As we discussed
----- Forwarded by Steven J Kean/NA/Enron on 12/20/2000 03:00 PM -----

	"IssueAlert" <IssueAlert@scientech.com>
	12/20/2000 06:58 AM
		 
		 To: 
		 cc: 
		 Subject: Exelon Completes Acquisition of 49.9 Percent of Sithe

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===============================================================
SCIENTECH IssueAlert, December 20, 2000
Exelon Completes Acquisition of 49.9 Percent of Sithe
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

Exelon Corporation and Sithe Energies Inc. announced the successful 
completion 
of Exelon's acquisition of 49.9 percent of the stock of Sithe. The remaining 
50.1 percent of Sithe will be owned by Vivendi (34 percent), Marubeni Corp. 
(15 percent) and Sithe Management (1 percent). Vivendi Universal retains 
a blocking minority interest of 34 percent in the company and PECO Energy 
(which, along with Unicom, formed Exelon Corp.) becomes Sithe's main 
shareholder. 
PECO has also been given a three-year commitment starting from December 
2002, to buy Vivendi Universal's remaining interest. 

ANALYSIS: The announcement of this acquisition was first made in August, 
prior to the formation of Exelon Corp. Under the original agreement dated 
Aug. 11, 2000, PECO Energy is purchasing 49.9 percent of Sithe's North 
American assets, including its domestic marketing and development businesses, 
for $682 million. The acquisition marks a new direction for Sithe Energies 
and a continuation of an aggressive generation expansion plan on the part 
of Exelon. 

This divestiture by Sithe Energies signals its withdrawal from power 
production. 
Only two years ago, Sithe Energies was one of the largest independent power 
producers in the United States, operating 43 power plants from New Jersey 
to California. Sithe Energies had made a decided effort to purchase vast 
generation assets in the Northeastern United States, believing that there 
would be value in having critical mass in the deregulated generation market 
in that region. Until last year, Sithe Energies was the primary subsidiary 
of French mega-utility Vivendi, which had been creating a reputation as 
an industry powerhouse due to its assets in electric energy services, thermal 
energy supply, water distribution and wastewater management. Interestingly, 
Vivendi did not own a gas or electric utility anywhere in the world, and 
instead used Sithe Energies as the vehicle to accumulate generation assets 
as its primary entry into the energy industry. 

Indications that the company's strategy was changing began to surface earlier 
this year. In February, Sithe Energies sold 21 power plants to Reliant 
Energy for a total of $2.1 billion. The sale generated an immediate capital 
gain of about $450 million for Sithe Energies, indicating that its generation 
assets were bringing strong shareholder value for its investors, even if 
the company appeared to be exiting the generation market.

Then, in June, Vivendi announced that it had entered into a "strategic 
business combination" with Canal and The Seagram Company Ltd to form a 
new company called Vivendi Universal, a communications conglomerate for 
wired and wireless markets owning the world's largest music company, second 
largest film library, major film production studio, and a PC-based software 
game publishing company. (Note that just yesterday Vivendi Universal entered 
into an agreement for the sale of Seagram's spirits and wine business to 
Diageo and Pernod Ricard for $8.1 billion, subject to regulatory approvals). 
Vivendi also continued to expand its significant water business, through 
its subsidiaries U.S. Filter Corporation and G,n,rale des Eaux Group which 
recently won water treatment contracts New Zealand and Indonesia. In a 
separate development, Vivendi, supported by Sithe Energies, developed a 
partnership with a company named Softbank to establish a unit called K 
Road Ventures. This company represented Vivendi's strategy of creating 
an Internet company specializing in B-to-B services for utilities and energy 
services.

All of these developments indicated that, although Vivendi planned to remain 
involved in the energy industry, its focus was no longer on building a 
generation portfolio through Sithe Energies. Rather, Vivendi is building 
on its role as a major player in communications and environmental services. 
The subtext of this new direction for the company is probably Vivendi's 
attempt to reduce the debt of its subsidiaries to a reported 11 billion 
euros by the end of this year. Yet, most financial analysts agree that 
the continuing divestiture of Sithe Energies marks Vivendi's complete 
withdrawal 
from the energy production business. Vivendi has been in the process of 
spinning off a new utilities arm named Vivendi Environnment, which will 
provide energy services such as equipment installation and maintenance, 
as well as water and wastewater treatment. The K Road Ventures unit probably 
will be operated within Vivendi Environnment; however, it appears fairly 
certain that generation is no longer a part of the company's primary strategy.

According to Vivendi, this divestiture confirms the exit of Sithe North 
America from the consolidation scope of Vivendi Universal. Including the 
divestiture of GPU, which took place at the beginning of the year, the 
transactions represent a total debt reduction of around 4 billion euros 
and a net capital gain of 170 million euros in the financial statements 
for 2000.

Presently across North America, Sithe Energies still owns and operates 
about 27 power generation plants with approximately 3,800 MW of net merchant 
generating capacity. Further divestiture of these assets is expected as 
Sithe and Vivendi continue to move away from power generation. PECO (now 
Exelon) and Reliant are two companies that have quickly picked up the 
generation 
assets divested by Sithe Energies, and has been a wise move for both 
companies. 
There should be a continuing high value placed on generation assets in 
the Northeastern United States, particularly since competitive markets 
are developing more rapidly in that region of the country. Reliant's purchase 
of the Sithe Energies' 21 plants supports its strategy of acquiring 
generation 
assets and developing a strong retail capability. 

Purchasing 49.9 percent of Sithe Energies, with the option to buy the rest 
of the company in as little as two years, is also a smart move for Exelon. 
The Power Generation Group (PGG) of PECO, which remains a subsidiary under 
the new Exelon holding company, is the business unit responsible for managing 
the fossil and hydro generating stations of the company. PGG manages a 
fleet of 72 generating units that can provide 5200 megawatts (MW) of power 
using a variety of fuels. These units include coal, natural gas, oil, 
landfill 
gas, and hydroelectric power plants. Under deregulation, this variety of 
fuels is helping PECO to remain competitive and prepared to meeting the 
energy needs of diverse customers. Presently, Exelon is the largest energy 
company in the United States, but will trumped by the Entergy/FPL Group 
combination, which is expected to close over the next year. 

The addition to Exelon's generation arsenal that it gains from almost half 
the shares of Sithe Energies should factor in nicely to Exelon's overall 
position in the industry. Exelon estimates that the initial investment 
in Sithe will contribute approximately $0.01 per share to its consolidated 
earnings in 2001 and 2002. And it certainly appears that Exelon aims to 
acquire the totality of Sithe's assets, based on comments coming out of 
the company's headquarters. If Exelon were to purchase the remaining 50.1 
percent of Sithe (as soon as two years from now), Exelon anticipates that 
the transaction would contribute approximately $0.15 to its annual 
consolidated 
earnings. This may be just the move that Exelon has in mind as a complete 
acquisition of Sithe's assets would increase Exelon's generation portfolio 
to 46,500 MW, which is perhaps just what it needs to secure its place as 
one of the nation's top generating companies and keep it in the running 
with FPL / Entergy.
===============================================================
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