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October 26, 2001 
Conectiv Completes Nuclear Plant Sales 
By Will McNamara
Director, Electric Industry Analysis 

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[News item from PR Newswire] Conectiv (NYSE: CIV), an energy provider located in the Mid-Atlantic, announced that its wholly owned subsidiary, Atlantic City Electric Company, completed the sale of its ownership interests in three nuclear plants to PSEG Nuclear LLC and Exelon Generation Company. The ownership interests were sold for approximately $11.3 million, excluding reimbursement of estimated fuel inventory, subject to adjustment. 
Analysis: This announcement from Conectiv came out late last week, but I did not want to miss the opportunity to provide some analytical commentary on what I think is a rather significant development. The transfer of ownership in the three nuclear plants included in this transaction is significant because of its relation to Conectiv's unique competitive strategy and the round-robin way in which nuclear assets are changing hands in the United States. Further, despite an increase in acquisition activity around the nation's nuclear facilities, we still are seeing only a small number of companies that actually own or control nuclear power in the United States.  
The divestiture of the nuclear assets includes only what is Conectiv's ownership in the plants, which Conectiv shares with other companies (who also happen to be the buying partners in this sale). The breakdown of the sale of nuclear assets is as follows: 
A 7.51-percent interest (164 MW) in the Peach Bottom Atomic Power Station Units 2 and 3 sold in equal shares to co-owners PSEG Nuclear and Exelon. Prior to the transaction, PSEG Nuclear, an indirect subsidiary of Public Service Enterprise Group Incorporated, and Exelon each owned about 46 percent of the Peach Bottom plant. Exelon is the operator of the Peach Bottom facility. 

A 7.41-percent interest (167 MW) in the Salem Nuclear Generation Station Units 1 and 2 was sold to PSEG Nuclear, which prior to the sale owned about 50 percent of the facility. PSEG Nuclear will remain the operator of the plant. 

A 5-percent interest (52 MW) in the Hope Creek Nuclear Generation Station Units 1 and 2 was sold to PSEG Nuclear, which is the operator of the plant and prior to the sale owned 95 percent of the facility. 

