The buy-sell balance
The US power sector is in the midst of major asset transfers ? a
direct result of the industry's turmoil, market volatility, and
declining credit quality over the last couple of years. As the
bottom of the credit cycle looms, many companies have started to
try and improve their financial health through asset sales. These
asset sales are likely to affect the credit quality of both the
selling companies and those companies issuing debt to acquire the
assets being sold.
The effect of asset sales on the selling companies is likely to be positive ? improved liquidity and stronger balance sheets. But some of these sales may also hurt their long-term cash flow positions. And although the more traditional utility holding companies and others with deep pockets may benefit from acquiring attractive assets at reasonable prices, some will issue debt to finance such acquisitions, putting pressure on their short-term credit quality.
With a large number of assets being put up for sale and comparatively few buyers, a buyers' market for power is likely to exist for the medium term. By contrast, asset rationalization in the nuclear sector is motivated by strategic rather than financial concerns as consolidators seek to capitalize upon nuclear expertise and to achieve economies of scale available to large operators.
Capitalizing on state and federal deregulation initiatives over the past decade, a large portion of the power sector has transformed into a commodity business. As such, companies need to de-leverage to bring their capital structures in line with increased earnings and cash flow volatility. Asset sales are only one of the strategies currently employed to accomplish this. Many companies have cut capital expenditure budgets in an effort to generate free cash flow for debt reduction. Others have accessed the equity markets as opportunities arise.
More than just merchant sales
The energy merchant sector underwent a severe credit and liquidity crisis in 2002. This resulted in a significant number of below investment grade downgrades due to poor cash flow, high debt levels, and large unanticipated claims on cash, such as increased collateral for trading activity, at a time when access to the capital markets and to bank funding has been curtailed or eliminated. Many companies in this sector are currently undergoing balance sheet restructuring programs, which centre on asset sales and ? to the extent that they are able to access capital markets ? the issuance of equity or debt securities with some equity-like characteristics.
Energy merchant companies announcing plans to sell assets in order to strengthen their liquidity and improve their balance sheets include Duke, Dynegy, El Paso, Mirant and Williams. Other companies active in independent power project development, including AES and NRG Energy, have also announced substantial asset sales. In addition, once traditional utility companies, such as Aquila and CMS Energy, which had emphasized growth from unregulated merchant activities in recent years, have also announced asset sales to bolster their financial positions. However, the scale, scope, and timing of these asset sales may make it difficult for all of these companies to realize their expected value from many of these assets.
Many companies now selling assets gained them in various convergence mergers in the late 1990's. Companies such as Dominion Resources merged with Consolidated Natural Gas and Duke Energy merged with PanEnergy to create large, intra-state energy companies. Other companies sought to capitalize upon opportunities in unregulated wholesale energy markets by building scale there, such as TECO Energy. Energy traders built up capacity as a means to add assets they could trade around. This latter group includes Williams and El Paso who sought to leverage their gas presence into power markets. Now these same companies are in the asset rationalization and sales and spin-off phase.
Asset value and desirability
By some estimates, more than $20 billion of US power assets may be either currently up for sale or likely to be put up for sale in the near future, including international assets of US energy companies. These power assets can be broadly categorized as either ?good? assets, ?bad? assets or, in some cases, ?ugly? assets, depending on their desirability to prospective purchasers and their current market value in relation to their original cost or carrying value.
In the ?good? category, we include natural gas pipelines, gas storage assets, gas reserves, transmission assets, midstream assets, power sales contracts or, in some cases, entire vertically integrated utility companies. Dynegy had little trouble attracting bidders for its prized Northern Natural Gas Pipeline unit, which was ultimately sold to MidAmerican Energy. MidAmerican also purchased Kern River Gas Transmission Company from Williams. Similarly, AES attracted numerous bidders for CILCORP, parent company of Illinois utility CILCO, a bidding process that was ultimately won by Ameren Corporation.
?Bad? assets, are those that are less desirable to potential investors either because of volatile and uncertain energy markets, including severe overcapacity and concurrent low power prices in many regions, or because of the large number of similar assets up for sale. These types of assets include the large number of new or partially completed merchant power plants built in recent years by companies such as Calpine, Dynegy, Mirant, and Williams. These sales come at a time when many other energy companies have either severely curtailed their merchant generation expansion plans, like Ameren, DPL, Progress Energy and TECO Energy, or exited power generation activities completely, such as Entergy. As a result, Moody's expects sizeable write-downs to occur when these assets are finally sold.
