Perennial Power Holdings Increases Stake in Hermiston Generating Plant

SCOA Power Business Unit refocuses business to become owner/operator of electrical plants

In the high desert of Eastern Oregon, nine miles south of the Columbia River, is the prototype for the bourgeoning Perennial Power business model.

There stands Hermiston Generating, a 474 Megawatt natural gas power plant that provides electricity to nearly 500,000 households in the Pacific Northwest. Perennial Power and SCOA bought a 25 percent stake in the Hermiston, Oregon plant in December of 2002 and increased their investment to 50 percent and became the operator in November of 2004.

It promises to be the first in a series of power plants Perennial Power, a subsidiary jointly owned by SCOA and Sumitomo Corporation, hope to acquire in the next few years as they shift their strategy from being passive investors to owners and operators of power generating plants.

Perennial Power Holdings

Perennial Power Holdings is part of the worldwide portfolio of Sumitomo Corporation companies in the power generating business. This includes a diverse range of power generating projects in places like Turkey where they have a stake in the Birecik Hydro Power Project and the Phu Mu generating plant in Vietnam that SC helped build and is part owner.

Altogether, SC currently has 2772 Megawatts in their power generation portfolio and they hope to increase this to 6300 Megawatts by 2010. Perennial Power was specifically created by SCOA and SC to acquire assets in the U.S. energy industry by either buying existing plants or developing new power plants on their own (what it is called “green field” development). Perennial is slated to acquire 2000 Megawatts by 2010 through a “best mix” of acquisition and green field development in the U.S. and Canada.

“The goal of Perennial Power is to create value by acquiring and developing ,and then owning, operating and managing power plants in the U.S, “explained Tsutomu Akimoto, the President of Perennial Power Holdings and General Manager of SCOA’s Los Angeles office, where Perennial Power is based. “Where before SCOA would strictly be a financial investor, we now desire a hands-on-role in the operations of the plants.”

According to Akimoto, SC has empowered Perennial Power to make the acquisitions necessary to get to 2000 megawatts, and the autonomy to determine which deals make the most sense. But Perennial Power is also working closely with the Power Group in Tokyo and is marketing themselves as part of the larger global electric generating group within SC.

At this point, Hermiston is the only plant in the portfolio although there are several potential deals in the pipeline. As a short term target, they hope to add quickly to their portfolio by buying existing power plants since green field power plant development can take up to five years.

Merchant vs. Contract Plants

There are two types of power plants: contract and merchant. Contract plants are often built after a utility agrees to buy the power generated by the plant at a fixed price for a specified duration of time. The Hermiston Generating Plant is a contract plant. The power generated is sold to the Portland based utility PacifiCorp, which owns the other 50 percent of the plant, under a long-term power sale agreement. PacifiCorp also has a long term contract to buy the natural gas needed to fuel the plant from a natural gas provider.

Merchant plants, of which a glut was built in the latest 1990s, sell their power on the spot market to utilities and their output and earnings are much more volatile. Because of this, Perennial Power will focus on the contract market.

Perennial Power is seeking to acquire natural gas and coal powered plants, although they are looking at renewable energy opportunities on a case-by-case basis.

Hermiston Generating Plant

While there are plans to buy more plants, Perennial Power is doing pretty well with their first purchase, the Hermiston Generating Plant.

Located in a veritable fertile crescent of power generation plants along the Columbia River Basin, the Hermiston plant was originally built by Bechtel in partnership with U.S. Generating in 1996 for $330 million.

Because of its recent construction it’s considered a high output, high reliability power plant that provides high and long term availability to PacifiCorp, who buys the power Hermiston generates. PacifiCorp actually controls the output of electricity from a nearby electrical sub-station and depends upon the plant, and offers bonuses, for reliable and efficient operations in the peak summer and winter months.

The Columbia River Basin is attractive to power generators because it’s close to the three main ingredients that are needed to produce power: natural gas, electrical grids and water. Hermiston Generating is just five miles from a major natural gas pipeline that runs from Canada to California and is in close proximity to major west coast electrical grids.

It is also close to the abundant waters of the Columbia River since the creation of electricity consumes a great deal of water. To heat the turbines and create steam gas, the Hermiston plant uses 2000 gallons a minute.

“It takes a lot of water, and a lot of natural gas,” explained Greg Cook, the plant manager at Hermiston.” But we produce electricity for about 500,000 households. That’s a lot of power.”

The plant also provides steam to a Lamb Weston potato plant located next door. Oregon recently surpassed Idaho as a top exporter of potato products and the Lamb Weston plant is an important customer, providing French fries to McDonald’s restaurants on the west coast.

Hermiston has a tight-knit and highly efficient crew of 23 employees that include technicians who also undertake maintenance duties.

“This is the best crew I’ve ever worked with in my 25 years in the business. They are great people and treat the plant as if it’s their own,” said Cook of Hermiston employees. Added Akimoto, “We hope to grow Perennial into a company that has many vibrant and professional employees like we have at Hermiston.”