Message-ID: <1705695.1075846363532.JavaMail.evans@thyme> Date: Wed, 13 Dec 2000 04:35:00 -0800 (PST) From: issuealert@scientech.com Subject: Constellation to Buy Nine Mile Point Nuclear Plants; Match for Entergy in New York Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: "IssueAlert" X-To: X-cc: X-bcc: X-Folder: \Steven_Kean_Dec2000_1\Notes Folders\Notes inbox X-Origin: KEAN-S X-FileName: skean.nsf http://www.consultrci.com ************************************************************************ Dear Subscriber, We are delighted that thousands of you took the time last week to download our free PDF sample of SourceBook Weekly. We hope that you found our analyses helpful in making your critical busines= s decisions. SourceBook Weekly is designed to give you the tools you need to identify competitive threats as well as business opportunities. 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Constellation will own a total of 1,550 MW of Nine Mile Point's 1,757 MW of total generating capacity. The total purchase price, including fuel, is $815 million. The Federal Energy Regulatory Commission, the Nuclea= r Regulatory Commission (NRC) and the New York Public Utilities Commission still need to give regulatory approval to the purchase, but Constellation Nuclear has said it expects the deal to be completed by mid-2001. ANALYSIS: This is a very strategic move for Constellation Nuclear for sever= al reasons. First, the purchase of the plants expands Constellation's generati= on assets, which has been one of the key strategies of the company over the last year. Secondly, the location of the plants is a critical factor.=20 Constellation has narrowed its competitive strategy to the Northeast region, and New York in particular is shaping up to be arguably the most important playing field for nuclear assets. Third, owning the Nine Mile Point plants will elevate Constellation's stature, moving it ever close to become on par with its nearest competitor in the New York market, Entergy Corp. Before I expand on the reasons why I think this is a such a pivotal move for Constellation Nuclear, let me establish some of the important factors of the deal. Nine Mile Point is a two-unit boiling water reactor site. Nine Mile 1 began producing electricity in 1969; Nine Mile 2 began producin= g electricity in 1988. The two units are both located in Scriba, N.Y., which is about 40 miles north of Syracuse. The Nine Mile Point units have had rather spotty histories, but over the last two years have shown signs of becoming strong performers. Niagara Mohawk operates both units. Constellation Nuclear is purchasing the plants from a group of several different utility owners. Niagara Mohawk happens to be the sole owner of Unit 1. Unit 2 is owned by a group of co-owners: Niagara Mohawk (41 percent= ), New York State Electric & Gas (18 percent), Rochester Gas & Electric=20 Corporation (14 percent), and Central Hudson Gas & Electric Corporation (9 percent). It is important to note that Constellation Nuclear is only able to purchase 82 percent of Unit 2 because the Long Island Power Authority, an additional co-owner that controls 18 percent of Unit 2, has opted not to sell its share of the plant at this time. The sale came about in part as a result of the New York Public Service Commission urging nuclear plant owners in the state to determine the market value of their plants through an open, competitive process. This is part of an overall effort to separate generation, transmission and distribution activities within the state. With that established, I will continue to support my case that the acquisit= ion of the Nine Mile Point plants effectively supports Constellation Energy's growth strategy. In early 2000, Constellation began a restructuring of its corporate identity, dividing its operations into two separate segments: one focused on its merchant energy business (including Constellation Nuclea= r) and the other focused on regional retail energy services. The merchant energy business was ranked fifth in the nation for sales of electric power in the third quarter of 2000, and the company is committed to expanding this growth. The goal for the merchant energy business, according to=20 Constellation Energy CEO Christian Poindexter, is to establish a portfolio of over 30,000 MW of electric generation facilities by 2005. Toward that end, Constellatio= n Energy acknowledged earlier this year that it would be taking advantage of "bargain prices for nuclear plants," which resulted in large part from other utilities focusing on transmission operations and thus choosing, or being mandated, to divest their generation plants. Another important point is that the Constellation Nuclear Services group, a unit within Constellation Nuclear, was established when Baltimore Gas & Electric, another Constellation Energy subsidiary, created a new area for its life-cycle license renewal activities. Thus, most likely Constellat= ion will be applying to renew the licenses for the two Nine Mile Point units, and has a core group of people with expertise in this area. License renewal= s in general have been moving rather smoothly through the NRC, so there shoul= d