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Preparing for a Nuclear Exchange

Three ways to value nuclear power plants for buyers and sellers.
Fortnightly Magazine - May 2004

of capital (WACC). This method requires publicly traded guideline company stocks to be investigated to develop a typical capital structure (equity and debt weightings) and beta (volatility or systematic risk inherent in the industry). The capital asset pricing model, or the build-up method, is used to derive an equity investor's required return on an investment in the nuclear power industry. The equity return must be adjusted for risks inherent in the single plant under valuation and the additional risks of equity ownership, compared with a larger participant in the industry that most likely owns several nuclear plants and other power plants. Equity investment risk in the nuclear power industry is high because if the subject plant were to shut down, the uranium fuel still would continue to be consumed and the cost to start up again could be so high that it would prevent start up, especially if the shutdown were caused by a catastrophic accident. Additional risk factors of equity ownership must be considered. Because debt cost is also high due to the single-plant nature of the investment, higher risk industrial bonds (higher risk but not junk) are utilized. The WACC is then calculated on an after-tax basis and applied to the forecasted cash-flow stream.

The result of the income analysis is the value of the entire business enterprise associated with the operating plant. To determine the value of the tangible assets alone, a normal level of net working capital is deducted (based on the guideline company analysis); in addition, the intangible assets must be valued, then deducted. Intangible assets include, but are not limited to, the trained and assembled workforce and management team, operating manuals and procedures, PPAs, and software. The resulting income indicator of value for the tangible assets includes the real estate comprising land, buildings, and land improvements; and the personal property, both electrical generation equipment units and support assets.

The cost approach, the final approach to be investigated, requires a certain level of knowledge about the economics and technology of the industry. To apply the cost approach, the appraiser must calculate the current cost of a plant, and the reproduction cost (an exact replica) or the modern replacement cost. The difference is a form of functional obsolescence (loss of value from within the property) due to excess capital costs.

An increase in natural gas reserves has made combined-cycle gas turbine (CCGT) plants more economical. Using CCGT technologies results in decreased construction costs, lower operation and maintenance costs, higher capacity factors, low emissions, and a greater operating flexibility in a deregulated market. Currently, natural gas appears to be the fuel of choice for future electricity generation in the United States. The modern replacement for a nuclear plant most likely would be a CCGT plant. Based on EIA's Annual Energy Outlook 2004, the current cost for a nuclear plant would be about $1,928/kW of capacity, while a CCGT plant would cost only around $615/kW, a significant difference.

Physical deterioration is deducted based on wear and tear experienced by the property. At this point in the cost approach, economic obsolescence