Finally, ?ugly? assets include the marketing and trading (M&T) operations of the energy merchant companies, which have also been cited as assets available for sale or for placing into joint ventures or a separate financial vehicle. The high degree of governmental scrutiny surrounding these assets makes it difficult to ascertain their value and creates concerns about potential liabilities. For these reasons, companies such as Aquila, Dynegy, Cleco and El Paso are closing, rather than selling, their energy trading operations. UBS Warburg, which had acquired Enron's energy trading operation with 630 employees in February, announced that it was closing Enron's former trading floor in Houston and reducing staff to under 100 employees.
Some sales help balance sheets but hurt long-term cash flow
In some cases, the sale of assets may negatively affect the seller's long-term credit strength, particularly if the assets sold are stable businesses generating steady cash flow supportive of issuer credit quality. These assets include natural gas pipelines and processing systems that are exactly the type of assets that have resulted in the most transaction closings to date. The companies selling such assets are left with less earnings and cash flow going forward and in some cases a higher proportion of their remaining cash flow coming from more risky, volatile, or less attractive businesses, negatively affecting their overall risk profile and long-term credit quality.
In August 2002, Dynegy sold its Northern Natural Gas Pipeline to MidAmerican Energy Holdings, which is partly owned by Berkshire Hathaway, for $928 million in cash plus the assumption of $950 million in debt. Although the sale provided an influx of much needed cash to Dynegy, the pipeline was sold for significantly less than the $1.5 billion Dynegy paid for it in February 2002 when it was purchased from Enron, and leaves Dynegy without a relatively stable, cash generating pipeline company as part of its overall business profile going forward.
Similarly, CMS Energy has also been engaged in a program to raise substantial capital and streamline its exposure in diversified energy markets through the sale of assets. These sales have become increasingly more important as sale proceeds provide support for the company's near-term liquidity. In addition to selling many of its non-core overseas and other investments like its electric transmission system and its coalbed methane holdings, it has put more attractive, cash flow generating assets up for sale as well, including its Panhandle and Trunkline interstate natural gas pipelines and its LNG receiving terminal in Louisiana.
Other merchant energy companies are in the process of divesting the unregulated investments they have acquired over the years and returning to their core regulated utility businesses as their major source of earnings and cash flow. Aquila is a prime example of this situation, as it is in the process of selling most of its investments outside of its regulated utility business in the US These investments, which were financed almost exclusively with a high level of debt, include international utilities, a telecommunications and utility-related construction company, communications technology, long-term gas delivery contracts, merchant energy wholesale services, and other investments. In April, 2003 Aquila's senior unsecured debt rating was downgraded to Caa1 from B1 reflecting Moody's view that poor returns from these investments had resulted in a significant deterioration of operating cash flows. In addition, with 95% of projected future earnings coming from regulated assets, the restructured Aquila generates cash from operations which supports its capital spending and dividends, but leaves little cash to flow to service debt.
Traditional utilities can benefit from asset sales
Among the companies best positioned to benefit from asset sales are the holding companies of more traditional utilities that have not been as aggressive in expanding into the energy merchant or independent power markets. These companies often have the key advantage of having one or more cash generating, regulated utility subsidiaries providing them with long-term financial stability. Other companies likely to benefit include international utilities and major oil companies with substantial cash generating capabilities and overall deep pockets. Examples of companies which have benefited from the latest wave of asset sales include Ameren, Constellation Energy, MidAmerican Energy, Progress Energy, and Scottish Power subsidiary PacificCorp.
? In January 2003, Ameren purchased CILCORP, Inc., the parent company of Illinois utility Central Illinois Light Co. (CILCO), from AES Corporation, for $1.4 billion, including the assumption of debt. Because of AES's purchase of IPALCO Enterprises, and its operating utility Indianapolis Power and Light Company, the SEC required that AES sell CILCORP.
? AES recently completed the sale of AES NewEnergy, its energy services subsidiary, to Constellation Energy for $240 million. This sale will permit the release of credit support being provided by AES to AES NewEnergy, improving AES's balance sheet and liquidity.
