Pepco Sells Generation Assets to Southern Energy

In a US$2.65 billion-deal representing the country's second-largest divestiture to date, Southern Energy plans to buy most of the generation assets of Potomac Electric Power Company (Pepco), representing a total capacity of 5,889 MW that includes plants and power purchase agreements.

When added to the US$152.5 million Pepco expects from the sale of its interest in the Conemaugh generating station, announced previously, this transaction brings the total for Pepco's generation divestiture to US$2.8 billion. Pepco sold Conemaugh to PPL Global and Allegheny Energy Supply in May.

Bob Dobkin, Pepco spokesman, said the agreement between Pepco and Southern Energy, a subsidiary of Atlanta-based Southern Company, followed an extensive competitive bidding process that started in this January.

As part of the deal, Dobkin said Pepco plans to purchase power from Southern Energy for up to four years at prices below the utility's current average cost of production. This enables Pepco to continue to provide power to customers that don't decide to switch electricity suppliers, as customer choice becomes effective.

"This sale is beneficial to both our customers and shareholders," said John M. Derrick, Jr., Pepco chairman and CEO. "Under sharing arrangements contained in settlements approved last year by the Maryland and District of Columbia Public Service Commissions, profits from the sale will be shared with customers."

Derrick said the sale also means the end to stranded cost payments for Pepco's customers. "This transaction will provide what the parties to the settlements hoped it would," he said. "Customers' share of the proceeds will lower their electricity bills and they will not have to pay any stranded costs."

About 1,000 Pepco employees are affected by the sale. However, Southern Energy intends to retain the vast majority of them, and severance packages are available, Dobkin said.

Once the transaction completes, which the companies expect to occur later this year, Southern Energy plans to take control of the following plants:

• 1,412 MW coal- and oil-fired Morgantown generating station in Charles County, MD
• 2,339 MW coal-, oil-, and gas-fired Chalk Point station in Prince George's County, MD
• 837 MW coal-, oil-, and gas-fired Dickerson station in Montgomery County, MD
• 482 MW coal-fired Potomac River station in Alexandria, VA

Southern Energy also plans to acquire Pepco's rights and obligations to the 84 MW, Southern Maryland Electric Cooperative, Inc., combustion turbine, an engineering and maintenance service facility, and its entitlements under five purchase power agreements (PPAs) totaling 735 MW. Two Pepco power plants—Benning and Buzzard Point—in Washington, D.C., are not included in the sale, but will be operated and maintained by Southern Energy.

Pepco retained Navigant Consulting, which is currently involved in the sale of about 34,200 MW or more than $10 billion in power assets, to manage the divestiture of its power generation portfolio. Merrill Lynch serves as Pepco's financial advisor, and the firm of Dickstein, Shapiro, Morin & Oshinsky serves as the company's legal advisor.

"We are very pleased to have Southern make a commitment to power generation in this region," said Dennis Wraase, Pepco's president. "Southern is a proven operator. That is good news for our employees and the communities we serve."

By April C. Murelio
editor@poweronline.com