As noted, the significance of these transactions relates to Conectiv's competitive strategy and the consolidation that is taking place in the nuclear sector. Let's look at Conectiv first.  
According to Conectiv's President and COO Thomas Shaw, the divestiture of the nuclear assets is consistent with the company's focused business strategy on two core energy businesses: Conectiv Energy, the company's integrated generation and asset optimization group, and Conectiv Power Delivery, the company's regulated delivery business. To support this two-tiered focus, Conectiv has been in the process of divesting its baseload generating plants to expand a generation portfolio that includes only mid-merit plants (units that have more flexibility to follow demand patterns). Mid-merit plants are often viewed as units that fill the operating space between baseload plants and peaker units. Whereas a baseload unit may have a generating capacity factor of about 80 percent, a mid-merit unit may have a generating capacity factor of about 30 percent to 55 percent. From Conectiv's perspective, the value of the mid-merit strategy is that these plants can be reserved to operate only when demand is comparatively high. Further, the company believes that mid-merit units are ideally suited to support the company's energy trading and asset optimization strategy because they are flexible enough to provide fuel arbitrage opportunities and ancillary service support when they are not needed to meet higher demands for power. 
The sale of the nuclear assets follows the previous sale of 1,081 MW of baseload generating capacity by Delmarva Power & Light, a subsidiary of Conectiv, to NRG Energy and the divestiture of Conectiv's telecommunications business (Conectiv Communications) to Cavalier Telephone of Richmond, Va., for $20 million. In addition, Conectiv sold its 50-percent stake in a 118-MW co-generation facility in New Jersey to Pedricktown Cogeneration LP, a non-utility electric generator, for $9 million.  
Conectiv is divesting all of its baseload generation but has maintained ownership of some 2,000 MW of mid-merit generation in the Mid-Atlantic region. The proceeds from the coal plant sales to NRG will reportedly be used to repay debt and fund Conectiv's development of additional mid-merit assets. Conectiv's immediate goal is to build more than 4,000 MW of mid-merit power generation within the Mid-Atlantic region by 2004. Toward that end, Conectiv is taking some of the proceeds from the NRG transaction and using the money to support a $300-million, 500-MW expansion of its Hay Road Generating Station, which is currently a 516-MW plant that is primarily fueled by natural gas.  
The divestiture of both the telecommunications business and the baseload generation supports Conectiv's strategy of re-focusing on its core businesses, which are power trading and wholesale marketing (through mid-merit units only) and a regulated delivery business. Conectiv Power Delivery provides energy service to more than one million customers in New Jersey, Delaware, Maryland, and Virginia. Given the fairly distinct line between Conectiv's regulated and unregulated businesses, I have previously speculated that Conectiv could be preparing to spin off its unregulated businesses into a stand-alone company (a trend represented by AEP, Reliant and UtiliCorp). Conectiv is in the midst of major restructuring, so it is unlikely that any such spin off of its generation business would take place in the near term. However, as far as I know, Conectiv is the only energy company that has focused exclusively on mid-merit plants.  
Conectiv is also involved in merger proceedings with Pepco, a partnership that is scheduled to close in April 2002.  In this deal, Pepco is acquiring Conectiv for a combination of cash and stock valued at $2.2 billion. Both companies will become subsidiaries of a new holding company to be named at a later date. The partnership between these two relatively small and regionally based utility companies reportedly will create the largest electricity delivery company in the Mid-Atlantic region. By combining their two electricity delivery businesses, Pepco and Conectiv reportedly will more than double their customer base and expand their service territory by nine times. 
In the nuclear sector, it is not terribly surprising that Exelon and PSEG Nuclear would be the buying partners in the three nuclear plants sold by Conectiv (despite the obvious fact that these companies already maintained majority ownership in the plants). Exelon and PSEG Nuclear are two of what is a small number of companies that are actively involved in the nuclear-power space, and thus it is not surprising that they would be involved in the license exchange on these three plants. Exelon has the largest nuclear fleet in the nation and still outpaces most of the competition in the nuclear industry, owning a total of 17 reactors. Earlier this year, Exelon CEO Corbin McNeill said he thought that a new nuclear plant would definitely be built in the next five years, and did not rule out the fact that his company might be the one to drive the construction of the new nuclear facility. 
As noted, PSEG Nuclear is an indirect subsidiary of the Public Service Enterprise Group Inc., which in 2000 was split into PSE&G, a regulated gas and electric delivery company in New Jersey and PSEG Power, an unregulated U.S. power generation company. As noted, PSEG Nuclear LLC operates the Salem and Hope Creek Nuclear Generating Stations in Lower Alloways Creek, N.J., and oversees PSEG Power's ownership interest in the Peach Bottom Atomic Power Station, located in Delta, Pa. When the Conectiv transaction is completed, PSEG Power will own 100 percent of Hope Creek, 52 percent of Salem, and 50 percent of Peach Bottom. 
In addition to Exelon and PSEG Nuclear, Entergy Corp. is another company that deserves a mention when discussing the nuclear sector. Since 1999, Entergy has been an active bidder on most every nuclear plant that has come onto the auction block. Recently, Entergy bought Con Edison's Indian Point Units 1 and 2 nuclear power plants in Westchester County, N.Y. In addition, Entergy recently announced an agreement with the Vermont Yankee Power Corporation to purchase the 501-MW Vermont Yankee nuclear power plant in Vernon, Vt., for $180 million. With the completion of the Vermont Yankee sale, Entergy will own a nuclear fleet that includes 10 reactors. Also note that the  New York State Public Service Commission (PSC) just approved the sale of Niagara Mohawk's Nine Mile nuclear generating station to Constellation Nuclear for about $780 million. The purchase prices for the 614-MW Nine Mile 1 and 82 percent of the 1,142-MW Nine Mile 2 are about $221 million and $559 million, respectively. Constellation is another company that has consistently increased its nuclear power assets. 
Given the volatility of natural gas prices and the high emissions associated with coal-fired generation, many industry analysts have debated whether or not nuclear power is on the brink of resurgence.  Exelon, for example, is involved in a joint venture that is attempting to commercialize a new nuclear technology called Pebble Bed Modular Reactor (PBMR).  Supporters of PBMR believe its relatively small size (110 MW), anticipated short construction time (24 months) and cost ($1,000/kW) can once again make nuclear power an acceptable option.  In February of 2001, Exelon filed an application with the U.S. nuclear energy regulators to license a similar reactor in the United States.  Clearly, steps are being taken to revive this controversial industry. 

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