Did Power Plant Buyers Pay Too Much?
plant dispatch and market prices.
In addition to simulations of expected market conditions, our market assessment team develops high- and low-valuation cases using variations in input parameters. Typically, sensitivities are constructed using variations in future fuel prices, the rate of generating capacity additions, the rate and impact of technological innovation (improved heat rates), and demand growth rates. In this way, a conceptual confidence band can be placed around the power plant valuation.
The Case Studies:
Homer City and the Central Maine Portfolio
Without using the additional values attributable to ancillary services and trading or retail sales, our firm evaluated two acquisitions and determined if a fair price was paid. The purpose is not to provide a detailed valuation, but to answer the simpler question, "Did the buyer pay too much?"
Homer City. Homer City is a coal-fired power generating plant located in central Pennsylvania. Units 1 and 2 were constructed in 1969; a third unit was completed in 1977. Because Homer City is a low-cost producer and is in the unique position of having access to two markets - PJM and the New York Power Pool - it appears to be a highly competitive plant.
According to data from the U.S. EIA, Homer City's demonstrated heat rate consistently has been at or below 10,000 British thermal units per kilowatt-hour for almost a decade. Combined with a non-fuel, variable O&M cost of less than $1 per megawatt-hour, Homer City's total variable costs averaged just over $17 per megawatt-hour from 1993 to 1997. Further, our analysis of fuel costs, as reported by EIA Forms 759 and 423, differs from the FERC Form 1 data used for the $17 per megawatt-hour reported figure. The Form 1 data includes fuel handling, storage and other costs in addition to the delivered fuel costs reported in EIA Forms 759 and 423. These additional costs may not persist under the pressures of competition. Further, our in-house fuels experts project a long-term decline in delivered coal prices. For these reasons, and to provide a conservative estimate of Homer City's costs, our analysis uses a delivered cost of fuel of $11.20 per megawatt-hour based on a 10,000 Btu per kilowatt-hour heat rate. This price is more consistent with our projection of delivered fuel costs to Homer City.[Fn.1]
With its low variable cost of operations, Homer City has enjoyed a capacity factor of more than 70 percent during the same five-year period (1993 to 1997). Under competitive conditions, it is likely that this capacity factor will increase substantially, and our computer models indicate that Homer City could dispatch at an 84 percent capacity factor for the next 20 years. Therefore, this analysis assumes that Homer City runs at 84 percent capacity. A sensitivity test is provided, testing the impact of a 90 percent capacity factor.
A more sophisticated analysis also would include consideration of emissions rights and valuation. In particular, a projection of allowance demands and prices could have an impact on the valuation of coal-fired power plants. However, for brevity and simplification, we omitted that step.
To determine the price and