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----- 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 http://www.consultrci.com ************************************************************************ Dear IssueAlert Subscriber, Visit our InfoStore to subscribe to SourceBook Weekly. Learn about SCIENTECH'S most popular competitive tools, including the E-Commerce and Telecommunications InfoGrid at: http://www.consultrci.com/web/infostore.nsf/Products/InfoGrid Jane Pelz Director of Marketing Communications SCIENTECH, Inc. ************************************************************************ =============================================================== 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. =============================================================== SCIENTECH is pleased to provide you with your free, daily IssueAlert. 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