News Analysis

 

NYPA's Nuke Auction: More at Stake Than Price?

 

Dominion had the high offer in the nuke plant bidding wars, but Entergy's willingness to cover potential tax liability on the decommissioning fund won the deal.

The bidding wars between Entergy Corp. and Dominion Resources for control of the New York Power Authority's FitzPatrick and Indian Point 3 nuclear power plants signal that a real competitive market for such assets may evolve. But while this sale set a record high on a dollar-per-kilowatt basis, it was not quite as impressive as many reports suggested.

On Nov. 2, 1999, the NYPA and Entergy announced that they had entered into exclusive negotiations for the sale of NYPA's James FitzPatrick and Indian Point 3 nuclear plants. By Feb. 15, the partners had hammered out an agreement for the sale. But just weeks later, on Feb. 24 and March 10, Dominion Resources submitted offers to purchase the two plants. Dominion claimed that its offer exceeded Entergy's. Entergy responded on March 16 by announcing that it had increased its offer.

According to press reports, Entergy's winning bid for the total 1,805 megawatts of capacity offered $967 million, or $536 per kilowatt, covering the plants, fuel, decommissioning expenses, and power purchase agreements. This price per kilowatt not only exceeds the previous average unadjusted price for nuclear assets--$75 per kilowatt--but also exceeds the average price paid for fossil capacity--$360 per kilowatt. However, our analysis indicates that when adjustments are made to the publicly available figures and future payments are properly discounted, the value of Entergy's bid is $419 million, or $232 per kilowatt. And interestingly enough, Dominion's bid actually topped that.

The complexity of the offers suggests that NYPA's choice of Entergy as the winner was based as much on confidence in the bidder as on price. The Power Authority itself, in announcing its approval of the sale, suggested that Entergy's commitment to the deal made its proposal "far superior" to Dominion's bid. (See sidebar, "NYPA's Rationale: Reduced Risk Outweighs Cash.")

Entergy's Original Bid

Entergy's initial offer was reported to be $806 million, but a closer examination of the proposal reveals that its present value was closer to half of that amount.

• Payments. Entergy would pay $50 million at deal's financial close, in seven annual installments of $84 million for the plants, and seven additional annual installments of $24 million for fuel. Although these payments total $806 million, discounting the future payments yields a present value of $468 million.
• Purchase Power Agreements. NYPA would purchase 100 percent of Indian Point 3's output at $36 per megawatt-hour, and an average 37 percent of Fitzpatrick's output at $32 per megawatt-hour through 2004. When considered against a projection of market rates, the present value of the purchase power agreement costs NYPA $53 million.
• Transfer of $25 Million from NYPA to Entergy for Employee Benefits. That amount would be subtracted from the net price Entergy paid for the facilities.
• Decommissioning. Entergy would assume the contract to decommission the plants, with NYPA retaining the $630 million decommissioning fund. Comparing the fund amount