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Did Power Plant Buyers Pay Too Much?
A line-by-line case study of two high-priced portfolios, comparing fixed, variable and capital costs against forecasts of regional market prices.
A multi-billion-dollar wave of utility divestiture and power plant auctions has taken place during the last 18 months. Table 1 details some of these transactions, including the purchase price on a dollar-per-kilowatt basis and as a multiple of net book value. These measures frequently are cited as indications that buyers paid too much. Here we refute the use of these measures for the valuation of competitive power plants, and offer step-by-step analytical approaches that are better suited to the task.
Pace Global Energy Services has provided valuation services to bidders for much of the divested utility capacity. Our analysis, supported by in-house financial and fuels services as well as our proprietary market price analysis system, indicates that some of the winning bidders of plants really are winners, some are maybe winners and some should prepare for a fire sale. But in no case was the book value a significant indicator of the market value of the plant. In all fairness, there may be a valid reason for the confusion surrounding the meaning of the multiple of net book value purchase price.
Our simplified analysis includes the following steps to assess each case:
1. Determine likely capacity factors;
2. Determine plant's output in megawatt-hours given its capacity factor and its demonstrated capacity in megawatts;
3. Establish variable costs of production based on historical data from the U.S. Energy Information Administration (EIA) in dollars per megawatt-hour;
4. Establish fixed operating costs based on historical EIA data in dollars per kilowatt translated into dollars per megawatt-hour on the basis of its estimated capacity factor determined in step 1;
5. Determine capital recovery costs assuming financing and tax-related costs that are typical for domestic power markets translated into dollars per megawatt-hour on the basis of its estimated capacity factor; and
6. Determine unit revenues necessary to provide cost recovery for fuel, non-fuel O&M, fixed O&M and capital costs on a dollar-per-megawatt-hour basis. If the required revenues appear to be achievable under reasonable market conditions, we declare the acquisition a winner.
In this article we analyze and compare two cases of utility plant divestitures. The two transactions are (1) Mission Edison's purchase of the Homer City plant in Pennsylvania, and (2) the purchase by FPL Energy of the Central Maine Power (CMP) portfolio of assets. We selected these projects because they are the most expensive acquisitions on a dollar-per-kilowatt basis of the projects shown in table 1.
Our analysis demonstrates that a power plant purchase price in excess of net book value cannot be interpreted automatically as an overpayment. Even with a purchase price of more than three times the net book value, Homer City appears to be a sound investment. Likewise, a price per kilowatt in excess of the price of a new combined-cycle station is not necessarily an indication that the buyer overpaid. Homer City's unit cost was $955 per kilowatt, while a new combined-cycle plant can be purchased for about $500 per kilowatt. Yet