not be any difficulty for Constellation with regard to this process. The only challenge might be that the two Nine Mile Point units are very differe= nt in age and could be viewed as two separate plants by the NRC. Presently, Constellation's generation assets are based in a mixture of coal and nuclear. The nuclear plant purchases that Constellation is making expand upon its Calvert Cliffs asset, an 850-MW two-unit nuclear plant in Southern Maryland. As natural gas prices are projected to rise for the foreseeable future, buyers on the wholesale market may turn to coal and nuclear as substitutes for their power purchases. Thus, Constellation could be in a prime position if the desire for nuclear-generated power continues to rise, as the company anticipates. While Constellation will most likely retain its coal-fired generation assets, the company is clearly moving closer toward a nuclear-based portfolio. Constellation has justified its move in this direction by saying that its experience has found that nuclear fuel is cheaper than coal and gas generators and that "the economics [of nuclear] are quite robust, once they are calculated out." A key element of the acquisition that may get overlooked in the press relea= ses is that Constellation Nuclear has secured a 10-year contract to provide electricity to the sellers at negotiated competitive prices. Specific terms of the deal are that Constellation has agreed to sell 90 percent of its share of the Nine Mile Point plants' output back to the sellers at an avera= ge price of nearly $35/MWh until 2010. This alone should provide a solid rate of return for Constellation's merchant energy business. In addition, as I indicated, the New York location is key factor in this deal. Aside from its large population, the state of New York is home to a number of nuclear plants that have come up for sale recently. For these two reasons alone, New York stands out as the center within Constellation's focus on the Northeastern United States. Yet, Constellation's competitors also have the same plan, and have all fought to gain assets in the region. Just within the last few months, Entergy Corp.=01*which also has based its strategy to a large extent on nuclear=01*has been aggressively making its own acquisitions of nuclear plants in New York State. In fact, Entergy was competing against Constellation Nuclear as one of the other bidders for the Nine Mile Point plants. I know this because I spoke to Carl Crawfor= d, an Entergy spokesperson, back in August and he confirmed that Entergy was actively attempting to purchase the two plants. However, despite the loss of the two Nine Mile Point plants, Entergy retains a very strong nuclear presence in New York. In late November, Entergy closed the sale on the New York Power Authority's two nuclear power plants, Indian Point Unit 3 in Westchester County and the James A. Fitzpatrick plant in Oswego County= . In fact, the purchase of the two plants from NYPA marked the largest=20 acquisition to date in Entergy's nuclear strategy, and also represented the highest purchase price ($967 million) ever of a nuclear asset. Earlier in the same month, Entergy completed a purchase of the Indian Point 2 plant from Con Edison. Altogether, Entergy now controls over 3,000 MW of nuclear generatio= n in the state of New York. Consequently, since clearly Constellation Nuclear wants to become one of the top nuclear power producers in the industry, it will need to match Entergy (along with other competitors such as Exelon and Duke) with regard to its nuclear portfolio. There is only a limited number of nuclear plants that will become available for purchase, and thus any acquisition of an operational nuclear plant is a significant accomplishment for those in this particular market. As a sidenote, I established that Niagara Mohawk was one of the primary sellers of the Nine Mile Point plants (100 percent of Unit 1 and 41 percent of Unit 2). It is important to remember that Niagara Mohawk is being acquir= ed by National Grid, a U.K. company that is considered one of the world's largest independent transmission companies. The acquisition of Niagara Mohawk is supporting National Grid's strategy of becoming a major presence in the transmission and distribution sectors of the U.S. energy industry. Generation is not a high priority for National Grid, and the sale of Niagar= a Mohawk's nuclear assets resulted from this strategy. Moreover, once again we see a case that represents the divergent approaches that different companies have toward deregulation in the United States. Whereas generation does not factor in to Niagara Mohawk's current strategy, it is a key component for Constellation Energy. There are certainly risks associated with both approaches, but the bottom line on this deal, from my perspective, is that Constellation has acquired some valuable assets in a strong market. It's pretty obvious that Constellation intends to be a contender in the nuclear arena, especially in New York, and owning the two Nine Mile Point units should effectuate that goal. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. 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