Under the deal where NRG Energy (NYSE: NRG) has the right to buy most of the assets of Edison Mission Energy (EME), EME has the right to sell certain non-core assets to third parties, including its share of a coal-fired power plant in West Virginia.
NRG and EME on Oct. 25 applied with the Federal Energy Regulatory Commission for approval under the Federal Power Act (FPA) of their asset purchase agreement (APA). In that application, they noted that certain assets are subject to an outside sale effort.
“Under Section 4.3 of the APA, EME has the right to market and sell certain assets covered by the APA to third parties,” the filing said. “Specifically, EME has the right to market and sell certain ‘Non-Core Assets,’ including (but not limited to) its interests in Big Sky and AmBit, and also the right to market and sell other assets otherwise covered by the APA for which the proceeds received by EME do not exceed $25 million individually or $50 million in the aggregate.”
The filing added: “EME will separately seek approval under FPA Section 203 if and to the extent required for any such sales. For purposes of this Application, Applicants have conservatively assumed that the generation facilities owned by Big Sky and AmBit, as well as other generation facilities that may potentially be sold to third parties, will be acquired by [NRG] Holdings through the Transaction. Applicants will identify in their notice of consummation of the proposed Transaction any of the EME Public Utilities, other generation-owning subsidiaries of EME, or generation assets that will not be acquired by [NRG] Holdings as a result of EME’s exercise of its rights under Section 4.3 of the APA.”
Big Sky Wind LLC (Big Sky), is an exempt wholesale generator (EWG) that owns and operates a 240 MW (nameplate) wind facility in Ohio, Ill., in the PJM Interconnection region.
American Bituminous Power Partners LP (AmBit) is a qualifying facility (QF) partially owned by EME that owns and operates an approximately 80 MW (summer rating) waste coal-fired facility in Grant Town, W.Va., in the PJM region. The voting interests in AmBit are indirectly held by EME (50%), American Hydro Power Co. (10%) and East Power Co. (40%).
EME is a power and energy producer based in California and it owns 9,142 MW of generating assets nationwide. It and most of its subsidiaries have been in Chapter 11 bankruptcy protection since December 2012. These assets are primarily located in the California ISO (2,421 MW) and PJM (5,062 MW).
Analysis commissioned by the companies shows no market power issues
John Morris, a Principal at Economists Inc., an economic consulting firm, did the competitive analysis for the companies. His work showed no market power concerns in this deal, since NRG and EME don’t have much overlap in operating territories.
The Morris competition study focuses on the California ISO and PJM because those are the locations where both companies have sufficient generation to warrant a delivered price test (DPT) and more thorough analyses of competitive issues. There are only four regions in which both companies own generation: the California ISO, Electric Reliability Council of Texas (ERCOT), Midcontinent ISO (MISO) and PJM.
ERCOT is not analyzed because the generation outputs in ERCOT are behind DC ties in Texas and do not enter interstate commerce. The Public Utility Commission of Texas will review the transaction based on standards developed for the ERCOT portion of Texas.
The Entergy/Cleco (or MISO South) region is slated to become part of MISO on Dec. 19, 2013. NRG owns generation in the MISO South region that will be within MISO as of that date, giving NRG 4,915 MW of capacity in MISO. But this amounts to only 2.9% of the generation in MISO, Morris noted. EME owns only 274 MW of generation in MISO, or 0.2% of MISO generation. Hence, after the transaction, NRG will have only 3.1% of the generation in MISO. This low share indicates that the combination is de minimis and that a DPT is not necessary, Morris wrote. In addition, because EME has contracted all of its generation capacity in MISO to third parties, the transaction will not change the short-term competitive situation in MISO. Accordingly, DPTs were performed only for the California ISO and PJM.