? In August, 2002 Dynegy sold its Northern Natural Gas subsidiary to MidAmerican Energy Holdings, Inc., partly owned by Berkshire Hathaway, for $928 million in cash and $950 million in debt. The cash portion of the purchase was 40% less than the $1.5 billion Dynegy paid Enron for the pipeline in November 2001, just nine months before. This acquisition followed MidAmerican's acquisition of Kern River Gas Transmission Company from Williams in March 2002 for $450 million in cash and $505 million of assumed debt.
? In February 2002, Progress Ventures, Inc., the unregulated subsidiary of Progress Energy, acquired two electric generating projects located in Georgia from LG&E Energy Corp., a subsidiary of Powergen plc. This acquisition enhanced Progress Energy's position as a leading regional energy provider in the Southeastern US
? Aquila sold its natural gas storage operations, including its Katy storage facility, to PacificCorp Power Marketing, Inc. a unit of Scottish Power plc, for $180 million in cash. This was part of Aquila's goal of selling $1 billion of assets, including its stake in Avon Energy Partners Holding Co., the holding company for Midlands Electricity PLC in the UK.
Acquisition debt a credit concern
In Moody's view, financing asset acquisitions with a high proportion of debt would negatively affect credit quality, at least in the short term. Moody's considers not only the amount of new debt incurred, but also the type and quality of the asset being purchased, its rationale and strategic fit with the acquiring company, and the ongoing cash flow impact of the acquired assets. Examples where asset acquisitions have put negative pressure on the purchaser's credit quality include:
? In January 2003, the senior unsecured rating of Ameren was downgraded to A3 from A2 following Ameren's purchase of CILCORP, the parent company of Central Illinois Light Co. (CILCO) from AES. The acquisition included the assumption of all of CILCORP's outstanding debt.
? In February 2003, the senior unsecured debt rating of Progress Energy was downgraded to Baa2 from Baa1 partly in response to the high level of debt incurred by the company, primarily to finance the acquisition of Florida Progress and the expansion of its Progress Ventures unregulated generation portfolio. The latter included the acquisition of two electric generating plants located in Georgia from LG&E.
? The senior unsecured debt rating of Energy East was downgraded to Baa2 from Baa1 in April 2002 reflecting the company's added debt burden following its acquisition of RGS Energy Group. The added debt places increased demands on cash flow from the operating utility companies which are the principal sources of cash flow to service parent company obligations.
Nuclear also in the sales mix
Although asset sales and purchases in the nuclear sector have traditionally been motivated by strategic rather than financial considerations, British Energy's more recent need to sell its interest in the Amergen nuclear assets, discussed below, is a clear exception to this trend.
The most recent nuclear asset sales have continued the consolidation trend in the ownership of nuclear generating assets, with almost 50% of the reactors in the country now either owned or partially owned by only five companies: Exelon, Entergy, Duke, Dominion, and Southern Company.
At present, Exelon is by far the largest operator of nuclear plants in the US, with 19 individual reactors, followed by Entergy with 10, with Duke, Dominion, and Southern each operating 6 reactors. In April 2002, FPL Group surprised many in the industry by announcing that it would purchase an 88.2% interest in the 1,161 MW Seabrook Nuclear Generating Station in New Hampshire for $836.6 million. FPL had not been an active purchaser of nuclear plants up until Seabrook, although it does own and operate a number of nuclear plants within its own Florida Power & Light Company service territory. Seabrook was the last major nuclear plant publicly available for sale, although others may become available over the long-term as smaller or individual plant operators continue to exit the business. Some smaller companies have been busy forming strategic alliances to generate some of the cost savings and to compete better with the largest nuclear operators.
Although we expected a lull in the sale of nuclear generating assets following the Seabrook announcement, the financial difficulties of British Energy changed that expectation. British Energy is the world's largest private sector nuclear energy company with operations in both the UK and in North America. Its North American operations include AmerGen Energy Co. LLC, a joint venture with Exelon in which British Energy and Exelon each have a 50% interest in three US nuclear plants: the 930-MW Clinton plant in Illinois, the 790 MW TMI Unit 1 plant in Pennsylvania, and the 620 MW Oyster Creek plant in New Jersey.
