<http://secure.scientech.com/images/spacer.gif>	  <http://secure.scientech.com/images/spacer.gif>	
  <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg>	  <http://secure.scientech.com/images/spacer.gif>	  <http://secure.scientech.com/_IA_TEST/Corner_TR.jpg>	
	  <http://secure.scientech.com/rci/wsimages/ia_banner02.gif>		
  <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg>		  <http://secure.scientech.com/_IA_TEST/Corner_BR.jpg>	



  <http://secure.scientech.com/images/spacer.gif>	 <http://secure.scientech.com/rci/details.asp?ProductID=971>




  <http://secure.scientech.com/images/spacer.gif>	  <http://secure.scientech.com/images/spacer.gif>	
	  <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg>
  <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg>		  <http://secure.scientech.com/_IA_TEST/Corner_TR.jpg>	
	
SPONSORS

  <http://secure.scientech.com/images/spacer.gif> <http://secure.scientech.com/main/ad_redirect.asp?URL=http://wwwthestructuregroup.com>
  <http://secure.scientech.com/images/spacer.gif>

INFORMATION PRODUCTS

 <http://secure.scientech.com/specialpages/Generation_Technology_IAs.asp>   <http://secure.scientech.com/images/spacer.gif> <http://secure.scientech.com/specialpages/Generation_Technology_IAs.asp>   <http://secure.scientech.com/images/spacer.gif>

CONFERENCES

  <http://secure.scientech.com/images/spacer.gif>



Energy VentureFair IIJan. 29-30, 2002JW MarriottHouston, TX   <http://secure.scientech.com/main/ad_redirect.asp?URL=http://wwwenergyventurefair.com>
CBI's 6th Annual "Profit from Merchant Plants" Conference Jan. 28-29, 2002 Four Seasons HotelHouston, TX <http://secure.scientech.com/main/ad_redirect.asp?URL=http://wwwcbinet.com>   <http://secure.scientech.com/images/spacer.gif> <http://secure.scientech.com/main/ad_redirect.asp?URL=http://cpunmsu.edu/>Center for
Public Utilties
The Evolving Electric Industry: 
Wholesale & Market-Based Influences
Feb. 3-6, 2002   <http://secure.scientech.com/images/spacer.gif>



SIXTH ANNUAL DISTRIBUTED GENERATION & ON-SITE POWER CONFERENCEMar. 11-13, 2002Marriott MarquisAtlanta GA <http://secure.scientech.com/main/ad_redirect.asp?URL=http://wwwdist-gen.com>   <http://secure.scientech.com/images/spacer.gif> <http://secure.scientech.com/specialpages/New_Rate_Card.asp>   <http://secure.scientech.com/images/spacer.gif>	
  <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg>		  <http://secure.scientech.com/_IA_TEST/Corner_BR.jpg>	

December 28, 2001



TXU Sells Two Texas Power
Plants to Exelon; Sale Supports
Strategies of Both Companies 



By Will McNamara
Director, Electric Industry Analysis



[News item from PRNewswire] TXU Corp. (NYSE: TXU) and Exelon Generation announced an agreement to sell two large TXU gas-fired electric generating plants to Exelon Generation, a subsidiary of Exelon Corp. (NYSE: EXC) for $433 million. The transaction, involving two Dallas/Fort Worth plants with a combined capacity of 2,334 MW will allow Exelon Generation to expand its presence in the Texas region, enhancing its geographic and market diversity, while providing TXU with the opportunity to expand beyond Texas. 

Analysis: Perhaps the key factor about this deal is that it supports the strategies of both companies particularly well. TXU, one of the largest generation companies in the world, has been attempting to expand out of its home state of Texas for some time, following competitive opportunities as they are presented by electric deregulation. The company, which will maintain a presence in the Texas market, has already expanded internationally into countries such as Australia and Europe, and will mostly likely use the proceeds from the divestiture of its two Texas plants to expand further in the United States. For Exelon, the deal provides a foothold into the expanding Texas market, which becomes fully competitive next week, and provides a particularly valuable inroad into the high-demand region of Dallas/Fort Worth.

