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SCIENTECH's IssueAlert
Today's IssueAlert Sponsors: =09 [IMAGE] SCIENTECH is currently interviewing 1,500 utilities on CIS/CRM and= customer care in the United States and Canada to determine: The leadi= ng software providers Drivers of utility technology decisions Analysis of= license sales versus ASP sales New market opportunities Growing/shrinkin= g software markets Download a sample prospectus for an introduction to t= his new survey at: http://secure.scientech.com/specialpages/Multi_Client.as= p and contact Jon Brock at 505-244-7607 for more details.=09 [IMAGE] [IMAGE][IMAGE] Electric Power System & Natural Gas System Maps ar= e available from SCIENTECH, Inc. Click here for full descriptions and pric= es of Electric and Gas Maps.=09 [IMAGE] [IMAGE] October 26, 2001=20 Conectiv Completes Nuclear Plant Sales=20 By Will McNamara Director, Electric Industry Analysis=20 [IMAGE] [News item from PR Newswire] Conectiv (NYSE: CIV), an energy provider locat= ed in the Mid-Atlantic, announced that its wholly owned subsidiary, Atlanti= c City Electric Company, completed the sale of its ownership interests in t= hree nuclear plants to PSEG Nuclear LLC and Exelon Generation Company. The = ownership interests were sold for approximately $11.3 million, excluding re= imbursement of estimated fuel inventory, subject to adjustment.=20 Analysis: This announcement from Conectiv came out late last week, but I di= d not want to miss the opportunity to provide some analytical commentary on= what I think is a rather significant development. The transfer of ownershi= p in the three nuclear plants included in this transaction is significant b= ecause of its relation to Conectiv's unique competitive strategy and the ro= und-robin way in which nuclear assets are changing hands in the United Stat= es. Further, despite an increase in acquisition activity around the nation'= s nuclear facilities, we still are seeing only a small number of companies = that actually own or control nuclear power in the United States. =20 The divestiture of the nuclear assets includes only what is Conectiv's owne= rship in the plants, which Conectiv shares with other companies (who also h= appen to be the buying partners in this sale). The breakdown of the sale of= nuclear assets is as follows:=20 A 7.51-percent interest (164 MW) in the Peach Bottom Atomic Power Station U= nits 2 and 3 sold in equal shares to co-owners PSEG Nuclear and Exelon. Pri= or to the transaction, PSEG Nuclear, an indirect subsidiary of Public Servi= ce Enterprise Group Incorporated, and Exelon each owned about 46 percent of= the Peach Bottom plant. Exelon is the operator of the Peach Bottom facilit= y.=20 A 7.41-percent interest (167 MW) in the Salem Nuclear Generation Station Un= its 1 and 2 was sold to PSEG Nuclear, which prior to the sale owned about 5= 0 percent of the facility. PSEG Nuclear will remain the operator of the pla= nt.=20 A 5-percent interest (52 MW) in the Hope Creek Nuclear Generation Station U= nits 1 and 2 was sold to PSEG Nuclear, which is the operator of the plant a= nd prior to the sale owned 95 percent of the facility.=20 As noted, the significance of these transactions relates to Conectiv's comp= etitive strategy and the consolidation that is taking place in the nuclear = sector. Let's look at Conectiv first. =20 According to Conectiv's President and COO Thomas Shaw, the divestiture of t= he nuclear assets is consistent with the company's focused business strateg= y on two core energy businesses: Conectiv Energy, the company's integrated = generation and asset optimization group, and Conectiv Power Delivery, the c= ompany's regulated delivery business. To support this two-tiered focus, Con= ectiv has been in the process of divesting its baseload generating plants t= o expand a generation portfolio that includes only mid-merit plants (units = that have more flexibility to follow demand patterns). Mid-merit plants are= often viewed as units that fill the operating space between baseload plant= s and peaker units. Whereas a baseload unit may have a generating capacity = factor of about 80 percent, a mid-merit unit may have a generating capacity= factor of about 30 percent to 55 percent. From Conectiv's perspective, the= value of the mid-merit strategy is that these plants can be reserved to op= erate only when demand is comparatively high. Further, the company believes= that mid-merit units are ideally suited to support the company's energy tr= ading and asset optimization strategy because they are flexible enough to p= rovide fuel arbitrage opportunities and ancillary service support when they= are not needed to meet higher demands for power.