During 2002, British Energy exhibited a deteriorating operating performance reflecting difficulties in the competitive UK wholesale electricity markets, high operating leverage, and vulnerability to market price levels, which have declined significantly over the last two years. Because of these financial problems, British Energy is considering the sale of its 50% interest in AmerGen. Exelon recently announced that it was exploring the possibility of selling its 50% interest in AmerGen as well. Unlike British Energy, Exelon's sale is not motivated by financial difficulties, but rather is driven by the company's initiatives to enhance shareholder value. There is also a clear sense that AmerGen would be more desirable and generate higher bids from the market as a whole company, rather than as a 50% share. Exelon may also consider purchasing British Energy 50% share of AmerGen if it considers the price to be attractive.
Companies are increasingly attracted to nuclear assets due to the likelihood that most if not all of the plants will have their operating licenses renewed. In 2000, the Nuclear Regulatory Commission approved the first license renewal, for Constellation Energy's Calvert Cliffs plants (Units 1 & 2), extending the original 40-year operating license an additional 20 years. Since that time, the NRC has approved license extensions for a number of other nuclear plants, including plants operated by Duke, Entergy, Southern and FPL. According to the Nuclear Energy Institute, as of February 2003, the owners of 49 nuclear units, or almost half of the nation's entire nuclear plant fleet, had decided to pursue license renewal, with more expected to follow. The drive to renew these licenses is at least partly attributable to industry deregulation, because most of these plants will be fully depreciated by the time their original license expires, making them particularly attractive from a power cost standpoint. Those companies with a concentration of nuclear plants could see their overall competitiveness improve over the long-term from a combination of low baseload power costs, operating efficiencies, and increased plant output.
Conclusion
The large number of asset sales announced or under consideration by companies in the power sector could affect the credit quality of both the purchasers and sellers. Selling companies may improve their balance sheets in the short-term, but at the same time sacrifice cash flow generating capabilities essential to long-term credit quality. Similarly, companies purchasing assets may benefit from very attractive prices in the buyer's market for these assets, but could also finance such acquisitions with a high proportion of debt, negatively affecting their credit quality, at least in the short-term. Regardless of financing, a company selling unregulated generating assets and purchasing regulated pipeline assets may improve its credit quality by virtue of a more stable asset mix.
The effect of asset sales on the selling companies is likely to be positive ? improved liquidity and stronger balance sheets. But some of these sales may also hurt their long-term cash flow positions. And although the more traditional utility holding companies and others with deep pockets may benefit from acquiring attractive assets at reasonable prices, some will issue debt to finance such acquisitions, putting pressure on their short-term credit quality.
With a large number of assets being put up for sale and comparatively few buyers, a buyers' market for power is likely to exist for the medium term. By contrast, asset rationalization in the nuclear sector is motivated by strategic rather than financial concerns as consolidators seek to capitalize upon nuclear expertise and to achieve economies of scale available to large operators.
Capitalizing on state and federal deregulation initiatives over the past decade, a large portion of the power sector has transformed into a commodity business. As such, companies need to de-leverage to bring their capital structures in line with increased earnings and cash flow volatility. Asset sales are only one of the strategies currently employed to accomplish this. Many companies have cut capital expenditure budgets in an effort to generate free cash flow for debt reduction. Others have accessed the equity markets as opportunities arise.
More than just merchant sales
The energy merchant sector underwent a severe credit and liquidity crisis in 2002. This resulted in a significant number of below investment grade downgrades due to poor cash flow, high debt levels, and large unanticipated claims on cash, such as increased collateral for trading activity, at a time when access to the capital markets and to bank funding has been curtailed or eliminated. Many companies in this sector are currently undergoing balance sheet restructuring programs, which centre on asset sales and ? to the extent that they are able to access capital markets ? the issuance of equity or debt securities with some equity-like characteristics.
Energy merchant companies announcing plans to sell assets in order to strengthen their liquidity and improve their balance sheets include Duke, Dynegy, El Paso, Mirant and Williams. Other companies active in independent power project development, including AES and NRG Energy, have also announced substantial asset sales. In addition, once traditional utility companies, such as Aquila and CMS Energy, which had emphasized growth from unregulated merchant activities in recent years, have also announced asset sales to bolster their financial positions. However, the scale, scope, and timing of these asset sales may make it difficult for all of these companies to realize their expected value from many of these assets.
