Nuclear Plant Valuation Discussion
Nuclear Plant Valuation
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Contents
• Introduction
• Power Prices and Discount Rates in Plant Valuation
• Review of Electricity, Gas and Coal Prices
• Capacity Prices
• Value per kW of Power Plants (Nuclear, Coal and Gas)
• Discount Rates in Nuclear Plant Valuations
• Valuation from Futures Prices
• Valuation from Exelon Stock Prices
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Introduction
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Introduction
• Valuation of electricity facilities for purposes of property tax assessment
on a basis other than book value is new.
• My objective is to provide background and not to take an advocacy
position on the value of the plant.
• I will try to provide some background so you can focus on key valuation
issues and gather appropriate information for future deliberations.
• Where possible, I attempt to use data from Exelon and outside
published sources such as PJM and NYMEX.
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Objective and Comments
• Is there a way to find the value of a power plant without getting into
issues of market price models and discount rates?
• Can we check the reasonableness of different valuations against any
sort of objective measures?
• Please feel free to interrupt at any time with questions and/or
comments.
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Byron Statistics
• Net Dependable Capacity (MW)
 2,353 MW
• Commercial Operation
 September 16, 1985
 August 2, 1987
• License Expiration
 October 21, 2024
 November 21, 2026
• 20 Year License Extension is Likely
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Review of Differences in Valuation
Byron Valuation
3,500,000,000
3,125,000,000
Even though the consultants for3,000,000,000
2,500,000,000
Exelon (Stone and Webster) and
the
2,000,000,000
Taxing Bodies Board used the
1,500,000,000
income approach, the valuations
1,000,000,000
were very different as illustrated500,000,000
on
the graph.
Dollars
•
•
1,745,996,789
Value
Exelon
MR Valuation
I present the valuations on a per kW
basis as well as an absolute basis so
that nuclear plant valuations can be
compared with other plant
valuations.
Byron Valuation
1,327.53
The MR valuation number
was 79% higher than the
Exelon number
Dollars per kW of Capacity
1,400.00
1,200.00
1,000.00
800.00
741.71
Value/KW
600.00
400.00
200.00
Exelon
Nuclear Plant Valuation
MR Valuation
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Points of General Agreement in Income Approach
• While the valuations are very different from Exelon and the Taxing
Bodies, there are many points without major dispute:
 Plant life (License extension is assumed)
 Operating Costs
 Capacity Factor
 Use of All-Hours Prices
 Capital Expenditures
 Tax Rates (39.75%)
 Use of Income Method
 Decommissioning Adjustments not Included
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Nuclear Capacity Factors
• Various sources document the capacity factor assumption of 92% used
by both Stone and Webster and MR Valuations
Exelon achieved nuclear
capacity factor is 93%
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Nuclear Operating Costs
• The projected operating costs
• An issue is how much A&G
(Administrative and General)
Costs are about $12.5/MWH
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Timeline of Issues Associated with Byron Valuation
• Mid 1970’s – Commonwealth Edison announces construction of Byron
(Commonwealth Edison was rated AAA).
• 1979 – Increased cost of Byron construction from TMI accident
(Commonwealth Edison falls to BBB rating).
• 1985 and 1987 – Byron completed and contentious issues at ICC
regarding prudence and used and useful. Cost of Byron on
Commonwealth Edison books was $4.2 billion.
• 1985-1999 – Byron subject to cost of service regulation; rate base value
used in assessment matters.
• 1997-2006 – Rate freeze.
• 2007 and later – Byron receives price of power on the open market after
approval by ICC of ComEd Power Auction proposal.
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Valuation of Byron Under Regulation
•
Under regulation, the board of review used the book cost less the accumulated
depreciation, effectively the rate base value:
•
Rate base value is lower by prudence adjustments which arose from extended
litigation at the ICC
•
Rate base value was that which the ICC allowed ComEd to earn a rate of return
on. (Under regulation, expenses to generate electricity were fully reimbursed.)
 Cost of Capital x Rate Base Value determines profit
 Present Value of Cash Flow (profit plus depreciation) at Cost of Capital =
Rate Base Value
 Therefore, rate base value is equivalent to an income approach
•
Even though cash flow was not used, the basic theory under regulation is similar
to the income approach – value comes from cash flow and discount rates.