=20 The sale of the nuclear assets follows the previous sale of 1,081 MW of bas= eload generating capacity by Delmarva Power & Light, a subsidiary of Conect= iv, to NRG Energy and the divestiture of Conectiv's telecommunications busi= ness (Conectiv Communications) to Cavalier Telephone of Richmond, Va., for = $20 million. In addition, Conectiv sold its 50-percent stake in a 118-MW co= -generation facility in New Jersey to Pedricktown Cogeneration LP, a non-ut= ility electric generator, for $9 million. =20 Conectiv is divesting all of its baseload generation but has maintained own= ership of some 2,000 MW of mid-merit generation in the Mid-Atlantic region.= The proceeds from the coal plant sales to NRG will reportedly be used to r= epay debt and fund Conectiv's development of additional mid-merit assets. C= onectiv's immediate goal is to build more than 4,000 MW of mid-merit power = generation within the Mid-Atlantic region by 2004. Toward that end, Conecti= v is taking some of the proceeds from the NRG transaction and using the mon= ey to support a $300-million, 500-MW expansion of its Hay Road Generating S= tation, which is currently a 516-MW plant that is primarily fueled by natur= al gas. =20 The divestiture of both the telecommunications business and the baseload ge= neration supports Conectiv's strategy of re-focusing on its core businesses= , which are power trading and wholesale marketing (through mid-merit units = only) and a regulated delivery business. Conectiv Power Delivery provides e= nergy service to more than one million customers in New Jersey, Delaware, M= aryland, and Virginia. Given the fairly distinct line between Conectiv's re= gulated and unregulated businesses, I have previously speculated that Conec= tiv could be preparing to spin off its unregulated businesses into a stand-= alone company (a trend represented by AEP, Reliant and UtiliCorp). Conectiv= is in the midst of major restructuring, so it is unlikely that any such sp= in off of its generation business would take place in the near term. Howeve= r, as far as I know, Conectiv is the only energy company that has focused e= xclusively on mid-merit plants. =20 Conectiv is also involved in merger proceedings with Pepco, a partnership t= hat is scheduled to close in April 2002. In this deal, Pepco is acquiring = Conectiv for a combination of cash and stock valued at $2.2 billion. Both c= ompanies will become subsidiaries of a new holding company to be named at a= later date. The partnership between these two relatively small and regiona= lly based utility companies reportedly will create the largest electricity = delivery company in the Mid-Atlantic region. By combining their two electri= city delivery businesses, Pepco and Conectiv reportedly will more than doub= le their customer base and expand their service territory by nine times.=20 In the nuclear sector, it is not terribly surprising that Exelon and PSEG N= uclear would be the buying partners in the three nuclear plants sold by Con= ectiv (despite the obvious fact that these companies already maintained maj= ority ownership in the plants). Exelon and PSEG Nuclear are two of what is = a small number of companies that are actively involved in the nuclear-power= space, and thus it is not surprising that they would be involved in the li= cense exchange on these three plants. Exelon has the largest nuclear fleet = in the nation and still outpaces most of the competition in the nuclear ind= ustry, owning a total of 17 reactors. Earlier this year, Exelon CEO Corbin = McNeill said he thought that a new nuclear plant would definitely be built = in the next five years, and did not rule out the fact that his company migh= t be the one to drive the construction of the new nuclear facility.=20 As noted, PSEG Nuclear is an indirect subsidiary of the Public Service Ente= rprise Group Inc., which in 2000 was split into PSE&G, a regulated gas and = electric delivery company in New Jersey and PSEG Power, an unregulated U.S.