News Analysis

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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 to the Nuclear Regulatory Commission estimates to decommission these facilities reveals a benefit for NYPA of approximately $3 million.
Other Potential Payments. These would include possible revenue sharing based on an agreed-upon schedule of prices vs. actual market prices for plant output after 2004. This analysis omits such payments as too speculative.

According to this analysis, Entergy's net price for the plant and fuel is $393 million, or $217 per kilowatt.

Dominion's Competing Bid

The offer from Dominion Resources was based on Entergy's bid, but topped Entergy's reported price by $75 million.

This additional payment at the closing would increase the present value of the future payments to $518 million ($468 million + $50 million).
By excluding NYPA's transfer of cash to cover employee benefits, Dominion's offer, unlike the Entergy proposal, would not reduce the net to NYPA for the facilities.
Such payments would include possible revenue sharing based on a schedule of prices lower than those in Entergy's initial offer, and payments contingent on Dominion acquiring other nuclear plants in New York state. These payments are excluded from the analysis as too speculative.

Our analysis indicates that Dominion Resources' total net price for plant and fuel is $468 million, or $259 per kilowatt.

The Counter Bid

The counter offer from Entergy added payments for plant decommissioning, as well increasing the purchase power agreement.

Entergy would pay eight annual installments of $11.5 million beginning in 2008. When discounted, these future payments have a present value of $15 million.
Under this agreement, NYPA would purchase the balance of the FitzPatrick plant's output at $29 per megawatt-hour through 2004. When considered against a projection of market rates, the present value of the purchase power agreement represents an $11 million benefit to NYPA (for purchasing power below market price).
Other payments would include possible revenue sharing based on a schedule of prices lower than those in Entergy's initial offer, and payments contingent on Entergy acquiring other nuclear plants in the state. Again, these amounts have been excluded from the analysis as too speculative.

This analysis indicates Entergy's revised total net price is $419 million, or $232 per kilowatt.

Entergy's Commitment Made for a Winning Hand

On a pure dollar basis, Dominion's offer represents more value than Entergy's (see table, "Bid Price Analysis"). But, as mentioned, the complexity of the offers and the speculative nature of many components suggest NYPA based its choice of a winner as much on confidence in the bidder as on price.

Indeed, as reported in Nucleonics Week, "NYPA's board of trustees agreed March 28 to sell the two units to Entergy after Dominion declined to match Entergy's offer to pay the tax consequences on realized gains on the decommissioning fund if the IRS decides the trust transfer is a taxable event."

What is significant about the NYPA sale, then, is that the real price per kilowatt paid, although not as high as the announced price, is nearly three times the average price paid for nuclear assets in the past. The jump in the real price per kilowatt can be explained not only by head-to-head competition, but the fact that the plants are strategically located near both a major load center and other nuclear plants that are for sale. The clear winner in this negotiated-bid-turned-auction is NYPA. Finally, by providing important knowledge to future sellers and buyers of nuclear plants, the sale should help to remove uncertainty about what sale processes and conditions are important. Consequently, look for higher prices for nuclear capacity in the future.

NYPA's Rationale: Reduced Risk Outweighs Cash

No one argues that the New York Power Authority snagged a good deal in March when it approved the sale of its Indian Point 3 and James A. FitzPatrick nuclear power plants to Entergy Corp. By its own account, the $967 million agreement is a record for the U.S. nuclear industry. Yet the Power Authority was quick to point out that there was more to the deal than money.

In a statement announcing its approval of the deal, NYPA noted, "Although Dominion had submitted a higher price for the plants and fuel in net present-value dollars, the Entergy decommissioning payments and several other factors made the overall value of the Entergy proposal far superior."

Entergy's Ability to Close Deal. Chief among the factors supporting that judgment, said NYPA, was the potential for Entergy to close the agreement.

"Entergy agreed to accept the risk of an adverse ruling on the tax status of the plants' decommissioning funds. Dominion declined to make a similar commitment on the ground it was unwilling to have its shareholders exposed to a $250 million risk." NYPA noted it was "unwilling to place this risk on the public."

NYPA's confidence that Entergy actually would close the deal was bolstered by Entergy's completion of the Pilgrim plant acquisition from Boston Edison last year. That point was key in the considerations because NYPA is eager to complete the deal before a refueling outage at the FitzPatrick plant in October. Refueling costs for the plant are estimated at more than $30 million.

New York Headquarters. A final factor in the decision to settle with Entergy was the utility holding company's commitment to establish a Northeast regional headquarters in New York state and maintain it for at least seven years. That was important, NYPA said, because assuring employment for staff and continued service to its customers were among its highest priorities.

Noted NYPA, "Dominion, in contrast, would commit to maintaining a regional headquarters in New York for only one year."

Other Potential Payments. As a bonus, NYPA will receive additional payments should Entergy acquire license extensions for Indian Point 3 and FitzPatrick, or additional nuclear plants in the state. Entergy also agreed to share the profits with NYPA if prices for electricity from the two nuclear plants exceed specified amounts between 2005 and 2015. --R.R.J.

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