•
The thought was that no seller would accept less than rate base value and no
buyer would pay more.
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Power Prices and Discount Rates in
Plant Valuation
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Effect of Energy Prices
• The graph below shows the S&W value of Byron using alternative
energy prices provided by MR.
• Energy prices are typically reported on a $/MWH basis. (This contrasts
with electricity bills which are typically reported on a cents per kWh
basis; $100/MWH equals 10 cents per kWh and is also called 100 mills
per kWh)
Begin with S&W model and
only change energy prices
Byron Valuation - $/kW
1,113.21
Dollars per kW of Capacity
1,200.00
1,000.00
800.00
741.71
600.00
400.00
200.00
Exelon
Nuclear Plant Valuation
Alternative
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Effect of Capacity Prices
•
The graph below shows the S&W value of Byron using alternative capacity prices
provided by MR.
•
Capacity prices are in a state of flux as the market is defined. S&W and MR made very
different assumptions with respect to capacity prices as shown on the graphs below.
•
Capacity prices are often reported on a $/kW/year or a $/kW/month basis. The prices
can be converted to $/MWH through multiplying by 1,000 (kW to MW) and then dividing
by 8,760 hours in a year.
Effect of capacity prices
without any other
adjustments
Byron Valuation - $/kW
1,127.89
Dollars per kW of Capacity
1,200.00
1,000.00
800.00
741.71
600.00
400.00
200.00
Exelon
Nuclear Plant Valuation
Alternative
July 17
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Effect of Discount Rates
•
Discount rates are supposed to reflect the cost of raising capital with similar risk
including the cost of raising debt and the unobservable cost of equity.
•
Exelon used an 11.02% weighted cost of capital (with a 17% cost of equity) while
MR used a 9.20% weighted average cost of capital (with a 14% cost of equity)
Byron Valuation - $/kW
Dollars per kW of Capacity
1,000.00
917.85
900.00
800.00
741.71
700.00
600.00
500.00
400.00
300.00
200.00
100.00
Exelon
•
Alternative
(The rate actually used by MR was 11.1% which was adjusted for property tax)
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Summary of the Effect Energy Prices, Capacity Prices and
Discount Rates on the S&W Model
• We will discuss below how the general rule of thumb is that a new
combined cycle plant costs about $700/kW to build
• It is not unreasonable to expect that a nuclear plant will have more than
double the value of a natural gas combined cycle plant
• The “Exelon” titles signify the S&W model and assumptions
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Note on Comparable Valuations with Power Contracts
• Power contracts dramatically affect the value of nuclear plants involved
in nuclear plant sales.
• The idea of selling plants has been to transfer operating expertise from
the seller to the new buyer rather than transferring the price risk.
 Therefore, the plants are often sold along with power contracts to
assure that the former seller does not have more power price risk.
 The presence of long-term contracts (PPAs) means that the value
in transactions is dramatically affected by the price in the long-term
contract.
 Valuations from transactions with long-term contracts are not
useful for comparative purposes.
 If I buy your farm but have a separate contract for you to by my
crops from that farm at a fixed contract price, then the value of the
farm is affected by the price in the contract.
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Review of Power Prices and Fuel
Prices
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PJM Power Prices
• Prices at the PJM Zone
• Prices at the Northern Illinois Hub of PJM
• Real Time and Day Ahead Prices
• Natural Gas Prices
• Coal Prices
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Downloading Prices from the PJM Website
• Energy prices are published on the website pjm.com. Monthly prices
are maintained in files for many different pricing areas.
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Energy Prices from the PJM Website
• Annual Prices are shown below through July 31st 2006. These are realtime prices from the PJM website for the Northern Illinois Hub and for
the entire PJM Zone. This data does not include any capacity prices.
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Monthly Prices from PJM Website
• The monthly prices are shown below
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Daily Prices from PJM Website
• These are average prices since ComEd joined PJM in April 2004.
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Recent PJM Prices
Exelon’s recent
presentation of
prices since
July 2005.
This
demonstrates
that Exelon
uses N. Illinois
HUB prices in
describing the
influences on
corporate
earnings.
