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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \Richard_Shapiro_Jan2002\Shapiro, Richard\Inbox X-Origin: Shapiro-R X-FileName: rshapiro (Non-Privileged).pst <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09 <http://secure.s= cientech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/C= orner_TR.jpg<=09 =09 <http://secure.scientech.com/rci/wsimages/ia_banner02.gif<=09=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.sciente= ch.com/rci/details.asp?ProductID=3D971< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 =09 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_TR.jpg<=09 =09 SPONSORS <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/main/ad_redirect.asp?URL=3Dhttp://wwwthestructuregroup.com<; <http://secure.scientech.com/images/spacer.gif<; INFORMATION PRODUCTS <http://secure.scientech.com/specialpages/Generation_Technology_IAs.asp< = <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.c= om/specialpages/Generation_Technology_IAs.asp< <http://secure.scientech.c= om/images/spacer.gif< CONFERENCES <http://secure.scientech.com/images/spacer.gif<; Energy VentureFair IIJan. 29-30, 2002JW MarriottHouston, TX <http://secur= e.scientech.com/main/ad_redirect.asp?URL=3Dhttp://wwwenergyventurefair.com<; CBI's 6th Annual "Profit from Merchant Plants" Conference Jan. 28-29, 2002 = Four Seasons HotelHouston, TX <http://secure.scientech.com/main/ad_redirect= .asp?URL=3Dhttp://wwwcbinet.com<; <http://secure.scientech.com/images/spac= er.gif< <http://secure.scientech.com/main/ad_redirect.asp?URL=3Dhttp://cpun= msu.edu/<Center for Public Utilties The Evolving Electric Industry:=20 Wholesale & Market-Based Influences Feb. 3-6, 2002 <http://secure.scientech.com/images/spacer.gif<; SIXTH ANNUAL DISTRIBUTED GENERATION & ON-SITE POWER CONFERENCEMar. 11-13, 2= 002Marriott MarquisAtlanta GA <http://secure.scientech.com/main/ad_redirect= .asp?URL=3Dhttp://wwwdist-gen.com< <http://secure.scientech.com/images/sp= acer.gif< <http://secure.scientech.com/specialpages/New_Rate_Card.asp< <h= ttp://secure.scientech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 December 28, 2001 TXU Sells Two Texas Power Plants to Exelon; Sale Supports Strategies of Both Companies=20 By Will McNamara Director, Electric Industry Analysis [News item from PRNewswire] TXU Corp. (NYSE: TXU) and Exelon Generation ann= ounced an agreement to sell two large TXU gas-fired electric generating pla= nts to Exelon Generation, a subsidiary of Exelon Corp. (NYSE: EXC) for $433= million. The transaction, involving two Dallas/Fort Worth plants with a co= mbined capacity of 2,334 MW will allow Exelon Generation to expand its pres= ence in the Texas region, enhancing its geographic and market diversity, wh= ile providing TXU with the opportunity to expand beyond Texas.=20 Analysis: Perhaps the key factor about this deal is that it supports the st= rategies of both companies particularly well. TXU, one of the largest gener= ation companies in the world, has been attempting to expand out of its home= state of Texas for some time, following competitive opportunities as they = are presented by electric deregulation. The company, which will maintain a = presence in the Texas market, has already expanded internationally into cou= ntries such as Australia and Europe, and will mostly likely use the proceed= s from the divestiture of its two Texas plants to expand further in the Uni= ted States. For Exelon, the deal provides a foothold into the expanding Tex= as market, which becomes fully competitive next week, and provides a partic= ularly valuable inroad into the high-demand region of Dallas/Fort Worth. Let's first establish some important data about the two plants that TXU is = selling to Exelon. As noted, the combined capacity of the two plants is abo= ut 2,334 MW. One of the plants is the 1,441-MW Handley Steam Electric Stati= on, which is located southeast of Fort Worth. According to TXU, 412,000 bar= rels of oil can be stored on site to fuel five oil/gas units at the plant. = Handley is cooled by water from Lake Arlington. The first unit was put into= operation in 1948, with the additional units coming on line in 1950, 1963,= 1976, and 1977. The other plant being sold is the 893-MW Mountain Creek St= eam Electric Station, which is located about two miles west of Loop 12 in D= allas. With the first oil/gas unit established in 1945, four more units wer= e added in 1949, 1956, 1958, and 1967. Both sales include the generating un= its of the plants, along with all of the other assets that are necessary fo= r them to operate (land, water rights, transmission interconnections, gas p= ipeline interconnections, production facilities, and emission allowances). The strategies of both companies that are driving these transactions are pr= etty straightforward. From TXU's perspective, the sales will reduce the com= pany's generation concentration in a single U.S. market, which up to this p= oint has been primarily in its home state of Texas. Proceeds from the sale = apparently will be used to help TXU to expand in other North American marke= ts outside of Texas. In addition, proceeds from the sale will be used to st= rengthen TXU's balance sheet by reducing debt, something that has become in= creasingly important to all companies operating in the competitive energy s= pace since the bankruptcy of market-leader Enron. It is important to note t= hat TXU has no plans to exit the Texas market, and still intends to operate= in the state as a generation company and retailer. Note that according to = Texas restructuring law, there must be a wall between the two operating uni= ts, which must function as separate companies. In essence, the divestiture = is merely being used as a strategy for TXU to free up necessary cash that w= ill support growth into other markets, and reduce the amount of potential m= arket power that the company may have in Texas.