Many companies now selling assets gained them in various convergence mergers in the late 1990's. Companies such as Dominion Resources merged with Consolidated Natural Gas and Duke Energy merged with PanEnergy to create large, intra-state energy companies. Other companies sought to capitalize upon opportunities in unregulated wholesale energy markets by building scale there, such as TECO Energy. Energy traders built up capacity as a means to add assets they could trade around. This latter group includes Williams and El Paso who sought to leverage their gas presence into power markets. Now these same companies are in the asset rationalization and sales and spin-off phase.
Asset value and desirability
By some estimates, more than $20 billion of US power assets may be either currently up for sale or likely to be put up for sale in the near future, including international assets of US energy companies. These power assets can be broadly categorized as either ?good? assets, ?bad? assets or, in some cases, ?ugly? assets, depending on their desirability to prospective purchasers and their current market value in relation to their original cost or carrying value.
In the ?good? category, we include natural gas pipelines, gas storage assets, gas reserves, transmission assets, midstream assets, power sales contracts or, in some cases, entire vertically integrated utility companies. Dynegy had little trouble attracting bidders for its prized Northern Natural Gas Pipeline unit, which was ultimately sold to MidAmerican Energy. MidAmerican also purchased Kern River Gas Transmission Company from Williams. Similarly, AES attracted numerous bidders for CILCORP, parent company of Illinois utility CILCO, a bidding process that was ultimately won by Ameren Corporation.
?Bad? assets, are those that are less desirable to potential investors either because of volatile and uncertain energy markets, including severe overcapacity and concurrent low power prices in many regions, or because of the large number of similar assets up for sale. These types of assets include the large number of new or partially completed merchant power plants built in recent years by companies such as Calpine, Dynegy, Mirant, and Williams. These sales come at a time when many other energy companies have either severely curtailed their merchant generation expansion plans, like Ameren, DPL, Progress Energy and TECO Energy, or exited power generation activities completely, such as Entergy. As a result, Moody's expects sizeable write-downs to occur when these assets are finally sold.
Finally, ?ugly? assets include the marketing and trading (M&T) operations of the energy merchant companies, which have also been cited as assets available for sale or for placing into joint ventures or a separate financial vehicle. The high degree of governmental scrutiny surrounding these assets makes it difficult to ascertain their value and creates concerns about potential liabilities. For these reasons, companies such as Aquila, Dynegy, Cleco and El Paso are closing, rather than selling, their energy trading operations. UBS Warburg, which had acquired Enron's energy trading operation with 630 employees in February, announced that it was closing Enron's former trading floor in Houston and reducing staff to under 100 employees.
Some sales help balance sheets but hurt long-term cash flow
In some cases, the sale of assets may negatively affect the seller's long-term credit strength, particularly if the assets sold are stable businesses generating steady cash flow supportive of issuer credit quality. These assets include natural gas pipelines and processing systems that are exactly the type of assets that have resulted in the most transaction closings to date. The companies selling such assets are left with less earnings and cash flow going forward and in some cases a higher proportion of their remaining cash flow coming from more risky, volatile, or less attractive businesses, negatively affecting their overall risk profile and long-term credit quality.
In August 2002, Dynegy sold its Northern Natural Gas Pipeline to MidAmerican Energy Holdings, which is partly owned by Berkshire Hathaway, for $928 million in cash plus the assumption of $950 million in debt. Although the sale provided an influx of much needed cash to Dynegy, the pipeline was sold for significantly less than the $1.5 billion Dynegy paid for it in February 2002 when it was purchased from Enron, and leaves Dynegy without a relatively stable, cash generating pipeline company as part of its overall business profile going forward.
Similarly, CMS Energy has also been engaged in a program to raise substantial capital and streamline its exposure in diversified energy markets through the sale of assets. These sales have become increasingly more important as sale proceeds provide support for the company's near-term liquidity. In addition to selling many of its non-core overseas and other investments like its electric transmission system and its coalbed methane holdings, it has put more attractive, cash flow generating assets up for sale as well, including its Panhandle and Trunkline interstate natural gas pipelines and its LNG receiving terminal in Louisiana.
