Michael T. Burr
When Entergy Corp. acquired London Electricity in early 1997 for $2.1 billion, the New Orleans utility didn`t expect it would sell the British distributor two years later. But that`s precisely what happened in early December, with Entergy turning a tidy $860 million profit.
The London Electricity story is being re-enacted all over the world stage-with different characters and settings. As one player enters a market, another exits. Meanwhile, the plot thickens.
“Entergy and others are re-thinking their investments,” said Ms. Gill Rider, Anderson Consulting`s partner and head of the North Europe utilities practice in London. “We expect to see more changes in investments. People will come in and then pull out if they find an investment doesn`t match what they want to do.”
Bob Anclien, Anderson`s global managing partner in Atlanta, expanded on Rider`s statement: “We`ve seen a lot of opportunistic investments. Some people jumped in, and have since developed a more comprehensive strategy.”
Recent international entries and exits include the following:
– Entergy`s sale of London Electricity for $3.185 billion to ElectricitÃ© de France;
– Entergy`s acceptance of AEP Resources` Aus$1.7 billion bid for Citipower of Melbourne, Australia;
– GPU and Cinergy Corp.`s sale of Midlands Electricity`s supply business to National Power Plc for $300 million, plus assumption of debt and other obligations. Excluded from the deal are Midlands` wires and substations, which GPU and Cinergy will keep.
As a backdrop for these moves, market conditions continue changing in places like Argentina, Australia and the United Kingdom. “Over the next five to 15 years, different markets will do different things,” Rider said. “Competition will increase, the industry will be unbundled, then will consolidate again, and trading systems will emerge.”
Through it all, companies continue pursuing their goals. “It`s like a game of Chutes & Ladders, where players move up and down, and get in and out as markets and strategies change.”
A similar scenario is playing out in the United States, as companies vie for position in the future deregulated U.S. power industry. The most recent plot twists:
– National Grid Plc`s planned acquisition of New England Electric Systems (NEES) for $3.2 billion, representing a 25 percent premium over NEES` stock price.
– Scottish Power`s announced takeover of PacifiCorp in a stock deal that values PacifiCorp at $7.9 billion;
– The AES Corp. agreed to acquire Peoria, Ill.-based CILCORP Inc. for $885 million;
– Shareholders of Mid American Energy and CalEnergy Co. voted in favor of the companies` merger, under which CalEnergy will effectively acquire MidAmerican for $4 billion;
– Dynegy Inc. and NRG Energy Inc. submitted the winning bid to acquire San Diego Gas & Electric`s 951 MW Encina power plant, plus 17 combustion turbine peaking units. The $356 million bid was 3.8 times the assets` 1997 book value.
– Entergy submitted the winning, $80 million cash bid to acquire Boston Edison`s Pilgrim nuclear station (see Sidebar: “Pilgrim`s promise: Entergy embarks on national nuclear strategy”);
– Southern Energy Inc. agreed to pay $480 million for 1,776 MW of generating assets from Orange & Rockland Utilities (O&R) and Consolidated Edison;
– Southern also won in its bid to buy three Pacific Gas & Electric power plants, totaling 3,065 MW, for $801 million; and
– AEP Resources acquired the midstream natural gas operations of Equitable Resources Inc., paying $320 million plus working capital for an integrated gas gathering, processing, pipeline and storage operation in Louisiana and an energy trading and marketing business in Houston.
Deregulated U.S. market forays are following a pattern similar to that seen in many international ventures, according to Tom Flaherty, national partner, energy consulting with Deloitte Consulting in Dallas.
“A good strategy is based on putting together a cluster of assets in given markets. This is a way to get into a position to expand and leverage the optionality of assets,” he said.
Many recent transactions, however, seem less strategic and more opportunistic in nature. “People are focusing on early entry,” he said. “They want to get in first, so they`re taking advantage of things coming onto the market.”
This drive to stake out a position is prompting some companies to pay higher prices for assets than might seem reasonable. “People are giving up value for early admission. For example, given the number of people entering the New England market, it`s hard to envision how everyone will be able to create a major position,” Flaherty said.
This will likely translate into more divestitures in the future. “It`s similar to the situation we`ve seen in Argentina and the U.K., where a secondary market developed from people exiting the business,” he said. “Some companies are waiting for this secondary market to open up in the United States, in hopes that asset values drop back down.”
Others are seeking to avoid the plant auction process by acquiring utilities whole. “CalEnergy, by buying MidAmerican, got generation assets at a lower premium than they might have paid for them at auction,” Flaherty said. “It`s a seller`s market. There are more than enough willing buyers to pay high premiums.”
Other factors driving prices include the presence of permitted but undeveloped sites, proximity to gas pipelines, and the liquidity of the trading market in the region, Flaherty said. “It all depends on how you view the market, and what you plan to do with the plant once you have it. It`s the management of the asset that makes the difference.”
ENTERGY EMBARKS ON NATIONAL NUCLEAR STRATEGY
Entergy`s winning, $80 million bid to acquire Boston Edison`s Pilgrim nuclear station marked the first U.S. nuclear plant to be sold in a competitive bidding process. It also signaled the first acquisition in Entergy`s new nuclear strategy, aimed at making the company a national nuclear generator.
“When we look at the economics, these units are extremely competitive with any other option,” said Don Hintz, president of Entergy Corp. and CEO of Entergy Nuclear. “We`re trying to buy nuclear plants at market value and increase their performance to the level of the rest of our plants.”
The Pilgrim auction drew interest from a large number of bidders, according to Reed Consulting Group, which managed the sale for Boston Edison. “This was a very competitive process that generated many strong bids from world-class nuclear operators,” said John J. Reed, president. The first stage of the auction generated a list of 10 potential suitors, which was eventually reduced to two finalists.
While numerous bidders lined up in the Pilgrim auction, nuclear asset sellers also have begun exploring the market. “We`re seeing a lot of interest by utilities to divest nuclear units,” Hintz said. “There are two reasons: deregulation and single-unit economics.” State regulators are encouraging utilities to divest their generation assets if they want to remain in the distribution business. They do this by giving divesting utilities “better treatment on the stranded cost issue,” Hintz said. “Boston Edison is an example of this.”
The other major driver is the difficulty of operating a single nuclear unit. “In a competitive environment, you have a disadvantage without an economy of scale on purchasing and operations,” Hintz said. Entergy intends its strategy to bring a critical mass of expertise and purchasing leverage.
Under the agreement signed in mid-November, Entergy will pay $67 million for the plant`s nuclear fuel and $13 million for the Pilgrim facility, as well as its 1,600 acre site on Cape Cod Bay. The deal includes a power purchase agreement (PPA) through 2004, under which Pilgrim`s output will be sold to Boston Edison, Commonwealth Electric and Montaup Electric Co. The PPA covers 100 percent of the plant`s 670 MW capacity through 2001, diminishing to 80 percent in 2002 and 50 percent in 2003 and 2004. Power not covered by the PPA is expected to be sold into the New England wholesale market.
At the deal`s closing, Entergy is expected to pay an additional $10 million for nuclear fuel in the reactor. Over the next 10 years, Boston Edison is to be paid another $31 million, in 1998 dollars, from insurance disbursements that involve policies transferred to Entergy.
Additionally, Boston Edison is expected to fully fund and transfer to Entergy a decommissioning trust totaling $466 million. This figure is $154 million less than Boston Edison`s estimate of decommissioning costs.
Entergy has targeted decommissioning services as an additional growth area in its nuclear strategy. The company signed a six-year, performance-based contract in late September 1998 to oversee decommissioning of the Maine Yankee plant.