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Post-Meltdown Valuation

Credit-quality concerns join fuel and market factors to affect power-plant valuation

Fortnightly Magazine - January 2008

clues to trends beyond the forecast. Some of these trends are driven by changing key fundamentals, such as tightening reserves, while others are driven by volatile fuel prices. Analysis of historical asset transactions shows a significant correlation between asset-sales prices and natural-gas prices. Considering that gas prices have been highly volatile, it is crucial to hedge one’s position during these transactions.

The impact of the near-term credit crisis likely will be limited to a slightly higher cost of debt and reduced leverage. Globally, there is an amazing amount of capital looking to be invested, and North American power generation is regarded as a relatively safe investment for most portfolios.

 

Endnotes:

1. Unless otherwise noted, asset values have been calculated as the net present value of the un-leveraged EBITDA-level expected stochastic merchant cash flows for 20 years, using a 12.5% percent real discount rate. This applies to all assets, even those insulated from merchant risk due to PPS’s or ownership by vertically integrated electric utilities.

2. Comparison is performed using Summer 2006 and Summer 2007 Power Generation Bluebook analyses with the same methodology. These are in nominal dollars; the change also includes 2006 to 2007 inflation.

3. In 2007 real dollars and at real escalation rate. These projections are much higher than previous projections which were around $1/MMBtu for the forecast period.

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