Other merchant energy companies are in the process of divesting the unregulated investments they have acquired over the years and returning to their core regulated utility businesses as their major source of earnings and cash flow. Aquila is a prime example of this situation, as it is in the process of selling most of its investments outside of its regulated utility business in the US These investments, which were financed almost exclusively with a high level of debt, include international utilities, a telecommunications and utility-related construction company, communications technology, long-term gas delivery contracts, merchant energy wholesale services, and other investments. In April, 2003 Aquila's senior unsecured debt rating was downgraded to Caa1 from B1 reflecting Moody's view that poor returns from these investments had resulted in a significant deterioration of operating cash flows. In addition, with 95% of projected future earnings coming from regulated assets, the restructured Aquila generates cash from operations which supports its capital spending and dividends, but leaves little cash to flow to service debt.
Traditional utilities can benefit from asset sales
Among the companies best positioned to benefit from asset sales are the holding companies of more traditional utilities that have not been as aggressive in expanding into the energy merchant or independent power markets. These companies often have the key advantage of having one or more cash generating, regulated utility subsidiaries providing them with long-term financial stability. Other companies likely to benefit include international utilities and major oil companies with substantial cash generating capabilities and overall deep pockets. Examples of companies which have benefited from the latest wave of asset sales include Ameren, Constellation Energy, MidAmerican Energy, Progress Energy, and Scottish Power subsidiary PacificCorp.
? In January 2003, Ameren purchased CILCORP, Inc., the parent company of Illinois utility Central Illinois Light Co. (CILCO), from AES Corporation, for $1.4 billion, including the assumption of debt. Because of AES's purchase of IPALCO Enterprises, and its operating utility Indianapolis Power and Light Company, the SEC required that AES sell CILCORP.
? AES recently completed the sale of AES NewEnergy, its energy services subsidiary, to Constellation Energy for $240 million. This sale will permit the release of credit support being provided by AES to AES NewEnergy, improving AES's balance sheet and liquidity.
? In August, 2002 Dynegy sold its Northern Natural Gas subsidiary to MidAmerican Energy Holdings, Inc., partly owned by Berkshire Hathaway, for $928 million in cash and $950 million in debt. The cash portion of the purchase was 40% less than the $1.5 billion Dynegy paid Enron for the pipeline in November 2001, just nine months before. This acquisition followed MidAmerican's acquisition of Kern River Gas Transmission Company from Williams in March 2002 for $450 million in cash and $505 million of assumed debt.
? In February 2002, Progress Ventures, Inc., the unregulated subsidiary of Progress Energy, acquired two electric generating projects located in Georgia from LG&E Energy Corp., a subsidiary of Powergen plc. This acquisition enhanced Progress Energy's position as a leading regional energy provider in the Southeastern US
? Aquila sold its natural gas storage operations, including its Katy storage facility, to PacificCorp Power Marketing, Inc. a unit of Scottish Power plc, for $180 million in cash. This was part of Aquila's goal of selling $1 billion of assets, including its stake in Avon Energy Partners Holding Co., the holding company for Midlands Electricity PLC in the UK.
Acquisition debt a credit concern
In Moody's view, financing asset acquisitions with a high proportion of debt would negatively affect credit quality, at least in the short term. Moody's considers not only the amount of new debt incurred, but also the type and quality of the asset being purchased, its rationale and strategic fit with the acquiring company, and the ongoing cash flow impact of the acquired assets. Examples where asset acquisitions have put negative pressure on the purchaser's credit quality include:
? In January 2003, the senior unsecured rating of Ameren was downgraded to A3 from A2 following Ameren's purchase of CILCORP, the parent company of Central Illinois Light Co. (CILCO) from AES. The acquisition included the assumption of all of CILCORP's outstanding debt.
? In February 2003, the senior unsecured debt rating of Progress Energy was downgraded to Baa2 from Baa1 partly in response to the high level of debt incurred by the company, primarily to finance the acquisition of Florida Progress and the expansion of its Progress Ventures unregulated generation portfolio. The latter included the acquisition of two electric generating plants located in Georgia from LG&E.
