Earlier this week, NRG Energy announced the sale of its 44% ownership interest in the two-unit South Texas Nuclear Project outside of Houston to Constellation Resources. The purchase price for about 1100 mws of nuclear capacity was $1.75 billion, although both parties noted that the final transaction price was closer to $1.4 billion after tax considerations. The seller, NRG, stated in its press release that the proceeds would be used mainly for corporate purposes and common stock repurchase. NRG has been the target of an activist investor, Elliott Associates, and this combined asset sale and stock repurchase can be seen as a form of corporate appeasement. NRG’s shares have meaningfully underperformed the utility and broad market indices in recent periods.
Constellation Energy is the purchaser of these nuclear units, the largest owner and operator of nuclear facilities in the US. The bulk of Constellation’s reactor fleet came from Chicago-based Exelon Corp. in a February 2022 merger.
The South Texas Nuclear Project consists of two Westinghouse-designed four-loop pressurized water reactors rated at 1280 mws apiece. The units entered commercial service in 1988-89 and have operating licenses extending for approximately twenty years. We’re surprised that this seemingly low purchase price has not garnered more attention. By comparison, consider that Southern Company’s Plant Vogtle will cost about $35 billion and produce 2500 mws of power from its two Westinghouse AP1000 reactors.
Lastly, we would note that the South Texas nuclear units were built under a fully regulated regime that no longer exists in Texas. The state has avoided a capacity market for electric power in its deregulatory zeal. However, just yesterday, Texas voters authorized the state to spend up to $5 billion on new gas-fired power generation to enhance reliability following winter storms that exposed system reliability issues. These new plants will supposedly have various financial guarantees that somewhat resemble the old rate base, rate of return regulation of yesteryear. But for all other power producers, the market price for energy sold is their only means of recompense and suggests a lower price for formerly regulated assets than we might expect.
We should ask: what accounts for the price? As we see it, the plants are worth the discounted net cash flow collected by the units over their remaining lives, or they have value as physical hedges for Constellations’ retail contracts in Texas. It should not matter to the buyer whether the plants were nuclear or burned peanut shells. This deal is another indicator that a new nuclear power could not survive in a competitive market because it would cost several times the discounted cash flow value it produced. Future nuclear power plants will require a regulated marketplace or a government subsidy of one sort or another. Maybe like what Texas will give the new gas-fired stations?
By Leonard Hyman and William Tilles for Oilprice.com
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