Scott M. Gawlicki
With many of the world`s energy markets undergoing revolutionary change, U.S. utilities are stepping up investments in independent power and merchant generating plants.
Electric Light & Power takes a brief look at three utility affiliates-PPL Global, Dominion Energy, and FPL Energy. While each has a unique approach, the purpose of all of them is the same-build the parent`s bottom line.
When PPL Resources, the holding company for Pennsylvania Power & Light (PP&L), formed PPL Global of Fairfax, Va., as its independent power developer four years ago, the initial goal was to generate roughly 10 percent of PP&L Resource`s annual net profits-about $30 million by the year 2000-and then continue to grow from there.
As a result, said Bob Fagan, PPL Global president, the company`s initial efforts involved foreign asset acquisitions-typically as a minority investor/owner-to generate revenues and become profitable as quickly as possible. “We were in the black in our second year because we focused more on acquisitions than development. You can`t do that by focusing only on development,” Fagan says.
By investing on average from $50 to $100 million a year, PP&L Global`s portfolio now stands at $635 million in investments and commitments to assets totaling about $2 billion-well ahead of the company`s business plan.
Fagan attributes the company`s fast growth to a focus on what he calls “quality” markets-Latin America, Europe and the United States. In these markets, PPL Global found opportunities to invest in existing facilities, rather than build new ones. Particularly, PPL Global looked at countries that were privatizing government-owned power facilities. “We looked at Asia, particularly China and India. But there weren`t as many acquisitions available and it would have taken a lot of startup capital to develop green field plants,” he said.
In some cases, the company first purchased a minority position in a facility, and then moved to majority ownership. For example, in mid-1996, PPL Global invested $189 million for a 25 percent stake in South Western Electricity (SWEB), one of 12 formerly government-owned British utilities privatized in 1990. SWEB`s primary owner at the time was Southern Investments UK Holdings Limited, an affiliate of Atlanta, Ga.-based Southern Co. Then, in June 1998, PPL Global took a majority position in SWEB by buying another 26 percent interest for $170 million.
“Initially we didn`t have a lot of staff, so we weren`t in a position to take over. As PP&L got more comfortable with us, the staff began to increase. Now we have people in Chile and England,” Fagan said.
With an ever-expanding international portfolio, PP&L Global has begun turning its attention to the U.S. market, where it is looking to develop both new projects and acquire divested electric utility assets.
In April, it announced its first domestic venture-a 500 MW merchant plant it hopes to develop in Wallingford, Conn., with Boston-based Stone & Webster Development. If the project goes through (negotiations are still underway with the town), the combined cycle, gas-fired plant will be built at the site of an existing plant owned by Wallingford.
In September, PPL Global announced plans to build a 650 MW gas-fired plant near Kingman, Ariz., near the Nevada border. NP Energy, a Louisville, Ky.-based energy marketing company partly owned by National Power, has agreed to purchase and market between 240 and 520 MW of the plant`s output.
In addition to its merchant activity (Fagan says it has two other merchants on the drawing board), PP&L Global has set its sights on acquiring existing utility assets. “We`ve been short listed at a number of auctions. We haven`t had any wins yet, but we`re on a few short lists right now and we expect to announce a win in the near future,” he said.
Expanding its ownership position in existing facilities and acquiring utility assets are also key issues at Richmond, Va.-based Dominion Energy, which has been equally busy growing both its international and domestic businesses.
Dominion Energy is the independent power and natural gas subsidiary of Dominion Resources, the holding company for Virginia Power. Although the company has been in business for some 10 years (it currently has operating interests in 28 generation facilities throughout the U.S., Argentina, Belize, Bolivia and Peru), its profile has risen in the last 12 months with several new deals.
For example, in February 1998, it put the finishing touches on a $186 million acquisition of Chicago-based Commonwealth Edison`s 1,108 MW Kincaid (Ill.) power station. Under terms of the agreement, Dominion Energy will own and operate the coal-fired plant and sell all the power back to ComEd via a 15-year power purchase agreement (PPA). Upon the completion of the PPA, Kincaid will then become a merchant plant.
In May, the company announced it will join Peoples Energy, a Chicago-based energy company, to build a jointly owned, $90 million, peaking facility near Elwood, Ill., 60 miles southwest of Chicago. The 300 MW, natural gas fired facility is scheduled to begin operation in June 1999.
Internationally, the company announced in May that it would invest an additional $40 million to increase to 98 percent its ownership position in the 450 MW Cerros Colorados hydro facility in Argentina`s Neuquen Pro- vince. Dominion assumed management control and partial ownership of the facility in July 1993 under a partnership with Neuquen provincial government and an Argentine subsidiary of the Louis Dreyfus Group.
From a strategic standpoint, each deal expanded the company`s influence in key markets. Kincaid and Peoples Energy projects were intended to give Dominion a strong foothold in the Midwest and northeast power markets, which the company says account for roughly 40 percent of the power consumed in the U.S. The Cerros Colorados investment gave Dominion Energy greater control over its single largest facility in Latin America, and one that is also a low-cost producer in a tight, competitive market.