Let's first establish some important data about the two plants that TXU is selling to Exelon. As noted, the combined capacity of the two plants is about 2,334 MW. One of the plants is the 1,441-MW Handley Steam Electric Station, which is located southeast of Fort Worth. According to TXU, 412,000 barrels of oil can be stored on site to fuel five oil/gas units at the plant. Handley is cooled by water from Lake Arlington. The first unit was put into operation in 1948, with the additional units coming on line in 1950, 1963, 1976, and 1977. The other plant being sold is the 893-MW Mountain Creek Steam Electric Station, which is located about two miles west of Loop 12 in Dallas. With the first oil/gas unit established in 1945, four more units were added in 1949, 1956, 1958, and 1967. Both sales include the generating units of the plants, along with all of the other assets that are necessary for them to operate (land, water rights, transmission interconnections, gas pipeline interconnections, production facilities, and emission allowances).

The strategies of both companies that are driving these transactions are pretty straightforward. From TXU's perspective, the sales will reduce the company's generation concentration in a single U.S. market, which up to this point has been primarily in its home state of Texas. Proceeds from the sale apparently will be used to help TXU to expand in other North American markets outside of Texas. In addition, proceeds from the sale will be used to strengthen TXU's balance sheet by reducing debt, something that has become increasingly important to all companies operating in the competitive energy space since the bankruptcy of market-leader Enron. It is important to note that TXU has no plans to exit the Texas market, and still intends to operate in the state as a generation company and retailer. Note that according to Texas restructuring law, there must be a wall between the two operating units, which must function as separate companies. In essence, the divestiture is merely being used as a strategy for TXU to free up necessary cash that will support growth into other markets, and reduce the amount of potential market power that the company may have in Texas. 

The issue of market power is another new factor that has developed in the latter half of this year, considering that recent rulings by the Federal Energy Regulatory Commission (FERC) have forced several other companies to charge cost-based prices for some wholesale transactions if they are deemed to hold market power in their particular service territories. Texas law allows a company to own and control no more than 20 percent of capacity within the Electric Reliability Council of Texas (ERCOT), and TXU claims that it is within this cap. However, TXU acknowledges that it had an over-concentration of generating capacity in one market and wanted to expand into other markets. Excluding the sold facilities, TXU will now own 18,651 MW of net capacity, which are still located primarily in Texas. However, it is becoming clear that TXU intends to reduce its role in the Texas generation market.

From Exelon's perspective, the sale expands the company's generating capacity by about 10 percent, which is an important increase considering that Exelon is attempting to maintain its position as one of the industry's largest asset-based traders. Exelon, which was created as a result of the merger between PECO Energy and Commonwealth Edison, is known mostly for its strong nuclear capabilities. In fact, 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 that produce about 17,000 MW of power. Exelon may be attempting to create a more diversified generation portfolio. Exelon Power, which will manage the output of the two plants bought from TXU, oversees Exelon's portfolio of coal, natural gas, oil, landfill gas, and hydro generating assets, which include 72 intermediate and peaking units in Pennsylvania and Maryland (capable of producing 4,800 MW of net generating capacity). Thus, Exelon's purchase of the two TXU plants could be seen as an effort to diversify, both regionally and from a power-source perspective, from the company's previous focus on nuclear power in the Northeast. 

Perhaps equally important, the sale provides a valuable inroad to the Texas market, which represents the second-largest energy market (behind California), offering a market value of about $20 billion. Now that California is no longer a competitive energy market, there are high hopes that Texas will prove to be a flourishing market once full competition begins in the state next week. On Jan.1, 2002, most customers of investor-owned utilities in Texas will have the opportunity to choose a Retail Electric Provider (REP)-the company that provides their electricity. As a whole, the Texas energy market represents 70,000 MW of generation operating on a 37,000-mile transmission network. 