= power generation company. As noted, PSEG Nuclear LLC operates the Salem an= d Hope Creek Nuclear Generating Stations in Lower Alloways Creek, N.J., and= oversees PSEG Power's ownership interest in the Peach Bottom Atomic Power = Station, located in Delta, Pa. When the Conectiv transaction is completed, = PSEG Power will own 100 percent of Hope Creek, 52 percent of Salem, and 50 = percent of Peach Bottom.=20 In addition to Exelon and PSEG Nuclear, Entergy Corp. is another company th= at deserves a mention when discussing the nuclear sector. Since 1999, Enter= gy has been an active bidder on most every nuclear plant that has come onto= the auction block. Recently, Entergy bought Con Edison's Indian Point Unit= s 1 and 2 nuclear power plants in Westchester County, N.Y. In addition, Ent= ergy recently announced an agreement with the Vermont Yankee Power Corporat= ion to purchase the 501-MW Vermont Yankee nuclear power plant in Vernon, Vt= ., for $180 million. With the completion of the Vermont Yankee sale, Enterg= y will own a nuclear fleet that includes 10 reactors. Also note that the N= ew York State Public Service Commission (PSC) just approved the sale of Nia= gara Mohawk's Nine Mile nuclear generating station to Constellation Nuclear= for about $780 million. The purchase prices for the 614-MW Nine Mile 1 and= 82 percent of the 1,142-MW Nine Mile 2 are about $221 million and $559 mil= lion, respectively. Constellation is another company that has consistently = increased its nuclear power assets.=20 Given the volatility of natural gas prices and the high emissions associate= d with coal-fired generation, many industry analysts have debated whether o= r not nuclear power is on the brink of resurgence. Exelon, for example, is= involved in a joint venture that is attempting to commercialize a new nucl= ear technology called Pebble Bed Modular Reactor (PBMR). Supporters of PBM= R believe its relatively small size (110 MW), anticipated short constructio= n time (24 months) and cost ($1,000/kW) can once again make nuclear power a= n acceptable option. In February of 2001, Exelon filed an application with= the U.S. nuclear energy regulators to license a similar reactor in the Uni= ted States. Clearly, steps are being taken to revive this controversial in= dustry.=20 An archive list of previous IssueAlerts is available atwww.scientech.com=20 We encourage our readers to contact us with their comments. We look forwar= d to hearing from you. Nancy Spring Reach thousands of utility analysts = and decision makers every day. Your company can schedule a sponsorship of I= ssueAlert by contacting Jane Pelz at 505.244.7650. Advertising opportunit= ies are also available on our Website. =09 Our staff is comprised of leading energy experts with diverse background= s in utility generation, transmission & distribution, retail markets, new = technologies, I/T, renewable energy, regulatory affairs, community relatio= ns and international issues. Contact consulting@scientech.com or call Nan= cy Spring at 505.244.7613. =09 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us know if we can help you with in-depth analyses or any other SCIENTECH i= nformation products. If you would like to refer a colleague to receive our= free, daily IssueAlerts, please reply to this e-mail and include their f= ull name and e-mail address or register directly on our site. If you no = longer wish to receive this daily e-mail, and you are currently a registere= d subscriber to IssueAlert via SCIENTECH's website, please visit http://s= ecure.scientech.com/account/ to unsubscribe. Otherwise, please send an e-= mail to to IssueAlert , with "Delete IA Subscription" in the subject line.= =09 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAler= ts are not intended to predict financial performance of companies discusse= d, or to be the basis for investment decisions of any kind. SCIENTECH's so= le purpose in publishing its IssueAlerts is to offer an independent perspe= ctive regarding the key events occurring in the energy industry, based on = its long-standing reputation as an expert on energy issues. Copyright = 2001. SCIENTECH, Inc. All rights reserved.=09
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