divided or are planning to divide their regulated and non-regulated=20 businesses (AEP, UtiliCorp, Southern Company, Reliant and NRG, to name a=20 few). The operations are being split not only to attract two different sets= =20 of investors, but also to allow a high-growth business such as independent= =20 power production or wholesale trading to grow independently from regulated= =20 operations. =20 Second, I think we can look to AEP as a company that is charting what may= =20 become a more common path. Last fall, after completing its acquisition of= =20 CSW, AEP announced an extensive corporate restructuring that includes an=20 exclusive focus on generation assets, wholesale marketing and trading. The= =20 company has no plans to expand its distribution assets, either domestically= =20 or internationally. AEP has not released its 1Q 2001 earnings report yet, b= ut=20 for year-end 2000 wholesale margins at the company were 41 cents per share= =20 higher than in 1999. AEP presently controls a generation portfolio of 38,00= 0=20 MW and is a top 10 power marketer and top 20 natural gas trader in North=20 America. Nevertheless, AEP's restructuring could take more than a year to= =20 accomplish, especially considering that the company may have pooling of=20 interests restrictions related to its merger with CSW and other conditions= =20 that fall under PUHCA.=20 Thus, it's evident why the power marketing and generation business is so=20 appealing. In addition, it is also becoming clear that transmission and=20 distribution businesses might be something to avoid unless a company only= =20 wants to remain in this heavily regulated side of the energy industry. I've= =20 already mentioned the low average return on equity associated with=20 T=02=15operations (also referred to as =01&wires businesses=018 in some sta= tes). In=20 addition, FERC continues to monitor interstate transmission activity, and= =20 oftentimes the policies affixed onto separate transmission systems can be= =20 divergent and extremely complicated. A company that owns or operates=20 T=02=15assets, especially ones that transcend regional boundaries, may find= that=20 the business causes an excessive amount of operational headaches that simpl= y=20 cannot be justified by its minimal profit opportunities. Siting is also a= =20 problem, as even when communities can be convinced of the need for new=20 T=02=15capacity, they typically do not want it within their own view.=20 As a result, the wires business is presently considered to be rather=20 lethargic, considering its low risk / low rate of return characteristics.= =20 According to Reuters, electricity demand over the next 10 years is expected= =20 to increase by 20 to 25 percent. In contrast, transmission line capacity is= =20 expected to increase by only about 4 percent. The reasons for this disparit= y=20 are that many companies are avoiding further investment in transmission=20 capacity due to the inherent disadvantages associated with this business.= =20 Further, companies that presently own or operate transmission lines are=20 impacted by FERC Order 2000, which mandates a plan for forming or joining a= =20 regional transmission organization (RTO) by Dec. 15 of this year. While RTO= =20 plans continue to remain a high priority, the siting or expansion of=20 T=02=15capacity has become a secondary concern.=20 Considering these many downsides to the wires business, Dynegy and other=20 companies that look to sell their T=02=15businesses may not have such an ea= sy time=20 with the divestiture. As noted, the business is heavily regulated and any= =20 potential sale would have to be approved by several layers of regulatory=20 agencies. In addition, a company looking to purchase T=02=15assets, assumin= g that=20 the company is aware of all the risks involved, would most likely be a=20 company that is only interested in T=02=15and is not an active participant = in the=20 generation business. =20 There are companies with this kind of business model. National Grid comes t= o=20 mind as a leading example. The U.K. company is one of the world's largest= =20 independent transmission companies and for over a year has been attempting = to=20 establish a major presence in the transmission and distribution sectors of= =20 the industry, primarily in the United States. National Grid has acquired=20 Niagara Mohawk, New England Electric System (NEES) and Eastern Utilities=20 Associates (EAU), all T=02=15operations located in the Northeastern United = States.=20 Dynegy's assets are located in the Midwest and do not seem consistent with= =20 National Grid's regional focus. However, the point to be made is that there= =20 are companies active in the United States that are aggressively pursuing=20 T=02=15operations, despite the seemingly obvious risks associated with this= =20 business.=20 An archive list of previous IssueAlerts is available at www.scientech.com Reach thousands of utility analysts and decision makers every day. Your=20 company can schedule a sponsorship of IssueAlert by contacting Nancy Spring= =20 via e-mail or calling (505)244-7613. Advertising opportunities are also=20 available on our website.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us=20 know if we can help you with in-depth analyses or any other SCIENTECH=20 information products. If you would like to refer a colleague to receive ou= r=20 free, daily IssueAlerts, please reply to this email and include their ful= l=20 name and email address or register directly on our site. =20 If you no longer wish to receive this daily email, send a message to=20 IssueAlert, and include the word "delete" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= =20 of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlert= s=20 are not intended to predict financial performance of companies discussed, = or=20 to be the basis for investment decisions of any kind. SCIENTECH's sole=20 purpose in publishing its IssueAlerts is to offer an independent perspecti= ve=20 regarding the key events occurring in the energy industry, based on its=20 long-standing reputation as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All rights reserved.
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