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Three ways to value nuclear power plants for buyers and sellers.
Appraisers don't make the market-they reflect it. But when the market speaks, appraisers listen. The appraiser must use judgment, experience, and common sense to correlate the final conclusion of value for a subject plant, basing the conclusion on market indicators.
The valuation of an operating nuclear plant assumes the transfer of ownership as of a particular date. The transfer price is based on the concept of a willing seller and a willing buyer, neither being forced to participate in the transfer and, also, both being reasonably knowledgeable of the relevant facts associated with the operations and the business. To determine the transfer price or value of the plant, three approaches to value are available to review: the sales comparison approach (based on the sales of similar plants), the income approach (based on projected cash flows), and the cost approach (based on the cost of construction).
In the sales comparison approach, transactions in the marketplace are used to derive a value for a nuclear plant based on the actions of buyers and sellers. Actual sales are analyzed and adjusted to the subject plant. Adjustments are made for: (a) size, that is, the generation capability of the generators; (b) production expenses, comparing the cost to produce electricity per kilowatt between the plants; (c) time, adjusting for the economics between the appraisal date and when the sale took place; (d) age, comparing the age (or remaining license life) and level of technology; and (e) location, adjusting for different economics between the subject and the sale; Several other adjustments can be made depending on the circumstances. Depending on the purpose of the valuation, any fuel inventories, intangible assets, power purchase agreement (PPA), transmission assets, or other assets must be removed from the transaction price to result in only the price of the tangible plant assets under review, as necessary.
The sales comparison approach is a powerful tool in a nuclear plant appraisal, because every nuclear plant uses a similar fuel source to generate electricity and is operated to maximize the production of electricity as a base-load plant. The difference between plants can easily be adjusted to the appraised plant by using the basic appraisal tools discussed in any valuation text.
Not So Risky Anymore
The market in sales of nuclear plants has been relatively dynamic. When plants first began to sell in 1999, they were considered risky investments. The first major transactions sold for between $0 and $72 per kilowatt of capacity, and several transactions that were announced never closed. However, by 2000, two plants sold for about $298/kW. In 2001, three additional plants sold for between $369 and $554/kW, and in 2002, two more plants sold for $257/kW and $477/kW. Two plant acquisitions were announced in late 2003 that are expected to close in 2004. These pending sales are at $343 and $582/kW. All of these sales prices reflect only the value of the tangible assets (net of nuclear fuel and intangible assets such as PPAs).
Ownership of a nuclear power plant involves risk.