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********************************************************************* SCIENTECH IssueAlert Sponsor: Energy Exchanges Online - Scottsdale - December 4-6: the only place to meet your future clients, suppliers and partners. SCIENTECH has secured a $300 discount for all IssueAlert subscribers to participate to this event= . To join Altra, HoustonStreet, Petrocosm, APX, Enron, Conoco, Duke plus a legion of other online energy experts visit www.eyeforenergy.com/xonline. This is the only event to take you from yesterday to tomorrow TODAY! ********************************************************************* =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 IssueAlert, November 21, 2000 Dynegy and NRG Energy to Purchase Sierra Pacific Assets By: Will McNamara, Director, Electric Industry Analysis =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 Dynegy (NYSE: DYN) and NRG Energy (NYSE: NRG) announced a major expansion of their co-owned generation portfolio in the West through asset purchase agreements to acquire 1,330 MW of power generation facilities from Sierra Pacific Resources (NYSE: SRP). The facilities include the 740 MW gas-fired Clark Generating Station and 590 MW of the 605 MW, coal-fired Reid Gardner Generating Station. The facilities are currently owned by Sierra Pacific Resources' subsidiary, Nevada Power Company, and serve the growing Las Vegas market. ANALYSIS: This $634 million purchase has resulted from regulatory mandates surrounding the Sierra Pacific-Nevada Power merger, which was completed in July 1999. Sierra Pacific is undergoing the sale and transfer of all of its remaining gas, oil and natural-gas fired Nevada generating assets, which it intends to complete in 2001. The Reid Gardner and Clark Stations are among the seven asset bundles that were included in an auction by Sierra Pacific earlier this year. Located in southeastern Las Vegas, the Clark Generating Station consists of 10 gas- and oil-fired generating units, which as noted total 740 MW. The oldes= t unit at the Clark Generating Station became operational in 1955, the newest in 1994. Specific information about which units at the Clark Generating Station are included in this purchase was not available. The Reid Gardner Generating Station consists of four baseload coal-fired units and is locate= d 52 miles northeast of Las Vegas. According to recent data from the Energy Information Administration, the California Department of Water Resources owns about 68 percent of the Reid Gardner Plant. It is not clear what impac= t the Dynegy / NRG purchase will have on this organization's ownership in the plant. The purchase of the Sierra Pacific assets is subject to approval from the Federal Trade Commission, FERC and the Nevada Public Utilities Commission, and is expected to close during the second quarter of 2001. Additional conditions of the deal include a power purchase agreement for Nevada Power to buy energy and ancillary services from Dynegy and NRG "at a stable price= " until March 2003. On their own, both companies are leaders in independent power production and energy supply. Yet this acquisition is the latest in a string of=20 collaborative efforts between Dynegy and NRG. Together, the companies have been actively acquiring power plants in Illinois and the West Coast, along with purchases that they have made independently. In fact, this purchase of assets from Sierra Pacific marks the sixth asset alliance between Dynegy and NRG.=20 Together, the two companies jointly own 2,768 MW of power generation facilities in California and 350 MW in Illinois. In most of the partnerships, and in the case of this latest purchase from Sierra Pacific, Dynegy markets the energy produced at the plants and oversees fuel management services, while NRG manages the operational side. Last July, Dynegy and NRG entered into a similar agreement to expand the Rocky Road Power Plant, a natural gas-fired, simple cycle peaking facility in East Dundee, Illinois. The move into Illinois was an important strategy for both companies. Of course, Dynegy completed its merger with Illinova last summer, creating a $22 billion company that is well-positioned to compete in electric generation, wholesale and retail marketing, and gas and electric power trading. At the time, the CEO of NRG Energy made it clear that the Rocky Road plant expansion was part of the two companies' strategy in becoming a large contributor to the Chicago-area energy market. Dynegy, in fact, intends to continue acquiring and expanding generation facilities in Illinois so that it can compete with Exelon Corp. Moreover, both companies are positioning themselves to be leaders in=20 generation capacity and power supply, and the purchase of the 1,330 MW from Sierra Pacific factors in to both of their strategies. Not only does the acquisiti= on help to expand both companies' asset base, but it also diversifies their power supply offerings. For instance, NRG claims that the assets complement its current gas-fired peaking and intermediate California assets, providing the benefits of fuel and dispatch level diversification. NRG aims to build a "top three position in its primary markets." The acquisition of assets from Sierra Pacific puts NRG into a prime position in the fast-growing Nevada and Western markets by adding a strong component of baseload generat= ion to its portfolio. In fact, this is the second acquisition that NRG has made from Sierra Pacif= ic. Just last month, NRG announced its intent to purchase a 50-percent interest in the Valmy Power Station, which Sierra Pacific is selling also as a resul= t of regulatory mandates. The Valmy Power Station, which is primarily=20 coal-fired, produces electricity in the northern Nevada and surrounding markets. In this $273 million deal, NRG acted as an independent buyer. Dynegy has long claimed that it wants to gain a 10-percent share, or 70,000 MW, of the U.S. electric market over the next five year by acquiring plants= , building them or negotiating the right to sell power produced by others. In order to reach this goal, I had projected last summer that Dynegy might be looking to merge with another provider to build its scale, considering the fierce competition it faces from other generation companies. The compan= y has now taken a different path to achieve essentially the same result. The addition of Sierra Pacific's facilities, combined with other assets that the company has acquired or developed this year, increases Dynegy's generating capacity by more than 4,000 gross megawatts. Dynegy contends that this figure is comparable to many industry mergers without the regulat= ed transmission and distribution businesses. Dynegy also believes the acquisit= ion will support a raise in its earnings forecast for 2001, from $1.75 to $1.80 per share. Dynegy's goals are pretty ambitious. However, the company has been increasi= ng earnings over the last year, so the $1.80 per share target may be attainabl= e. For 3Q 2000, Dynegy reported recurring net income of $176.5 million, or 55 cents a share, compared with Dynegy / Illinova pro forma recurring net income of $96.5 million, or 32 cents per share, for the same period last year. Much of this growth is coming from Dynegy Marketing and Trade, whose reported net income increased to $141.9 million=01*80 percent of the compan= y's consolidated net income. There is little doubt that Dynegy and NRG,=20 considering that they own 2,768 MW of power in the state, benefited from the short supplies in California this summer, which=01*along with other factors=01*dr= ove up the cost for power in the state. Another interesting element to this announcement is the fact that similar strategic acquisitions are being made possible by mandated divestiture that other companies have faced due to merger activity. Just yesterday, I wrote about Duke and Williams embarking on a joint venture to purchase the Gulfstream pipeline project from Coastal Corp. This sale was made possi= ble because Coastal is being forced to divest the pipeline as a result of its merger with El Paso Energy. As the old adage goes, one company's loss is another company's gain, which could be viewed as one of the drawbacks of M&A activity. Another possible trend is the joint activity we are seeing between companies. The Duke / Williams and Dynegy / NRG projects are both examples of companies that have collaborated on development and acquisition ventures to support both their joint and individual strategies. As the energy industry becomes more competitive, like-minded companies may find that they can actually gain more by developing similar strategic alliances, rather than following a insular path typically exemplified by, for example, Southern Company. =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 Read SCIENTECH's free SourceBook Weekly article: "AES: SourceBook's Company of the Year," at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html =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. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =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 Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =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's IssueAlerts are compiled based on independent analysis by=20 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 purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and type "remove" in the subject line.
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