? The senior unsecured debt rating of Energy East was downgraded to Baa2 from Baa1 in April 2002 reflecting the company's added debt burden following its acquisition of RGS Energy Group. The added debt places increased demands on cash flow from the operating utility companies which are the principal sources of cash flow to service parent company obligations.
Nuclear also in the sales mix
Although asset sales and purchases in the nuclear sector have traditionally been motivated by strategic rather than financial considerations, British Energy's more recent need to sell its interest in the Amergen nuclear assets, discussed below, is a clear exception to this trend.
The most recent nuclear asset sales have continued the consolidation trend in the ownership of nuclear generating assets, with almost 50% of the reactors in the country now either owned or partially owned by only five companies: Exelon, Entergy, Duke, Dominion, and Southern Company.
At present, Exelon is by far the largest operator of nuclear plants in the US, with 19 individual reactors, followed by Entergy with 10, with Duke, Dominion, and Southern each operating 6 reactors. In April 2002, FPL Group surprised many in the industry by announcing that it would purchase an 88.2% interest in the 1,161 MW Seabrook Nuclear Generating Station in New Hampshire for $836.6 million. FPL had not been an active purchaser of nuclear plants up until Seabrook, although it does own and operate a number of nuclear plants within its own Florida Power & Light Company service territory. Seabrook was the last major nuclear plant publicly available for sale, although others may become available over the long-term as smaller or individual plant operators continue to exit the business. Some smaller companies have been busy forming strategic alliances to generate some of the cost savings and to compete better with the largest nuclear operators.
Although we expected a lull in the sale of nuclear generating assets following the Seabrook announcement, the financial difficulties of British Energy changed that expectation. British Energy is the world's largest private sector nuclear energy company with operations in both the UK and in North America. Its North American operations include AmerGen Energy Co. LLC, a joint venture with Exelon in which British Energy and Exelon each have a 50% interest in three US nuclear plants: the 930-MW Clinton plant in Illinois, the 790 MW TMI Unit 1 plant in Pennsylvania, and the 620 MW Oyster Creek plant in New Jersey.
During 2002, British Energy exhibited a deteriorating operating performance reflecting difficulties in the competitive UK wholesale electricity markets, high operating leverage, and vulnerability to market price levels, which have declined significantly over the last two years. Because of these financial problems, British Energy is considering the sale of its 50% interest in AmerGen. Exelon recently announced that it was exploring the possibility of selling its 50% interest in AmerGen as well. Unlike British Energy, Exelon's sale is not motivated by financial difficulties, but rather is driven by the company's initiatives to enhance shareholder value. There is also a clear sense that AmerGen would be more desirable and generate higher bids from the market as a whole company, rather than as a 50% share. Exelon may also consider purchasing British Energy 50% share of AmerGen if it considers the price to be attractive.
Companies are increasingly attracted to nuclear assets due to the likelihood that most if not all of the plants will have their operating licenses renewed. In 2000, the Nuclear Regulatory Commission approved the first license renewal, for Constellation Energy's Calvert Cliffs plants (Units 1 & 2), extending the original 40-year operating license an additional 20 years. Since that time, the NRC has approved license extensions for a number of other nuclear plants, including plants operated by Duke, Entergy, Southern and FPL. According to the Nuclear Energy Institute, as of February 2003, the owners of 49 nuclear units, or almost half of the nation's entire nuclear plant fleet, had decided to pursue license renewal, with more expected to follow. The drive to renew these licenses is at least partly attributable to industry deregulation, because most of these plants will be fully depreciated by the time their original license expires, making them particularly attractive from a power cost standpoint. Those companies with a concentration of nuclear plants could see their overall competitiveness improve over the long-term from a combination of low baseload power costs, operating efficiencies, and increased plant output.
Conclusion
The large number of asset sales announced or under consideration by companies in the power sector could affect the credit quality of both the purchasers and sellers. Selling companies may improve their balance sheets in the short-term, but at the same time sacrifice cash flow generating capabilities essential to long-term credit quality. Similarly, companies purchasing assets may benefit from very attractive prices in the buyer's market for these assets, but could also finance such acquisitions with a high proportion of debt, negatively affecting their credit quality, at least in the short-term. Regardless of financing, a company selling unregulated generating assets and purchasing regulated pipeline assets may improve its credit quality by virtue of a more stable asset mix.
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