PNM Resources-Cascade Joint Venture Agrees To Buy Houston-Area Plant

Albuquerque, NM - PNM Resources recently announced that its joint venture with a subsidiary of Cascade Investment, L.L.C., has agreed to purchase a natural gas-fired cogeneration plant within the high-demand Houston Zone of the Electric Reliability Council of Texas. The purchase by the joint venture, currently called EnergyCo, would diversify its generation fleet and provide a substantial amount of marketable electricity.

Under a purchase and sale agreement, EnergyCo would acquire the CoGen Lyondell Power Generation Facility, a combined-cycle plant, from Dynegy for approximately $467.5 million. Based on Dynegy's winter rating of 614 megawatts, the purchase price equates to less than $800 per kilowatt, which is consistent with new construction costs in the Houston Zone.

EnergyCo's acquisition of the Lyondell facility is consistent with PNM Resources' previously announced strategy to pursue selective opportunities in the unregulated energy sector through the joint venture.

"The Lyondell facility is an established, efficient and reliable power plant within a capacity-deficient region of ERCOT," said Mark Kubow, EnergyCo president of Generation and Development. "Acquiring Lyondell would diversify EnergyCo's generation assets, provide a stable revenue stream through existing off-take agreements and give us the opportunity to maximize the plant by marketing a significant portion of its capacity."

A recently released ERCOT report showed that the state's 2007 electricity reserve margin is expected to be below 15 percent. By 2010 Texas' reserve margin is expected to shrink to about 8 percent, even if permitted units and available mothballed generating stations go online as scheduled.

Located in Channelview, Texas, about 15 miles east of Houston, the facility recently renegotiated a long-term, mutually beneficial steam supply contract with the Lyondell Chemical Company manufacturing complex that includes power off-take of 70 megawatts. Two other power sales agreements of 50 megawatts and 100 megawatts expire at the end of 2007 and 2008, respectively.

Kubow said EnergyCo will inherit a very experienced management team with sound operational and environmental track records, and he expects continued outstanding reliability and performance at the plant. He said the Lyondell plant has numerous inherent advantages and substantial upside potential, including:

• Location – The Lyondell plant is an established facility in the same ERCOT zone as the nation's fourth-largest city. Because Houston is a nonattainment area, permitting for new generation could be a difficult and lengthy process.
• Environmental Enhancements – Combined with location, Lyondell's recently upgraded environmental control systems provide built-in value. Additional benefits reside in the potential sale of excess nitrogen oxide allowances.
• Operational Characteristics – The facility is efficient with a heat rate of approximately 7,200 Btu per kWh. Because of Lyondell's steam-delivery obligations, it is essentially run in a base load configuration, which allows it to be dispatched quickly at a lower heat rate and with less start-up fuel than similar plants.
• Potential Expansion – Lyondell has the potential for on-site expansion. It is located adjacent to three gas pipelines and could be a key resource if ERCOT's reserve margins shrink as predicted.

Once the acquisition is completed, the facility would expand EnergyCo's generation fleet to nearly 920 megawatts. Later this week on June 1, PNM Resources expects to complete its contribution of the 305-megawatt, coal-fired Twin Oaks Power facility to EnergyCo. Twin Oaks is one of Texas' cleanest-burning coal facilities, and combined with Lyondell, the two plants position EnergyCo as an emerging generator with a strong belief in using environmentally responsible technology.

Kubow said that in addition to its growing generation fleet, EnergyCo also has the energy trading and marketing expertise to maximize its portfolio.

Purchase Financial Impact and Details
Chuck Eldred, PNM Resources chief financial officer, said EnergyCo's purchase of the Lyondell facility is expected to be neutral to PNM Resources' earnings in 2007 and slightly accretive beginning in 2008. The purchase is anticipated to result in strong cash from operations and have the potential to increase PNM Resources' cash from operations by approximately 5 percent during the first full year.

EnergyCo's $467.5M purchase of the Lyondell facility will be funded with a combination of debt and equity. PNM Resources and the subsidiary of Cascade, which is the private investment firm for Microsoft founder Bill Gates, each will contribute $42.5M in equity to help fund the transaction. The balance of the funds will be financed through EnergyCo.

The acquisition of the Lyondell facility is expected to close during the third quarter and is subject to review by the Public Utility Commission of Texas and under the Hart-Scott-Rodino Act.

After the acquisition of the Lyondell facility and the June 1 contribution of the Twin Oaks Power facility by PNM Resources to EnergyCo, the joint venture's enterprise value will be approximately $1B.

Lehman Brothers served as exclusive financial advisor on this transaction. LeBoeuf, Lamb, Greene & MacRae LLP acted as legal counsel to EnergyCo.

SOURCE: PNM Resources