One of Exelon's main objectives is to expand its portfolio of generation assets and position itself as one of the nation's top-tier energy suppliers. Penetrating a state like Texas seems like a natural step for Exelon, which up to this point has developing generating assets that stretch from Chicago to Pennsylvania. This is not the first expansion that Exelon has made into the Texas market. In the summer of 2001, Exelon began operating a new 165-MW combustion turbine known as the ExTex LaPorte plant near Houston. Prior to that, Exelon had already become involved in marketing power output from two other plants in Texas (830 MW from the Tenaska Frontier plant and 350 MW from the Wolf Hollow plant).

It is important to note that Exelon and TXU are competitors in the Texas market, especially on the wholesale side of the business, and thus there are fine lines drawn between the companies in light of the sales contract. Under the sales agreement, Exelon Power, Exelon Generation's power plant operation arm, will assume operation of the plants. The transaction includes a tolling agreement under which TXU Energy will have the right to purchase power during summer months for the next five years at market-based rates. Considering the standard definition of a tolling agreement, it is presumed that TXU will be providing the natural gas to operate the two plants during the summer months of the five-year contract, and then purchasing the electric output of the plants during that time. Interestingly, TXU is able to abide by Texas' requirement that it not own and control more than 20 percent within ERCOT by selling off its ownership of these two plants. However, realistically, TXU still has a hand in the operational control of these two plants, at least in the summer months during its five-year contract with Exelon. This raises a philosophical question of whether or not the sales contract between TXU and Exelon truly accomplishes the goals of Texas' deregulation plan. 

  _____  


Testimonials:


"Let me take this opportunity to wish you a happy holiday as well and to tell you how much I appreciate receiving IssueAlert. It's the most relevant and insightful publication that I receive and the only electronic one that I read daily. Thanks and keep up the good work."

Stephen Wiel

  _____  

"I want to thank you for providing one of the best energy markets analysis services on the web!"

Merwin Brown
Market Sector Manager, Electricity and Natural Gas Markets
National Renewable Energy Laboratory

  _____  

"Your columns are part of my industry reading each week. I really appreciate them and hope to work with you again in the new year."

Rich Daileader
First Union Securities, Inc.

  _____  

"Thank you for your interesting and wonderful publication. I wish you and your colleagues a Merry Christmas and Happy New Year." 

H?seyin Tekinel

  _____  

"Thanks for your material. It is good and I enjoy reading it."


Patrick McCormick
Balch & Bingham, LLP


  _____  

"Christmas greetings, Will, from one of your readers in Australia.

I must commend you on your articles. I find them not only useful in the detail but also thoughtful in the presentation.

It has indeed been an exciting year. If anything, it proves that 'design' and 'market' do not belong together - but bureaucrats and academic economists will never learn."

Margaret Beardow
Benchmark Economics

  _____  



An archive list of previous IssueAlert articles is available at
www.scientech.com <http://secure.scientech.com/issuealert/> 


  _____  

We encourage our readers to contact us with their comments. We look forward to hearing from you. Nancy Spring  <mailto:nspring@scientech.com>

Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Jane Pelz  <mailto:jpelz@scientech.com>at 505.244.7650. Advertising opportunities are also available on our Website. 

  _____  

Our staff is comprised of leading energy experts with diverse backgrounds in utility generation, transmission and distribution, retail markets, new technologies, I/T, renewable energy, regulatory affairs, community relations and international issues. Contact consulting@scientech.com <http://consulting@scientech.com> or call Nancy Spring at 505.244.7613. 

  _____  

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. If you would like to refer colleagues to receive our free, daily IssueAlert articles, please register directly on our site at secure.scientech.com/issuealert <http://secure.scientech.com/issuealert/>. 

If you no longer wish to receive this daily e-mail, and you are currently a registered subscriber to IssueAlert via SCIENTECH's website, please visit <http://secure.scientech.com/account/> to unsubscribe. Otherwise, please send an e-mail to IssueAlert <mailto:IssueAlert@scientech.com>, with "Delete IA Subscription" in the subject line. 

  _____  

SCIENTECH's IssueAlert(SM) articles are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlert articles is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. 



Copyright 2001. SCIENTECH, Inc. All rights reserved.
  <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=12/28/2001>