On Oct. 8 Talen Energy (NYSE:TLN) announced the sale of three power plants.  Two of these were hydro plants totaling 292MW of capacity. The other was the 704MW Ironwood gas fired plant, sold to TransCanada (NYSE: TRP) for $654M (or $930,000/MW).  These sales were ordered by FERC as a condition for TLN’s spinoff from PPL Corporation (NYSE: PPL) and merger with RJS Power Holdings. Ironwood is located just east of Harrisburg, PA, and is in PJM’s MAAC capacity market region. It was originally purchased by PPL in 2012 from AES for $304M, meaning that the plant’s value has actually doubled over the last 3 years. (Not a bad return for Talen/PPL.) The asset sale, particularly of Ironwood, gives investors a useful pricing point for valuing other power plants in PJM. 

Care needs to be taken in the use of this information, however.  Consider Talen’s 399MW C. P. Crane coal-fired power plant in Baltimore.  Crane and Ironwood are shown on Map 1, and are only about 70 miles apart.  Blindly applying Ironwood’s $930,000/MW valuation implies that Crane is worth $371M. However, using that number would be wildly inappropriate.  On Oct. 22, TLN actually agreed to “sell” the plant for proceeds that “are not material.” (In my book this means they are giving it away for nothing.)  Environmental issues related to coal and Crane’s infrequent operation eat away at the locational value of being near Ironwood. This is a great example of why all plant attributes such as, fuel type, location, size, efficiency and capacity factor need to be considered when doing this type of analysis.

Map 1

Source: SNL

The power plants displayed in Map 1 are a pretty diverse group.  10,275MW of this is coal, 23,028MW is gas or oil, and 12,974MW is nuclear. The value of Ironwood probably has some relevance to the value of all these plants, but the challenges to coal and nuclear in the face of today’s low gas prices often prevents a straight application of the $930,000/MW value. In addition to Crane, the Oyster Creek nuclear plant is another example worth mentioning. Oyster Creek is licensed to run through 2029, but owner Exelon (NYSE:EXC)  plans to close the plant in 2019 because of its marginal profitability. With only four more years to run, this plant is obviously not worth $930,000/MW.

The remainder of this analysis will just look at gas plants to avoid the obvious difficulties encountered by comparing different fuel types.  The next step to narrowing down the list of appropriate comparables to Ironwood is a review of the efficiency and capacity factor at nearby gas plants. Chart 1 shows Ironwood’s capacity factor this decade.

Chart 1

 

Source: SNL

Ironwood’s peers should be plants running within this historic range.  Ironwood’s capacity factor was actually the highest of any gas power plant in eastern PJM in 2014. Chart 2 shows the relationship between heat rate and capacity factor among the eastern PJM gas plants.

Chart 2

 

Source: SNL

It is interesting to see how the power plants in the region break out in Chart 2.  Plants with a heat rate below 8,500 Btu/kWh ran significantly more than the plants with higher heat rates.  Based on Chart 2, it is pretty obvious that the plants that ran below a 40 percent capacity factor should be considered peaker plants and are not true peers of Ironwood.

Regenerating the map using only gas plants with a capacity factor over 40 percent gives the following:

Map 2

 

Source: SNL

The fifteen plants that meet this criteria are presented in the following table:

Table 1

 

Source: SNL and Talen

 

Calpine (NYSE: CPN) has the most megawatts of comparable capacity to Ironwood, and these plants are worth over $2.6B based on Ironwood’s value. These three plants were all part of Calpine’s purchase of Pepco Holdings’ merchant power plants in 2010. Calpine actually bought 4,500MW of power plants in that transaction for $1.65B.  This is another example showing the dramatic rise in gas power plant values over the last few years, as the three Calpine plants shown above are worth almost $1B more than the entire fleet that was purchased just five years ago.

While this analysis shows significant value for a number of different plants in eastern PJM, additional factors could justify an even higher value for these plants.  One important point is that Talen was a forced seller. As a forced seller they probably couldn’t be as aggressive with their negotiating and had to give away some value to make sure a transaction took place.  There are also a few plants under construction that have higher estimated costs than Ironwood’s per MW sales price.  For example, Public Service Enterprise Group’s (NYSE: PEG) 540MW Sewaren 7 project in eastern New Jersey is estimated to cost over $1.1M/MW. Obviously if PEG is building this plant, they think they will create significantly more value than the cost of this project.

There are a number of different ways to “value” an asset (discounted cash flow, replacement cost, etc.), but a great check on that value is what a third party would be willing to pay.  The sale of Ironwood, has given analysts some significant insight into the private market value for at least fifteen other plants in the eastern PJM region with similar attributes.

 

Companies to watch:

* The newly formed spinout from PPL, Talen (NYSE:TLN), has the majority of its capacity in PJM, and is significantly impacted by the trends discussed in this article.

* Calpine Corporation (NYSE:CPN), has about 5,000MW of gas generating capacity in PJM, and is building the 760MW York 2 Energy Center about 40 miles south of the Ironwood plant.

* Public Service Enterprise Group (NYSE:PEG) owns over 11,000MW in PJM of various fuel types.  Their 540MW gas combined cycle Sewaren 7 project is located about 100 miles east of Ironwood.

 

Robert Howard is the founder of Garnet Research, LLC, an independent investment research and consulting firm focused on utilities.  Prior to forming Garnet Research he spent thirteen years as an investment analyst at a hedge fund.  He started his career as a pricing analyst and engineer at Baltimore Gas and Electric over seven years.  Rob has a BS in Engineering and a BA in Economics from Swarthmore College, and an MBA with a concentration in Finance from The University of Texas.  He is also a CFA charterholder.