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Generating Plant Sales and Acquisitions: Who's Doing What, and Why

Fortnightly Magazine - February 15 1999

1997, GPU announced plans to auction 5,300 MW of non-nuclear generation, stating that it felt that a much greater size would be required in order to compete in the competitive generation market of the future, and that GPU did not have the resources or strategic intent to achieve these economies of scale. Instead, GPU indicated that it intended to focus on what it considered to be its core business: energy distribution.

Recently, AmerGen Energy Inc. acquired 810 MW of GPU's nuclear assets (in Three Mile Island, Pa.). Edison Mission Energy bought another 940 MW of GPU's coal assets (GPU's share of the Homer City, Pa. plant). Sithe Energies has just bought the remaining 4,117 MW of GPU's non-nuclear assets.

Meanwhile, Montana Power Co., with its low-cost generation assets, did not have regulation motivating its announced asset divestiture. Instead, its management made the strategic decision to transform the company into a transmission and distribution-only operation and to focus on its core strength of customer service. Montana Power's generation assets (2,600 MW) are being sold to PP&L Global (parent of Pennsylvania Power & Light Co.).

As another example, Commonwealth Edison recently put up for sale 5,400 MW of its coal-fired assets. The cash generated from the sale will support ComEd's focus on superior operation of its nuclear plants and its regulated energy delivery systems. The sale will also enable Unicom Corp. (the parent company) to invest in new growth markets. ComEd expects to receive exceptionally high prices based on the number of companies that have expressed an interest in acquiring these assets. No buyer has been chosen yet.

Why They're Buying: Players and Strategies

The strategies that lie behind decisions to purchase generating plants vary widely. However, in general, one can pare them down to three approaches:

1. Economies of scale (fuel supply chain);

2. Asset-backed trading (retail and wholesale energy

services); and

3. Operational efficiency (management services for other asset owners).

Economies of Scale. The scale-driven strategy involves acquiring ownership of assets on a national basis. The goal is to create economies of scale across fuel management, supply chain/logistics management and operations management functions. Typical assets are base- and intermediate-load units. As such, the transactions will be relatively simple and often will involve selling into the local power pool or spot wholesale market.

Integration between asset management and plant operations is critical to the success of a scale-driven strategy. As the asset management group creates and refines the portfolio of assets, it needs to have input from plant operations to ensure that the asset adjustment is creating value for the company. For example, if the prospective (to be acquired) plant uses or can be converted to use the same fuel as existing resources, the "coal pile" potentially can be optimized across multiple sites, reducing capital invested in inventory. Other examples of value creation include savings through equipment standardization, reduced logistics costs and increased buying power though scale repurchasing.

The importance of plant operations is based on the need to drive the company to operational excellence and attain a low-cost position, while generating at