Peco buys 49.9% stake in Sithe Energies

Continuing its effort to gain scale and scope in electric generation, Peco Energy Co. will buy 49.9% of Sithe Energies for $682 million, with an option to acquire the rest of the company within 5 years. The purchase is set to make Peco the second largest North American generator after its merger with Unicom Corp. is completed later this year.


Ann de Rouffignac
OGJ Online

Continuing its effort to gain scale and scope in electric generation, Peco Energy Co. will buy 49.9% of Sithe Energies for $682 million, with an option to acquire the rest of the company within 5 years. The purchase is set to make Peco the second largest North American generator after its merger with Unicom Corp. is completed later this year.

Peco officials said the Sithe acquisition will add 3,800 Mw of existing merchant generation, 2,500 Mw under construction, and another 3,700 Mw of generation in various stages of development.

With 46,000 Mw, Exelon Corp., as the new company will be named, will be second only to the combined generation of Entergy Corp. and FPL Group Inc., with 48,000 Mw of capacity.

Peco�s strategy of getting bigger took a twist from its recent accumulation of nuclear assets which the company had been relentlessly pursuing. Quizzed by analysts on a conference call Monday about the continuation of the nuclear strategy, Peco CEO Corbin McNeill Jr. said his appetite for nuclear remained �undiminished.� But he quickly added that recent events on that front have changed the future of that strategy somewhat. Seabrook is the next nuclear plant expected to be sold.

�There is only one more plant, Seabrook, likely to come up for sale in the Northeast,� McNeill said. But he suggested nuclear plant prices have become too expensive. �Based on the Millstone results, our success at that is likely to be somewhat mitigated,� he said.

The three Millstone nuclear units sold for a whopping $600/kw, while the Sithe purchases will come at a price of $335/kw, he said.

Instead, McNeill emphasized the Sithe purchase will diversify Peco's fuel portfolio. All of the plants being acquired are either newer gas fired-generation or can switch between natural gas and fuel oil. He also noted the purchase will move Peco away from base load plants and towards more peaking and intermediate capacity.

Northeast concentration
Geographically, the new assets will give Peco broad access to the tight electricity supply markets in New York, Massachusetts, and Pennsylvania and even in Texas, Colorado, California, and Idaho. After the merger and the Sithe transaction, Peco will have most of its electric generating power in the Northeast, including 21,700 Mw in the National Electric Reliability Council�s MAIN control area and 11,200 Mw in MAAC.

Peco executives warned the purchase will not boost earnings immediately. In fact, they informed analysts that earnings impact will be neutral to positive for the first 2 years. The purchase will be debt-financed for the first 2 years. Permanent financing will be structured 50-50 with debt/equity options, says McNeill.

But after 2 years, Peco has an option to buy the rest of the company. At certain prices not disclosed publicly, Peco has the right to buy and Sithe has the right to force a purchase.

�The entire purchase is predicated on the assumption that we will acquire the whole company,� says McNeill.

The company advised analysts that starting in 2003, earnings/share will be boosted by 15�-20�/share, when the rest of Sithe is purchased and all of the Sithe plants under construction are finished.

Sithe's sale comes as no surprise. The owners of Sithe, Vivendi, 33%; Marubeni Corp., 15%; and Sithe management, 10%; had placed the company on the block in October 1999. Earlier this year, Reliant Energy Inc. purchased 40 Sithe plants.

Industry sources say Vivendi is laboring under a heavy debt load. The sale is expected to cut its debt by a total of about 4 billion euros. After the sale, Sithe will be owned by Peco, 49.9%; Vivendi, 30.1%; Marubeni, 15%; and Sithe management; 5%.

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