Proceeds From Dominion’s Merchant Plant Sale Below Expectations

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On March 11, Dominion Resources announced it had reached an agreement to sell three merchant power plants to Energy Capital Partners, a private equity firm. The sale is expected to result in after-tax proceeds of approximately $650 million, roughly one third of the amount we had assumed when Dominion announced it would sell the facilities last September. The lower-than-expected cash proceeds from the sale represent a negative impact of $2 per share on our fair value estimate of $54 per share.

The most valuable of the three power plants is the 1,528 MW Brayton Point Station in Somerset, Mass. Brayton Point has three coal-fired units and one oil or natural gas-fired unit. This plant near Boston has significant environmental controls, and we suspect it accounted for most of the value in the transaction.

Since the $650 million proceeds from the transaction includes cash tax benefits, the actual selling price is roughly $500 million, or about $300 per kilowatt for the Brayton Point plant. The purchaser put very little, if any, value on the 1,158 MW coal-fired Kincaid Power Station near Springfield, Ill., or Dominion’s 50% ownership of the 1,424 MW Elwood Power Plant outside of Chicago.

The low value that Dominion achieved for these facilities continues a trend of depressed pricing for coal-fired power plants even for those with emissions controls in favorable power markets. Last August, Exelon EXC sold three Maryland coal-fired power plants totaling 2.6 GW for a similar implied value of about $300 per kilowatt.

Although the selling price Dominion is to receive is significantly lower than investors had hoped, it is good shareholder stewardship to invest these funds in the significant capital investment opportunities Dominion has in its regulated utility in Virginia and its natural gas transmission, gathering, and storage facilities.

 

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