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Forward Prices
• Discussion
• Data from NYMEX Website
• Adjustments to data
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NYMEX Website
• The NYMEX website has many forward contracts for the energy
industry.
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Exelon Futures Price Analysis Presented to Investors
Prices – Locational Prices are
energy prices without capacity
prices
Exelon uses forward prices to
make projections
Exelon presents coal and gas
prices along with the electricity
prices
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Natural Gas Prices
• Historic Prices
• Relationship between Electricity and Natural Gas Prices
• How Natural Gas and Coal Prices Set Prices Received by Byron
• Forward Natural Gas and Electricity Prices
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Historic Natural Gas Prices - Annual
Natural Gas Prices have
increased over historic levels
Annual Natural Gas Prices
10.00
8.81
9.00
8.00
6.99
$/MMBTU
7.00
5.50
6.00
5.00
4.31
3.96
3.36
4.00
3.00
5.91
2.21
2.00
1.89 1.73
2.75 2.48
2.09 2.27
1.00
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Nuclear Plant Valuation
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2006-07-01
2005-11-01
2005-03-01
2004-07-01
2003-11-01
2003-03-01
2002-07-01
2001-11-01
2001-03-01
2000-07-01
1999-11-01
1999-03-01
1998-07-01
1997-11-01
1997-03-01
1996-07-01
1995-11-01
1995-03-01
1994-07-01
1993-11-01
$/MMBTU
Historic Natural Gas Prices - Monthly
Natural gas prices have come
down somewhat after Katrina
Monthly Gas Prices
16
14
12
10
8
6
4
2
0
31
PJM, Northern Illinois Hub and Natural Gas
This shows that the price of
natural gas is a major driver of
electricity prices.
Natural gas plants on the margin
drive the price and the nuclear
plants receive the price that is
driven by the cost of more
expensive units.
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Basic Supply and Demand in the Short-Run
Supply and Monthly Peak - December
160.00
140.00
Won/kWh
120.00
100.00
80.00
60.00
40.00
20.00
0.00
0
10,000
20,000
30,000
40,000
50,000
Capacity - MW
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Natural Gas and Electricity Prices
• The relationship between electricity and gas prices is shown on the
Exelon’s presentation below
Exelon’s graph
shows how on-peak
prices closely track
gas prices and how
off-peak prices track
coal prices
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Forward Natural Gas Prices from NYMEX
• Forward Natural Gas Prices from NYMEX are shown below
Futures prices are
reported by month
through 2011
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Forward Natural Gas Prices
• The S&W future prices are far below the current projections shown by
Exelon. For example in 2008, the forward price shown by Exelon was
$9.72/MMBTU
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Forward Prices of Electricity from NYMEX Website
• The various NYMEX contracts are shown below. Note that the Natural
Gas futures contracts extents longer than the PJM and the PJM extends
longer than the Northern Illinois Hub price.
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Annualized Forward Prices
• The average of annual forward prices are shown on the table below.
These are futures from 8/11/2006. The futures prices vary with market
conditions.
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Forward NI Hub Prices using PJM and Natural Gas Futures
• The table below shows the forward all-hours prices using the ratio of onpeak to off-peak hours of 47% on-peak.
• For 2010, the PJM on-peak price is used as a basis of the forward and
for 2011, the natural gas price is the basis.
• Off-peak prices for 2010 and 2011 are simply continued from 2009.
• All of this analysis does not include capacity prices.
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Coal Prices
• The following table shows S&W coal price assumptions.
• Actual coal prices have dramatically increased as shown on the above
Exelon presentation to investors.
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Capacity Prices
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Capacity Prices
• Theory of Capacity Prices
 Capacity prices are intended to be added to energy prices so that
companies will have an appropriate incentive to build new capacity.
 Capacity prices should be about the cost to build a new peaking
unit which is about $400/kW.
• Northeast Settlement
 In the New England pool a settlement has been reached that
includes a capacity price of $3 to $4 per kW/Month.
 This compares with a capacity price of $.42/kW/Month in the Stone
and Webster projections and $4.73/kW/Month in the MR
projections.
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Value per kW of Alternative Plants
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Relative Value of Gas and Nuclear Plants
• This section is intended to provide background on reasonable $/kW
estimates of the value of plants
• The cost of a combined cycle gas plant is about $700/kW which is
generally accepted in the industry
• The profit margin of a nuclear plant is much more than a gas plant
because of the lower operating cost. This means that nuclear assets
are more valuable than gas or coal plants.
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Exelon Presentation on Plant Valuation
Nuclear Plant Valuation
The difference
between variable
costs of nuclear
and gas mean that
nuclear is worth
more than gas
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Key Insights from Above Graph
• Forecasted Price in 2006 dollars is about $45/MWH (this inflates)
• Exelon did not include much capacity price
• Long-term assumptions are shown
 3% cost escalation
 9% after tax weighted average cost of capital
 40% income tax rate
 $8/MMBTU gas price
• I have investigated these calculations further and attempted to value
Byron with the same assumptions
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Value of Nuclear Capacity at Different Natural Gas and
Electricity Prices
• Replication of Exelon Numbers
• Sensitivity to Gas Prices
• Valuation using current electricity and gas prices and base case
capacity price and discount rate assumptions is shown below.
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Discount Rates
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Sources of Discount Rates
• Exelon Presentation Above
 Discount rate of 9% is below either the MR number or Stone and
Webster number
• Merger Documents
 Morgan Stanley presented WACC numbers for the valuation of
Exelon Generation in May 2005
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Morgan Stanley Discussion of Discount Rates
• Exelon Generation: Morgan Stanley calculated a range of aggregate
terminal values at the end of the projection and extension period by
applying an Aggregate Value to EBITDA multiple to Exelon Generation's
2009 estimated EBITDA based on the extensions of the Exelon forwardlooking financial information for 2008 through 2009 provided by Exelon's
management.
• The Aggregate Value to EBITDA multiple range used was 8.0x to 9.0x
and the weighted average cost of capital was 7.5% to 8.0% for cash
flows through the period ended December 31, 2009 and 7.75% to
8.25% for the terminal value.
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Valuation with Alternative Discount Rates
• The following table shows the valuation of Byron using the S&W model
assumptions including energy and capacity price and the alternative
discount rates:
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Valuation Pulling Things Together
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Valuation from Forward Prices
• Actual Prices from 2005 and 2006
• Forward NYMEX Prices as discussed above
• Capacity prices from New England Settlement
• Discount Rates from High Morgan Stanley
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Valuation with no Future Escalation
• The valuation still depends on the future inflation. With zero future
inflation, the valuation $1,782 per kW (Compared with Exelon $741 per
kW valuation)
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Valuation with 2% Escalation in Prices and Costs
• The valuation with 2% escalation is $2,497/kW as shown in the table
below.
• The prices are the same for the first seven years, but escalate later.
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Valuation from Exelon Stock Price
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Exelon Value Components
• The value of Exelon stock includes
 Value of nuclear generating plants
 Value of non-nuclear generating plants
 Value of ComEd transmission and distribution
 Value of PECO transmission and distribution
• If we know the value of Exelon and the value of the all of the other items
except the value of nuclear plants, we can derive the value of Exelon
nuclear plants.
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Valuation of Nuclear Plants -- Summary
• The value of nuclear capacity is more than $2,000/kW from market
analysis as summarized below:
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Components of Earnings
• Most of Exelon’s profits will come from generating plants
This implies that
most of the
valuation of Exelon
is from the
generating plants
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Nuclear Value Using Earnings Percentages
• Using the earnings per share proportions above, the valuation is similar
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Exelon Market Value
• Exelon’s stock price is $57.91/Share.
• Based on shares outstanding, the market value of shares is $38.77
billion
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Total Exelon Capacity
• The total nuclear and non-nuclear capacity is shown in the chart below
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Value of PECO and ComEd
• I have valued the distribution assets through multiplying the book value of
the equity by an industry average market to book ratio.
• The market to book ratios are taken from other distribution companies as
shown below
• The goodwill is subtracted because the debt and equity funds the goodwill
that does not produce anything.
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Value of ComEd and PECO
• To assess the value of generating assets, the value of non-generating
assets, a value per kW is attributed to the non-nuclear generation as
follows.
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