nuclear plant valuation discussion

Nuclear Plant Valuation Apr 20, 20231

Nuclear Plant Valuation Discussion


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


Introduction


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.


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.


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


Review of Differences in Valuation

• Even though the consultants for Exelon (Stone and Webster) and the Taxing Bodies Board used the income approach, the valuations were very different as illustrated on the graph.

• 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

1,745,996,789

3,125,000,000

-

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

3,000,000,000

3,500,000,000

Exelon MR Valuation

Do

llars

Value

The MR valuation number was 79% higher than the Exelon number

Byron Valuation

741.71

1,327.53

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

Exelon MR Valuation

Do

llars

per

kW

of

Cap

acit

y

Value/KW


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


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%


Nuclear Operating Costs

• The projected operating costs

• An issue is how much A&G (Administrative and General)

Costs are about $12.5/MWH


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.


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.


Power Prices and Discount Rates in Plant Valuation


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)

Byron Valuation - $/kW

741.71

1,113.21

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

Exelon Alternative

Do

llars

per

kW

of

Cap

acit

y

Begin with S&W model and only change energy prices


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.


741.71

1,127.89

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200.00

400.00

600.00

800.00

1,000.00

1,200.00

Exelon Alternative

Do

llars

per

kW

of

Cap

acit

y

Effect of capacity prices without any other adjustments


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)

• (The rate actually used by MR was 11.1% which was adjusted for property tax)


741.71

917.85

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

1,000.00

Exelon Alternative

Do

llars

per

kW

of

Cap

acit

y


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


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.


Review of Power Prices and Fuel Prices


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


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.


Energy Prices from the PJM Website

• Annual Prices are shown below through July 31st 2006. These are real-time prices from the PJM website for the Northern Illinois Hub and for the entire PJM Zone. This data does not include any capacity prices.


Monthly Prices from PJM Website

• The monthly prices are shown below


Daily Prices from PJM Website

• These are average prices since ComEd joined PJM in April 2004.


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.


Forward Prices

• Discussion

• Data from NYMEX Website

• Adjustments to data


NYMEX Website

• The NYMEX website has many forward contracts for the energy industry.


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


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


Historic Natural Gas Prices - Annual

Annual Natural Gas Prices

2.21 1.89 1.73

2.75 2.482.09 2.27

4.31 3.963.36

5.505.91

8.81

6.99

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1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

$/M

MB

TU

Natural Gas Prices have increased over historic levels


Historic Natural Gas Prices - Monthly

Monthly Gas Prices

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2

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6

8

10

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1993

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1994

-07-

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-03-

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-03-

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-07-

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-03-

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-03-

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2003

-03-

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2004

-07-

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2005

-03-

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2005

-11-

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2006

-07-

01

$/M

MB

TU

Natural gas prices have come down somewhat after Katrina


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.


Basic Supply and Demand in the Short-Run

Supply and Monthly Peak - December

0.00

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40.00

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0 10,000 20,000 30,000 40,000 50,000Capacity - MW

Wo

n/k

Wh


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


Forward Natural Gas Prices from NYMEX

• Forward Natural Gas Prices from NYMEX are shown below

Futures prices are reported by month through 2011


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


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.


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.


Forward NI Hub Prices using PJM and Natural Gas Futures

• The table below shows the forward all-hours prices using the ratio of on-peak 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.


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.


Capacity Prices


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.


Value per kW of Alternative Plants


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.


Exelon Presentation on Plant Valuation The difference between variable costs of nuclear and gas mean that nuclear is worth more than gas


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


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.


Discount Rates


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


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 forward-looking 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.


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:


Valuation Pulling Things Together


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


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)


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.


Valuation from Exelon Stock Price


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.


Valuation of Nuclear Plants -- Summary

• The value of nuclear capacity is more than $2,000/kW from market analysis as summarized below:


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


Nuclear Value Using Earnings Percentages

• Using the earnings per share proportions above, the valuation is similar


Exelon Market Value

• Exelon’s stock price is $57.91/Share.

• Based on shares outstanding, the market value of shares is $38.77 billion


Total Exelon Capacity

• The total nuclear and non-nuclear capacity is shown in the chart below


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.


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.