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Whiting USA Trust I Worth No More Than $1.38 Per Share  Will Expire Worthless First Half 2015 $WHX http://seekingalpha.com/a/1g64x Aug 19, 2014
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Securities Fraud 2: AEHI's Land Value Estimate 2 comments
If you'd like to hear more about AEHI visit lucidaehi.blogspot.com
One of AEHI claims that has raised eyebrows is that the land in Payette County which it intends to purchase for $5 million will be worth $1.5 billion when the NRC has approved it for construction of a nuclear power plant. And that's before the construction even starts!
Let's think about that for a moment: why should the value increase? The reason is that one could bring a power plant to market four years earlier than if starting from scratch (assuming four years for the permit process).
However $1.5 billion is a mindboggling number and you've probably wondered how they come up with it. Well, wonder no more. A potential investor who was equally curious asked the company for the justification when considering a private placement. Here's the appraisal the company provided.
J. Eric Cooper (Doctor of Philosophy, no less) is the author and we learn that AEHI was actually very conservative in the number it uses with investors: Cooper comes up with a range of estimates between $1.5 billion and a whopping $13.5 billion.
Cooper uses a 1600 MW power plant and assumes 94% availability.
The appraisal references a couple of papers two of which we provide for convenience:
A quick look at them reveals that they are concerned with the valuation of nuclear power plants, not just the land on which they are built. The appraisal does not provide any further details on how "Monte Carlo" or "Comparable Sales" were used to arrive at the given results. The resulting numbers for the land are higher than what the cited papers come up with as value for entire nuclear plants so lets just say some reasonable doubt exists about the claims.
In one area however Cooper does go into enough detail that we can reverse engineer the argument: NPV and IRR at EBITA. That's finance vocabulary for determining today's value of the cash the plant would generate during the first four years (remember by buying the land a power producer could bring a plant online four years earlier).
The IRR is the interest the company wants to earn on its investments (Cooper uses 20%), so the first years cash is discounted by dividing by 1 + 20%, second years by dividing by ( 1 + 20% ) * ( 1 + 20% ) and so forth. Applying that to the $1.185 billion in cash (EBITA) per year yields a total present value of $3.07 billion, just as he provides in the appraisal.
Sounds good, right?
Well, until you look at the assumptions:
Let's see if we can fix the calculation:
First what's a realistic interest on a 30 year loan? The US government pays 4.78%. Lets just say AEHI gets really, really lucky and gets a loan of $5 billion for 7.5%. That'd be a yearly cash outlay of $375 million. That's 2.7c per kWh.
Then lets look at the other costs. Here's a good paper on the topic. Operation and maintenance is currently at 3c per kWh and fuel costs are at 1.5c per kWh for a total cost of 2.7c + 3c + 1.5c = 7.2c per kWh.
Now lets look at our profits: for each kWh we sell to California we get 3.5c and pay 7.2c. For a loss of 3.7c per kWh or $487 million per year. And a current present value of  drum roll  negative $1.26 billion.
In other words if you had the power to force AEHI to build the above plant and sell the electricity to California it would make sense for them to pay you $1.26 billion so they could start incurring the losses four years later!
Maybe a doctor in philosophy is not the right background for appraising nuclear power plants after all?
After we've shown that the only verifiable calculation is completely off base, and if only to show that AEHI's associates are not only crooked, but also intellectually extraordinarily challenged, let me point out the following logical problem in Coopers appraisal:
Cash flows will only be generated once the plant is operating, so after its construction is complete. Even in AEHI's rosy world construction takes four years. So any cash flow will start coming in four years after the site's been acquired and needs to be discounted by dividing by 1.2^4 = 2.07.
In summary:
And this document is used in context of selling securities to an investor. Should sound familiar, because just like yesterdays case this is an "untrue statement of a material fact" "in connection with the purchase or sale of any security" (illegal according to rule 10b5). Or just simply Securities Fraud.
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