While selling its utility stake in PacifiCorp (see related story), ScottishPower is not abandoning the energy market in the United States, the energy holding company’s CEO Ian Russell emphasized in an earnings conference call Tuesday from London to provide background on the $9.4 billion sale to MidAmerican Energy Holdings Co. Instead, the UK energy giant is planning to focus on two parts of the merchant energy business in the United States — wind power and natural gas storage.
Russell said his company is focused on delivering “growth and returns,” and its U.S. merchant unit, PPM Energy, is thought to have much better prospects for delivering that promise than its former affiliate, PacifiCorp, which saw its earnings slip by 3% last year. After a detailed review, both the “scale and timing” of the capital expenditures and the projected returns, which were determined to be much more favorable for PPM than PacifiCorp, drove the sale, Russell said (see separate story).
(In a separate conference call from Salt Lake City, PacifiCorp CEO Judi Johansen, who is also on the ScottishPower board, said that the UK financial model calls for faster returns on capital investments than do U.S. investors, and thus, the UK-based company did not think the returns would come quickly enough from the continued growing investments needed in the utility business, compared to the two merchant energy areas.)
For its most recent fiscal year, ScottishPower said PPM continued to “deliver substantial growth,” with earnings up by $35 million over the previous year, or 60%, according to CFO David Nish. The unit contributed $111 million in profits for the past year, including its substantial benefits from production tax credits (PTC) for its wind energy operations in the United States, he said. Gas storage profits increased by $48 million for ScottishPower, said Nish, adding that wind profits were $10 million, along with an additional $12 million in earnings from PTCs.
Over the next five years, Russell said, ScottishPower sees “growing demand for wind energy and natural gas storage” in both the UK and in the United States for PPM Energy. He said the holding company is planning to invest about 1.4 billion pounds in PPM over the next five years.
In natural gas storage, PPM has about an 11% market share and it plans to “triple the business” over the next five years, Russell said. It intends to own 125 Bcf of merchant storage by 2010.
In its U.S. wind energy operations, Russell said, 90% of the output is now sold under long-term contracts, “so looking forward that locks in the margins in that business.” On the gas side, PPM has 30 Bcf of contracted storage, he said, to complement its “owned” storage, and ScottishPower “continues to see good opportunities for origination around our [storage] assets and our long-term contracts.”
For this year, PPM is targeting 2,300 MW of wind-generated power capacity by 2010, and the company has a pipeline of 9,000 MW to enable the company’s deliveries, with 600 MW of wind capacity under construction currently, Russell said. In addition, PPM is expanding its western-based wind operations to the East with its recent acquisition of Atlantic Renewable Energy, which is focused on projects in the Northeast.
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