“We prefer to control our own destiny by operating our facilities and having a majority ownership,” said Thomas N. Chewning, president and chief executive officer. “In the U.S., we couldn`t do that before. Under PURPA, the rules were very narrow, so we were more of an investor most of the time. Now we can own 100 percent of a facility, like Kincaid.”
While the Kincaid project signals a major step in the company`s domestic strategy, Chewning said the project is also unique because many utility asset sales have thus far typically involved buy-back periods of only two to four years.
In addition, the project was funded under a $265 million sale of non-recourse, long-term, investment-grade bonds. During the last seven years of the bonds` 22-year term, the plant will be selling electricity as a merchant outside the 15-year PPA-a signal the investment community is becoming comfortable with the idea of financing merchant risk.
For Juno Beach, Fla.-based FPL Energy, the focus is almost solely on the U.S. market. In January, FPL Group, the holding company for Florida Power & Light, announced the consolidation of two subsidiaries-ESI Energy, its domestic independent energy developer, and FPL Group International, its international developer-into FPL Energy.
Since then, FPL Energy announced a host of acquisitions and projects. Its focus is primarily on acquiring or building “clean energy” facilities in the United States. “Our goal is to become a growth vehicle for the FPL Group,” said Michael Yackira, FPL Energy`s president.
Initially, Yackira said, ESI Energy`s project stakes ranged from as low as 5 percent, to up to 50 percent. Since 1993, however, the company increased its participation to 90 percent on average.
The company`s growth strategy essentially boils down to: 1) taking majority ownership and improving the earnings of its existing facilities; 2) acquiring divested utility assets; 3) developing and building merchant facilities; and (4) acquiring existing independent power plants. As examples of each, Yackira points to the following:
– In 1997, FPL Energy bought out its partners and became the sole owner and operator of the 665 MW gas-fired combined cycle Doswell facility near Richmond, Va. It then set out to improve the plant`s profitability by revamping the plant`s operating procedures, renegotiating the long-term power sales agreement with Virginia Power, and refinancing the project`s debt.
– In April 1998 the company completed its 100 MW gas-fired Cherokee plant, a combined cycle gas-fired plant in South Carolina. It provides power to Duke Energy under a long-term contract. FPL`s energy marketing and trading operation also supports the plant through fuel procurement and marketing about 20 MW as merchant power.
– In February FPL Energy announced it would join Green Ridge Power in acquiring wind facilities capable of producing some 164 MW of capacity in California`s Altamont Pass region from Kenetech Windpower.
– In January 1998, FPL Energy, in partnership with Tractebel, a Belgium-based energy and industrial services firm, agreed to purchase a 300 MW gas-fired, combined cycle cogeneration plant at Bellingham, Mass., southwest of Boston, and a similar 300 MW plant at Sayreville, N.J., near Newark, from Massachusetts-based Intercontinental Energy.
– FPL submitted the winning bid in an auction to acquire The Geysers 700 MW geothermal development from Pacific Gas & Electric in Sonoma and Lake Counties. The $213 million acquisition would have complemented FPL`s existing
108 MW of geothermal capacity in California and Nevada. The deal, however, seems to have been derailed. Calpine Corp., which operates The Geysers steam fields, exercised its right of first refusal to match the winning bid and buy the 150 MW Lake County plants. Calpine agreed to pay $73.8 million, plus a $1.5 million break-up fee to FPL. In partnership with Unocal Corp., Calpine also owns 25 percent of the Sonoma 550 MW operation, and the companies said they were evaluating whether to match FPL`s bid for the Sonoma assets.
– FPL also had agreed to purchase 1,185 MW of generating assets from Central Main Power (CMP) for $846 million, but in mid-November the company asked a federal court to release it from the deal. FPL`s withdrawal was prompted by
Federal Energy Regulatory Commission (FERC) rulings that the company said have reduced the value of CMP`s plants. FERC quashed some New England Power Pool policies mandating grid access for existing plants. FPL envisioned building an additional 1,500 MW of gas-fired, combined-cycle capacity on CMP`s fossil sites.
How these recent setbacks in New England and California will affect FPL`s position is uncertain, but the company`s broad strategy seems tailored to withstand such slings and arrows.
“If you want to be a major player, you can`t just focus on one aspect of the market,” Yackira said. “We believe you need a combined approach in order to grow.”
Scott M. Gawlicki is an Electric Light & Power contributing editor and communications consultant in West Hartford, Conn.
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Dominion Resources` Bolivian electric generation subsidiary began a $35 million program in 1997 to expand its output.
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FPL Energy bought out its partners` share of the 665 MW Doswell plant in Virginia in 1997. Subsequently, the company renegotiated the plants` power purchase agreement and improved the facility`s operating performance.