=20 The issue of market power is another new factor that has developed in the l= atter half of this year, considering that recent rulings by the Federal Ene= rgy Regulatory Commission (FERC) have forced several other companies to cha= rge cost-based prices for some wholesale transactions if they are deemed to= hold market power in their particular service territories. Texas law allow= s a company to own and control no more than 20 percent of capacity within t= he Electric Reliability Council of Texas (ERCOT), and TXU claims that it is= within this cap. However, TXU acknowledges that it had an over-concentrati= on of generating capacity in one market and wanted to expand into other mar= kets. Excluding the sold facilities, TXU will now own 18,651 MW of net capa= city, which are still located primarily in Texas. However, it is becoming c= lear that TXU intends to reduce its role in the Texas generation market. From Exelon's perspective, the sale expands the company's generating capaci= ty by about 10 percent, which is an important increase considering that Exe= lon is attempting to maintain its position as one of the industry's largest= asset-based traders. Exelon, which was created as a result of the merger b= etween PECO Energy and Commonwealth Edison, is known mostly for its strong = nuclear capabilities. In fact, Exelon has the largest nuclear fleet in the = nation and still outpaces most of the competition in the nuclear industry, = owning a total of 17 reactors that produce about 17,000 MW of power. Exelon= may be attempting to create a more diversified generation portfolio. Exelo= n Power, which will manage the output of the two plants bought from TXU, ov= ersees Exelon's portfolio of coal, natural gas, oil, landfill gas, and hydr= o generating assets, which include 72 intermediate and peaking units in Pen= nsylvania and Maryland (capable of producing 4,800 MW of net generating cap= acity). Thus, Exelon's purchase of the two TXU plants could be seen as an e= ffort to diversify, both regionally and from a power-source perspective, fr= om the company's previous focus on nuclear power in the Northeast.=20 Perhaps equally important, the sale provides a valuable inroad to the Texas= market, which represents the second-largest energy market (behind Californ= ia), offering a market value of about $20 billion. Now that California is n= o longer a competitive energy market, there are high hopes that Texas will = prove to be a flourishing market once full competition begins in the state = next week. On Jan.1, 2002, most customers of investor-owned utilities in Te= xas will have the opportunity to choose a Retail Electric Provider (REP)-th= e company that provides their electricity. As a whole, the Texas energy mar= ket represents 70,000 MW of generation operating on a 37,000-mile transmiss= ion network.=20 One of Exelon's main objectives is to expand its portfolio of generation as= sets and position itself as one of the nation's top-tier energy suppliers. = Penetrating a state like Texas seems like a natural step for Exelon, which = up to this point has developing generating assets that stretch from Chicago= to Pennsylvania. This is not the first expansion that Exelon has made into= the Texas market. In the summer of 2001, Exelon began operating a new 165-= MW combustion turbine known as the ExTex LaPorte plant near Houston. Prior = to that, Exelon had already become involved in marketing power output from = two other plants in Texas (830 MW from the Tenaska Frontier plant and 350 M= W from the Wolf Hollow plant). It is important to note that Exelon and TXU are competitors in the Texas ma= rket, especially on the wholesale side of the business, and thus there are = fine lines drawn between the companies in light of the sales contract. Unde= r the sales agreement, Exelon Power, Exelon Generation's power plant operat= ion arm, will assume operation of the plants. The transaction includes a to= lling agreement under which TXU Energy will have the right to purchase powe= r during summer months for the next five years at market-based rates. Consi= dering the standard definition of a tolling agreement, it is presumed that = TXU will be providing the natural gas to operate the two plants during the = summer months of the five-year contract, and then purchasing the electric o= utput of the plants during that time. Interestingly, TXU is able to abide b= y Texas' requirement that it not own and control more than 20 percent withi= n ERCOT by selling off its ownership of these two plants. However, realisti= cally, TXU still has a hand in the operational control of these two plants,= at least in the summer months during its five-year contract with Exelon. T= his raises a philosophical question of whether or not the sales contract be= tween TXU and Exelon truly accomplishes the goals of Texas' deregulation pl= an.=20 _____ =20 Testimonials: "Let me take this opportunity to wish you a happy holiday as well and to te= ll you how much I appreciate receiving IssueAlert. It's the most relevant a= nd insightful publication that I receive and the only electronic one that I= read daily. Thanks and keep up the good work." Stephen Wiel _____ =20 "I want to thank you for providing one of the best energy markets analysis = services on the web!" Merwin Brown Market Sector Manager, Electricity and Natural Gas Markets National Renewable Energy Laboratory _____ =20 "Your columns are part of my industry reading each week. I really appreciat= e them and hope to work with you again in the new year." Rich Daileader First Union Securities, Inc. _____ =20 "Thank you for your interesting and wonderful publication. I wish you and y= our colleagues a Merry Christmas and Happy New Year."=20 H?seyin Tekinel _____ =20 "Thanks for your material. It is good and I enjoy reading it." Patrick McCormick Balch & Bingham, LLP _____ =20 "Christmas greetings, Will, from one of your readers in Australia. I must commend you on your articles. I find them not only useful in the det= ail but also thoughtful in the presentation. It has indeed been an exciting year. If anything, it proves that 'design' a= nd 'market' do not belong together - but bureaucrats and academic economist= s will never learn." Margaret Beardow Benchmark Economics _____ =20 An archive list of previous IssueAlert articles is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 _____ =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<at 505.244.7650. Advertising opportunities are also= available on our Website.=20 _____ =20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission and distribution, retail markets, new te= chnologies, I/T, renewable energy, regulatory affairs, community relations = and international issues. Contact consulting@scientech.com <http://consulti= ng@scientech.com< or call Nancy Spring at 505.244.7613.=20 _____ =20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. 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SCIENTECH'= s sole purpose in publishing its IssueAlert articles is to offer an indepen= dent perspective regarding the key events occurring in the energy industry,= based on its long-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D12/28/2001<;
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