Power plant asset values ... a pricing point in Arkansas

| About: TECO Energy, (TE)

Today TECO Energy (NYSE:TE) announced the sale of one of its last remaining unregulated power assets.  This provides yet another pricing point in our ongoing look at the values at which merchant and unregulated power plant sales are being bought and sold.

TECO energy sold its still incomplete Dell Power Plant to a municipal/rural electric copperative in Missouri (see TE's press release for details: TE's Press Release on Dell's Sale).

The plant was sold for $75 million ... and is designed to be a 599 MW gas-fired combined-cycle power plant.  It is not yet complete, and has no contracts associated with it (i.e. the capacity and energy, should the Electric Coop not use it for its own purposes, would have to be sold on the spot market).  The proce received?  About $125/KW, below 35% of the plant's replacement cost. 

This is the lowest price per KW of any of the recent BASE-LOAD power plant sales (WEC sold a plant for about the same price, but it was a simple-cycle peaking plant, with at least some capacity contracted for).  But it SHOULD be the lowest price ... it is a plant that is not yet complete (so the Missouri Coop will have to put additional money into the plant to bring it on-line), and has no contracts for its capacityor power.  I would anticipate that a large chunk of the plant will be used for the internal needs of the Electric Coop purchasing the plant.

This would represent another example of a "strategic" buyer, as opposed to a "financial" buyer.  So-called strategic buyers usually require lower rates of equity return (regulated utilities have lower required equity returns than private equity firms, and muncipal or rural electric coops have even lower requitred returns ... in fact requiore ZERO equity returns, as they are neither publicly traded companies, nor do they have equity investors). 

A financial buyer could not possibly compete on pricing with a municipal or rural electric coop in the purchase of an asset the coop might need to serve its customers.  I would say that a financial buyer ccould not even pay two-thirds of what TE received for this asset (i.e. $80-$90 per KW), and still even deliver mid-teen equity returns to its investors.

As a reminder, see our other general articles on power plant asset valuation:

    1. EEI Value Views
    2. Bull and Bear Views
    3. PEG's Plant Sale

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