Pinnacle West (NYSE:PNW) announced the sale of its portion of a merchant power plant in Nevada to a subsidiary of Sierra Pacific Resources (SRP).
PNW announce that it was selling its 75% share of the Silverhawk Power Station, a 570 MW combined cylce (gas-fired) for $208 million.
The buyer is Nevada Power (a subsidiary of SRP), and the price works about to about $485/KW. This is generally consistent with our view that "strategic" buyers (i.e. a company that is likely to need the power from the plant for its own use; another utility) can generally pay higher prices for power plants than "financial" buyers. The reason strategic buyers can pay more, and still earn a reasonable risk-adjusted return is that they both require lower equity returns, and can more easily find a market for the power ... their own service territory.
It appears that PNW gains, as they were LOSING money on the plant operations, so by selling, their earnings will rise as they remove an earnings drag, even though PNW will report a $55 million after tax loss on the plant sale according to the company. PNW is selling the plant for about 70 cents on the dollar of its total investment.
But SRP's earnings may RISE, as they have need for the power, and will be able to earn a positive return on the investment (possibly putting the plant into rate base). SRP's current power plant portfolio serves less than half of the demand -- the rest is purchased from other power plants and companies. By making this purchase, SRP will substantially reduce its reliance on purchased power, and increase its control over its own resources.
As a reminder, see our other general articles on power plant asset valuation: