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Appraisal Analysis of
Highwood Generating Station
Report Date: March 29, 2013
Appraisal Date: January 1, 2013
Mr. Lee Freeman
Chapter 11 Trustee for
Southern Montana Electric Generation & Transmission Cooperative, Inc.
c/o John Cardinal Parks
Horowitz & Burnett, P.C.
1660 Lincoln Street, Suite 1900
Denver, Colorado 80264
5 Professional Circle, Suite 208, Colts Neck NJ 07722 x Tel: 732.780.6000 x Fax: 732.780.6020 x www.MRValuation.com
(;+,%,7$
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March 29, 2013
Mr. Lee Freeman
Chapter 11 Trustee for Southern Montana Electric Generation & Transmission Cooperative, Inc.
c/o John Cardinal Parks
Horowitz & Burnett, P.C.
1660 Lincoln Street, Suite 1900
Denver, Colorado 80264
RE:
Appraisal of the Highwood Generating Station
Dear Mr. Freeman:
Per your request, MR Valuation Consulting, LLC (““MRV Consulting””) has estimated the market
value of the Highwood Generating Station, located at 369 Salem Road, Great Falls, Montana
59405 (the ““Facility””). Southern Montana Electric Generation (““Southern””) owns a 100 percent
interest in the Facility. Mark Rodriguez, Scott McMahon, and Steven Munson toured the
Facility on February 13, 2013.
The purpose of this engagement is to provide Lee Freeman, Chapter 11 Trustee for Southern (the
““Trustee””), with an appraisal of the Facility, as of the property tax assessment date of January 1,
2013. The appraisal will be used in connection with property tax negotiations and assessment
appeal involving the Facility. The use of our report for any other purposes is not permitted.
We have prepared this appraisal report according to the assessment procedures set forth within
the State of Montana.
For this particular analysis, the appropriate standard of value is market value as defined by the
State of Montana:
§15-8-111. Assessment –– market value standard –– exceptions. (1) All taxable property
must be assessed at 100 percent of its market value except as otherwise provided. (2) (a)
Market value is a value at which property would change hands between a willing buyer
and a willing seller, neither being under any compulsion to buy or to sell and both having
a reasonable knowledge of relevant facts
5 Professional Circle, Suite 208, Colts Neck NJ 07722 x Tel: 732.780.6000 x Fax: 732.780.6020 x www.MRValuation.com
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Page ii
We have conducted a complete appraisal of the Facility and have considered the three traditional
approaches to value –– the sales comparison approach, cost approach, and income approach. Our
report is presented as a Summary Appraisal Report in accordance with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation, the American Society of
Appraisers.
We did not exclude any of the appropriate appraisal approaches from consideration.
performed the research and analyses to estimate the market value of the Facility.
We
This letter is invalid as an opinion of value if detached from the accompanying report, which
contains the supporting text and appendices.
Conclusion of Market Value
Subject to the assumptions and limiting conditions stated throughout this report and based on our
research and analysis, we have estimated the market value of the Facility. Our results are
summarized in the following Table 1.
Table 1
Market Value Conclusion
Highwood Generating Station
As of January 1, 2013
$5,600,000
Five Million Six Hundred Thousand Dollars
The attached appraisal report includes our detailed report documenting our methodologies,
conclusions, and results. This cover letter is not meant to be a separated from the attached
report.
Should you have any questions with regard to the matters discussed herein, or if we can be of
any further assistance to you, please contact Mark Rodriguez with any questions or comments at
732-780-6010 or through email at MRodriguez@MRValuation.com.
Respectfully submitted,
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal Analysis of Highwood Generating Station, As of January 1, 2013
March 29, 2013
A: TABLE OF CONTENTS
Description
Page
A: TABLE OF CONTENTS ........................................................................................................ 1
B: DEFINITIONS AND ABBREVIATIONS ............................................................................. 2
C: ASSUMPTIONS AND LIMITING CONDITIONS ............................................................. 4
D: CERTIFICATION................................................................................................................... 7
E: SUMMARY OF SALIENT FACTS ....................................................................................... 8
F: INTRODUCTION .................................................................................................................... 9
G: MARKET AREA DESCRIPTION ...................................................................................... 12
H: LOCATION MAPS ............................................................................................................... 14
I: INDUSTRY AREA DESCRIPTION..................................................................................... 17
J: DESCRIPTION OF FACILITY ........................................................................................... 19
K: ECONOMIC OUTLOOK..................................................................................................... 20
L: HIGHEST AND BEST USE ANALYSIS ............................................................................ 24
M: APPRAISAL METHODOLOGY ....................................................................................... 26
N: SALES COMPARISON APPROACH ................................................................................ 27
O: COST APPROACH............................................................................................................... 30
P: INCOME APPROACH ......................................................................................................... 41
Q: RECONCILIATION AND MARKET VALUE CONCLUSION ..................................... 47
APPENDIX 1: PROFESSIONAL QUALIFICATIONS ........................................................ 50
APPENDIX 2: DISCOUNTED CASH FLOW ANALYSIS .................................................. 53
APPENDIX 3: WEIGHTED AVERAGE COST OF CAPITAL .......................................... 60
APPENDIX 4: PROPERTY TAX ADJUSTED WACC ........................................................ 62
APPENDIX 5: REPLACEMENT COST NEW ANALYSIS ................................................. 64
APPENDIX 6 COST APPROACH ANALYSIS ..................................................................... 66
APPENDIX 7 PHOTOGRAPHS .............................................................................................. 68
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
B: DEFINITIONS AND ABBREVIATIONS
AEO
Annual Energy Outlook
Appraisal Date
January 1, 2013
ASA
American Society of Appraisers
Cap Rate
Capitalization Rate
Client
Mr. Lee Freeman, Chapter 11 Trustee for Southern Montana
Electric Generation & Transmission Cooperative, Inc.
COLA
Combined Operating License Application
CTG
Combustion Turbine Generator
DCF
Discounted Cash Flow
DEP
Department of Environmental Protection
DOE
Department of Energy
EIA
Energy Information Agency
EPAct
Energy Policy Act of 1992
ENR
Engineering News Record
ERO
Electric Reliability Organization
Facility
Highwood Generating Station
FERC
Federal Energy Regulatory Commission
FPS
Foot Per Second
FIRREA
Federal Institution Reform, Recovery, Enforcement Act of 1989
FOMC
Federal Open Market Committee
GWh
Gigawatt Hour
HW
Handy –– Whitman Index
HGS
Highwood Generating Station
ICE
InterContinental Exchange
IEEE
Institute of Electrical and Electronics Engineers, Inc.
IEO
International Energy Outlook
IPP
Independent Power Producer
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
IRR
Internal Rate of Return
ISO
Independent System Operator
km
Kilometer
kW
Kilowatt
kWh
Kilowatt––hour
kV
Kilovolt
MACRS
Modified Accelerated Cost Recovery System
Management
Mr. Lee Freeman, Chapter 11 Trustee for Southern Montana
Electric Generation & Transmission Cooperative, Inc.
MOU
Memorandum of Understanding
M&S
Marshall & Swift (Marshall Valuation Service)
MW
Megawatt
MWh
Megawatt––hour
MWe
Megawatt––electric
MRV Consulting
MR Valuation Consulting, LLC
NOI
Net Operating Income
NWPP
Northwest Power Pool
PPA
Power Purchase Agreement
PPI
Producer Price Index
RCN
Reproduction Cost New
RCNLD
Reproduction Cost New Less Depreciation
Southern
Southern Montana Electric Generation & Transmission
Cooperative, Inc.
TOC
Trended Original Cost
Trustee
Mr. Lee Freeman, Chapter 11 Trustee for Southern Montana
Electric Generation & Transmission Cooperative, Inc.
US
United States of America
USPAP
Uniform Standards of Professional Appraisal Practice
WACC
Weighted Average Cost of Capital
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
C: ASSUMPTIONS AND LIMITING CONDITIONS
This report is subject to the following General Assumptions and Limiting Conditions. Other
assumptions and limiting condition may be included in this report at other locations in the report.
In this section of this report, the term Appraisal can mean appraisal, research or analysis and any
report or work product or deliverable about the appraisal, research, or analysis. Further, the term
Consultant means MRV Consulting’’s consultant, appraiser, or service provider.
Information and Data Sources
1.
The information on the financial, legal and physical condition of the Facility provided by
the Client, the Facility owner, or others, directly to us or to the public through various
public disclosure methods is assumed to be correct.
2.
Other materials and information obtained from various professionally appropriate
published and unpublished sources are assumed to be correct.
3.
The information contained within this report was obtained from sources deemed to be
reliable. Reasonable efforts, given the use, purpose and scope of the appraisal and work
product, have been made to verify such information as reliable; however, no warranty is
given as to its accuracy.
Facility Specific Assumptions and Limiting Conditions
4.
This report analyzes the fee simple interest in the Facility, free and clear of any or all
liens or encumbrances. It is also assumed that the title to this interest is marketable.
5.
No responsibility is assumed for matters of a legal nature, matters of title, or matters of
audit. It is assumed that the legal descriptions as obtained from public records or as
furnished are correct. The Consultant has made no land survey of the Facility.
6.
Except as noted herein, the Consultant assumes that there are no hidden or unapparent
conditions at the Facility land and/or improvements, which would render the Facility
more or less valuable. The Consultant assumes no responsibility for such conditions, or
for engineering, or legal or architectural counseling which might be required to discover
such factors. Except as noted herein, it is assumed that the Facility is not adversely
affected by unknown contaminates or health risks, and that there are no unknown
contamination or health risks exist on or near the Facility. We assumed that there were
no ADA issues sufficient to render the Facility more or less valuable.
7.
It is assumed that there are no zoning or building code issues, or other federal, state or
local regulation compliance issues concerning the Facility that would significantly
increase or decrease the value of the interest being appraised, unless noted.
8.
Competent and responsible management and ownership are assumed.
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Publication, Distribution, Use of Report
9.
The opinions proffered in this appraisal are as of a specific date, for a specific use and
purpose, and made under specific assumptions and limiting conditions. Using the
opinions proffered herein for any other use or purpose is probably inappropriate and
unwise, and is prohibited, unless authorized by MRV Consulting.
10.
Possession of this report, or a copy thereof, does not give the holder the right of
publication, nor may the report or any part thereof be used by anyone other than the
Client and intended users for the intended use.
11.
Disclosure of the contents of this appraisal is governed by the By-Laws and Regulations
of the Appraisal Institute and the American Society of Appraisers. MRV Consulting and
its staff members are authorized by the Client to disclose all or any portion of this
appraisal and the related appraisal data to appropriate representatives of the American
Society of Appraisers, if such disclosure is required to enable the Consultants to comply
with the By-Laws and Regulations of the American Society of Appraisers now or
hereafter in effect.
12.
Neither all nor part of the contents of this report, or copy thereof, shall be conveyed to the
public through advertising, public relations, news, sales or any other media without
written consent and approval of MRV Consulting. Nor shall the Consultants, MRV
Consulting or any professional organization, of which the Consultants are a member or
candidate, be identified without the written consent of the Consultant.
13.
The appraisal will not be utilized in any present or proposed, public or private
syndication of any of the interests in the Facility unless prior written agreement has been
obtained from the Consultant.
Appraisal Analysis and Format Assumptions
14.
This appraisal has been prepared in accordance with the requirements of USPAP of the
Appraisal Foundation and the American Society of Appraisers. Jurisdictional exceptions
may apply.
Limit of Liability
15.
Any valuation models of income and expenses in this report are not predictions of the
future. No warranty or representation is made that the model will coincide with future
events. Furthermore, there will usually be differences between the modeled results and
actual results, because events and circumstances frequently do not occur as expected, and
those differences may be material.
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
16.
In providing this service, MRV Consulting and its staff members establish and the Client
understands and agrees that:
a)
No relationship other than one of a service provider is created between MRV
Consulting and its staff members and the Client; and
b)
MRV Consulting and its staff members assume no responsibility for or ownership of
the risks and rewards of the client’’s business decisions based on, or business results
that are consequential to the use of, this appraisal.
Statements of Qualifications and Personal Histories
17.
Any statements of qualifications, resumes, and personal and/or company histories are
presented in summary for marketing purposes and to assist the intender(s) of the report
with understanding the professional competency and experience of the Consultants and
the company. These statements of qualifications, resumes, and personal and/or company
histories are (1) not a complete listing of our professional experiences and qualifications
and (2) not a full disclosure of our professional, corporate, and personal interactions and
relationships.
Extraordinary Assumptions and Hypothetical Conditions
18.
Extraordinary Assumptions and Hypothetical Conditions, as defined by USPAP, will be
disclosed at various points in the report, if applicable in this Appraisal.
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
D: CERTIFICATION
We certify that, to the best of our knowledge and belief:
1. The statements of fact in this report are true and correct. Certain efforts, as described herein,
given the use, purpose and scope of the appraisal, have been made to verify such statements
of facts.
2. The reported analysis, opinions, and conclusions contained herein are limited only by the
reported assumptions and limiting conditions, and my personal, impartial and unbiased
professional analyses, opinions, and conclusions.
3. The undersigned has no present or prospective future interest in the real estate or assets that
are the subject of this report, and no personal interest with respect to the parties involved.
4. The undersigned has no bias with respect to the real estate or assets that are the subject of this
report, or to the parties involved.
5. The engagement in this appraisal assignment was not contingent upon developing or
reporting predetermined results.
6. The compensation for this appraisal is not contingent upon the development or reporting of a
predetermined value or direction in value that favors the cause of the Client, the amount of
the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent
event directly related to the intended use of this appraisal.
7. This appraisal has been developed and reported in conformity with, and is subject to, the
requirements of the Code of Professional Ethics and Standards of Professional Practice of the
Appraisal Institute and the Uniform Standards of Professional Appraisal Practice of the
Appraisal Foundation.
8. Mark Rodriguez, Scott McMahon, and Steven Munson toured the Facility on February 13,
2013.
9. Steven Munson and Anthony Castagna assisted Scott McMahon, ASA MRICS and Mark
Rodriguez, ASA MRICS in the preparation of the analyses, conclusions, and opinions
concerning Highwood Generating Station that are set forth in this report.
10. As of the date of this report Mark Rodriguez and Scott McMahon have completed the
requirements of the continuing education program established by the American Society of
Appraisers (see Appendix 1 for Professional Qualifications).
Mark Rodriguez, ASA MRICS
MR Valuation Consulting, LLC
Scott McMahon, ASA MRICS
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
E: SUMMARY OF SALIENT FACTS
Name of Facility:
Highwood Generating Station
Location:
369 Salem Road, Great Falls, Montana 59405
Land Size:
197.561 acres
Net Annual Mean Rating:
Unit Capacity: 46 MW
Description:
A simple cycle natural gas fired power plant which was
completed in 2011
Ownership:
Southern Montana Electric Generation & Transmission
Cooperative, Inc.
Appraisal Purpose:
Determined market value of the Highwood Generating Station
Scope of Appraisal:
Summary Appraisal Report
Use of Appraisal:
Negotiation and litigation support for property tax assessment
appeal purposes
Date of Appraisal:
January 1, 2013
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
F: INTRODUCTION
Facility Identification
The subject of this appraisal is a simple cycle natural gas fired power plant, commonly known as
Highwood Generating Station. The Facility is located in Great Falls, Montana.
Purpose, Use and Scope
The purpose of this engagement is to provide the Trustee with an appraisal of the Facility, as of
the property tax assessment date of January 1, 2013. The appraisal will be used in connection
with property tax negotiations and assessment appeal involving the Facility. The use of our
report for any other purposes is not permitted.
We considered the three traditional approaches to value (cost, sales comparison, and income) in
determining the market value of the Facility. For this particular analysis, the appropriate
standard of value is market value as defined by the State of Montana:
““§15-8-111. Assessment –– market value standard –– exceptions. (1) All taxable property
must be assessed at 100 percent of its market value except as otherwise provided. (2) (a)
Market value is a value at which property would change hands between a willing buyer
and a willing seller, neither being under any compulsion to buy or to sell and both having
a reasonable knowledge of relevant facts.””1
Comment: Forming an opinion of market value is the purpose of many appraisal assignments,
particularly when the client’’s intended use includes more than one intended user. The conditions
included in market value definitions establish market perspectives for development of the
opinion. These conditions may vary from definition to definition but generally fall into three
categories:
1. the relationship, knowledge, and motivation of the parties (i.e., seller and buyer)
2. the terms of sale (e.g., cash, cash equivalent, or other terms)
3. the conditions of sale (e.g., exposure in a competitive market for a reasonable time prior
to sale)
In the context of this appraisal analysis, the above definition of value is considered appropriate to
satisfy Montana property tax reporting purposes.
MRV Consulting has conducted a complete analysis, which considers the three traditional
approaches to value. This report is presented in a summary report format in accordance with
USPAP of the Appraisal Foundation. When necessary for compliance with local law and
assessment procedures, we may employ the jurisdictional exception rule of the USPAP. While
1
Montana Code Annotated 2011, <http://data.opi.mt.gov/bills/mca/15/8/15-8-111.htm>, November 9, 2012.
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
this report has been prepared in a summary report format, we did not exclude any appropriate
appraisal approach from consideration. MRV Consulting conducted the research and analyses
appropriate to determine the market value of the Facility, as of the Appraisal Date.
Appraisal Process
First, appraisers establish the purpose, use, and scope of an appraisal. Next, they describe the
property, the legal rights and the physical qualities to be appraised. The market is researched and
analyzed and the highest and best use of the property is analyzed. Only then are the various
analyses, or approaches to value, researched and applied. There are three basic approaches in
determining the value of real estate: the sales comparison approach, the cost approach and the
income approach. The principles and basic methodology involved in each approach are
summarized in this report. After conducting the applicable approaches to value, the appraiser
concludes the appraisal with a reconciliation process where the various indications of value are
reviewed, and the particular merits of each of the completed approaches are analyzed. A value
for the Facility is concluded in the reconciliation process.
In connection with this analysis, we have relied upon assumptions developed by the Client as
well as our own industry research/knowledge and internal consultants. Within the scope of this
analysis, we do not express any opinion with respect to the forecasts, projections or other
forward looking information, included or referred to in our analysis. However, as part of our
analysis, we reviewed the projections provided by the Client and found them to be acceptable for
appraisal purposes.
The procedures performed included, but were not limited to, the following:
x
Discussions with the Client and Facility’’s representatives regarding the history,
operations, financial condition, competitive environment, and the future business
prospects for the Facility
x
Discussions with financial, operational, and engineering personnel regarding the nature of
the fixed assets
x
Reading of various corporate documents, including historical and prospective financial
information, contracts, etc.
x
Research and analysis of relevant industry, market, and economic data
x
Appraisal of the Facility considering the cost approach, income approach, and sales
comparison approach
x
Site tour of the Facility performed on February 13, 2013
x
Developing a written report detailing our appraisal approaches to value, assumptions
utilized, and conclusions of value
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Property Rights Appraised
The assumption is that the Facility is held in a fee simple estate. For a property owner, a
property is held in a fee simple estate when there are no leases on the property. Once a lease is
signed, the property owner’’s interest becomes a leased fee estate, and the tenant holds a
leasehold estate. By definition the difference between the fee simple and leased fee estate is the
leasehold estate. For reference, we have included the following definitions:2
2
x
Fee Simple –– Absolute ownership unencumbered by any other interest or estate, subject
only to the limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
x
Leased Fee – The ownership interest held by the lessor, which includes the right to the
contract rent specified in the lease plus the reversionary right when the lease expires.
x
Leasehold – The right held by the lessee to use and occupy real estate for a stated term
and under the conditions specified in the lease.
x
Arm’s-Length – A transaction between unrelated parties under no duress.
x
Market Rent – The most probable rent that a property should bring in a competitive and
open market reflecting all conditions and restrictions of the typical lease agreement,
including the rental adjustment and revaluation, permitted uses, use restrictions, expense
obligations, term, concessions, renewal and purchase options, and tenant improvements.
Appraisal Institute The Appraisal of Real Estate, 13th ed. (Chicago: Appraisal Institute, 2008).
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
G: MARKET AREA DESCRIPTION
City of Great Falls, Montana
History
Founded in 1883 by Paris Gibson and railroad magnate James J. Hill, Great Falls began as a
planned power city, situated to take advantage of the hydroelectric power of the waterfalls of the
Missouri River.
In 1889, construction on the Black Eagle Dam began, which would provide the city with
hydroelectric power by the following year. Great Falls quickly became a thriving industrial and
supply center and, by the early 1900s, was en route to becoming one of Montana’’s largest cities.
The rustic studio of famed Western artist Charles Marion Russell was a popular attraction, as
were the famed ““great falls”” after which the city was named. A structure billed as the world’’s
tallest smokestack was completed in 1908 by the city’’s largest employer, the Anaconda Copper
Mining Company’’s smelter, measuring 508 feet tall. The Big Stack immediately became a
landmark for the community.
Great Falls prospered further with the opening of a nearby military base in the 1940s, but as rail
transportation and freight slowed in the later part of the century, outlying farming areas lost
population, and with the closure of the smelter and cutbacks at the airbase, its population has
plateaued.
Geography
Highwood Generating Station is located in the City of Great Falls, Montana. The City lies near
several waterfalls on the Missouri River and is located near the center of Montana on the
northern Great Plain. Additionally, Great Falls is in close proximity to the Montana Rocky
Mountain Front and is about 100 miles south of the Canadian border. The City of Great Falls
has a land area of approximately 22.26 square miles.
Demographics
The US Census Bureau is the nation’’s primary provider of data on urban populations and
businesses. As the largest statistical agency of the country, the US Census Bureau provides a
vital resource of information about the nation’’s people and its economy, information that is used
by the general public and researchers, as well as federal, state, and local governments, to make
more informed economic and social plans and decisions.
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
According to the US Census Bureau Profile of General Population and Housing Characteristics:
20103, the City of Great Falls had an estimated total population of 58,505, consisting of 51.1
percent females and 48.9 percent males. The median age was 37 years. The US Census Bureau,
2010 Census shows Great Falls had a total of 25,301 housing units, the average household size
being 2.26 people and the average family size being 2.88.
Economics
According to the 2011 American Community Survey 5-Year Estimates4, the median income of
households in Great Falls, Montana was $42,540. For the employed population 16 years and
older, the leading industries in Great Falls were educational services, and health care, and social
assistance with 22.5 percent, and retail trade with 14.3 percent.
Among the most common occupations were: management, business, science, and arts
occupations with 30.6 percent; sales and office occupations with 28.9 percent; and service
occupations with 19.3 percent. 78.3 percent of the people employed were private wage and
salary workers; 15.7 percent was Federal, State, or local Government workers; 5.8 percent was
self-employed in own not incorporated business workers; and 0.2 percent were unpaid family
workers.
3
US Census Bureau ““Great Falls, Montana –– US Census Bureau, 2010 Census.””
<http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk>, accessed on February 5, 2013.
4
US Census Bureau ““Great Falls, Montana –– 2007-2011 American Community Survey 5-Year Estimates.””
<http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk>, accessed on February 5, 2013.
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
H: LOCATION MAPS
Figure H–1
Regional Map of Highwood Generating Station
Highwood Generating Station
369 Salem Road, Great Falls
Montana 59405
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Figure H–2
Local Area Map of Highwood Generating Station
Highwood Generating Station
369 Salem Road, Great Falls
Montana 59405
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Figure H–3
Aerial Photograph of the Highwood Generating Station
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
I: INDUSTRY AREA DESCRIPTION
In order to accurately determine the market value of the Facility, it is necessary to understand the
industry and marketplace in which it operates.
Highwood Generating Station is located in the Northwest Power Pool Interconnection regional
electricity market. NWPP serves as a forum in the electrical industry for reliability and
operational adequacy issues in the Northwest, through both the transition period of restructuring
and the future. NWPP promotes cooperation among its members in order to achieve reliable
operation of the electrical power system, coordinate power system planning, and assist in
transmission planning in the Northwest Interconnected Area. It is a voluntary organization
comprised of major generating utilities serving the Northwestern US, British Columbia and
Alberta. Smaller, principally non-generating utilities in the region participate indirectly through
the member system with which they are interconnected. A control map of the areas covered by
NWPP can be seen below in Figure I––1.5
Figure I–1
NWPP Control Area Map6
5
6
Northwest Power Pool, <http://www.nwpp.org/>, accessed on February 5, 2013.
Northwest Electric Market, <http://www.ferc.gov/market-oversight/mkt-electric/northwest/elec-nw-reg-des.pdf>, accessed on February 5, 2013.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
General Information
The Northwest Power Pool, in the form of the Operating Committee, was established in 1942 to
serve as a forum for the Northwest’’s electric utilities to more effectively coordinate operations
and ensure reliability. In 1964, with the signing of the Pacific Northwest Coordination
Agreement and formation of its Coordination Contract Committee (now known as the
Coordinating Group), the Pool’’s staff was given the responsibility of conducting the studies
necessary to put together an annual plan for operating the NW’’s coordinated hydro system and
for facilitating the planning process. In 1990, a Transmission Planning Committee was formed
to serve as a forum to assist in promoting the coordinated planning of the Northwest’’s
transmission system.
Geography7
States Covered:
All or most of Washington, Oregon, Utah, Nevada, Montana,
Wyoming and part of California
Reliability Region:
Northwest Power Pool Area sub-region of the Western Electric
Coordinating Council.
Hubs:
California-Oregon Border and Mid-Columbia
Generation/Supply
Marginal Fuel Type:
Hydro and Natural Gas
Generating Capacity:
±57,120 MW
Capacity Reserve:
±16,822 MW
Reserve Margin:
Approximately 42 percent
When taken together, hydro, fossil fuels, nuclear energy, and renewable resources were adequate
to provide electricity in excess of in region needs.
7
Northwest Electric Market, Overview and Focal Points <http://www.ferc.gov/market-oversight/mkt-electric/northwest/2012/12-2012-elec-nwarchive.pdf>, accessed on February 5, 2013.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
J: DESCRIPTION OF FACILITY
Highwood Generating Station is located in the City of Great Falls, Cascade County, in the State
of Montana. The station was constructed on a 197.561 acre site.
The Facility consists of one 46 MW simple cycle natural gas fired Combustion Turbine
Generator, one gas compressor, one step up transformer, one unit auxiliary transformer, and
supporting balance of plant systems and equipment. The commercial operating date of this
Facility began in February 2012.
Simple Cycle Combustion Turbine Generator
A simple cycle combustion turbine power plant consists of an air compressor, combustion
chamber, turbine and generator. The typical fuel is natural gas. The turbine is similar to a jet
airplane engine; air is drawn into the front of the unit, compressed, mixed with fuel, and the
mixture is ignited. The heated air expands and turns the turbine, which then turns the generator
to produce electricity. A generic illustration of this process can be found in Figure J––1.
Figure J–1
Simple Cycle Combustion Turbine
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
K:
ECONOMIC OUTLOOK
Economic Analysis
It is important to have a thorough and relevant economic analysis for a well prepared appraisal.
First, IRS Revenue Ruling 59-608 requires consideration of ““the economic outlook in general
and the condition and outlook of the specific industry in particular.”” Second, an understanding
of the economic and industry outlook is fundamental to developing reasonable expectations
about the prospects of the subject natural gas fired power plant. We have considered some of the
major economic factors such as inflation, interest rates, financial markets, housing markets, and
unemployment.
Consumer Spending and Inflation9
The Consumer Price Index for All Urban Consumers was unchanged in December on a
seasonally adjusted basis, the US Bureau of Labor Statistics reported today. Over the last 12
months, the all items index increased 1.7 percent before seasonal adjustment.
The gasoline index declined again in December, but other indexes, notably food and shelter,
increased, resulting in the seasonally adjusted all items index being unchanged. Gasoline was
the only major energy index to decline; the indexes for natural gas and electricity both increased.
Within the food category, five of the six major grocery store food groups increased as the food at
home index rose for the third consecutive month.
The index for all items less food and energy increased 0.1 percent in December, the same
increase as in November. Besides shelter, the indexes for airline fares, tobacco, and medical care
also increased. The indexes for recreation, household furnishings and operations, and used cars
and trucks all declined in December.
The all items index increased 1.7 percent over the last 12 months, compared to a 1.8 percent
figure in November. The index for all items less food and energy rose 1.9 percent over the last
12 months, the same figure as last month. The food index has risen 1.8 percent over the last 12
months, and the energy index has risen 0.5 percent.
Year in Review
The CPI rose 1.7 percent in 2012 after a 3.0 percent increase in 2011. This was the third smallest
December to December increase of the past 10 years and compares to a 2.4 percent average
annual increase over the span.
8
9
Rev. Rul.59-60, 1959-1 CB 237 –– IRC Sec. 2031.
US Bureau of Labor Statistics. ““Consumer Price Index –– December 2012.”” US Bureau of Labor Statistics. January 16, 2013
<http://www.bls.gov/news.release/archives/cpi_01162013.htm>, accessed on March 28, 2013.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
The energy index increased 0.5 percent in 2012, a sharp deceleration from its 6.6 percent
increase in 2011. The gasoline index rose 1.7 percent in 2012 after increasing 13.8 percent in
2010 and 9.9 percent in 2011. The household energy index declined in 2012, falling 1.1 percent
after increasing 1.8 percent in 2011. The fuel oil index rose 3.6 percent in 2012, but the
electricity index decreased 0.5 percent and the index for natural gas fell 2.9 percent, the fourth
straight year it has declined.
The index for food rose 1.8 percent in 2012, a deceleration from its 4.7 percent increase in 2011.
The index for food at home rose 1.3 percent in 2012 compared to 6.0 percent in 2011. Five of
the six major grocery store food group indexes rose in 2012, with increases ranging from 0.5
percent (dairy and related products) to 2.0 percent (other food at home). The nonalcoholic
beverages group was the only index to decline, falling 0.2 percent. The index for food away
from home rose 2.5 percent in 2012 after increasing 2.9 percent in 2011.
The index for all items less food and energy decelerated slightly in 2012, rising 1.9 percent after
a 2.2 percent increase in 2011. This matches the average annual increase of 1.9 percent over the
past ten years. Several indexes decelerated in 2012. T he apparel index, which rose 4.6 percent
in 2011, increased 1.8 percent in 2012. The index for new vehicles increased 1.6 percent in 2012
after rising 3.2 percent in 2011, and the medical care index rose 3.2 percent in 2012 after a 3.5
percent increase the prior year. The index for airline fares rose 2.1 percent, the tobacco index
increased 1.9 percent, and the recreation index rose 0.8 percent; all of these increases were
smaller than in 2011. The index for household furnishings and operations was unchanged in
2012 after rising in 2011, and the index for used cars and trucks turned down in 2012, falling 2.0
percent after increasing 4.0 percent in 2011. In contrast, the shelter index accelerated in 2012,
rising 2.2 percent after a 1.9 percent increase in 2011. The index for rent rose 2.7 percent and
the index for owners’’ equivalent rent increased 2.1 percent.
Food
The food index rose 0.2 percent in December for the third month in a row. The index for food at
home increased 0.2 percent after rising 0.3 percent in each of the two previous months. The
index for meat, poultry, fish, and eggs was unchanged in December, while the remaining major
grocery store food group indexes all increased. The fruits and vegetables index posted the
largest increase, rising 0.6 percent; this was its seventh increase in the last nine months. The
indexes for cereals and bakery products, dairy and related products, and nonalcoholic beverages,
rose in November, each increased 0.2 percent in December. The index for other food at home
increased 0.1 percent in December after rising 0.4 percent in November. The index for food
away from home rose 0.1 percent in December, the same increase as in October and November.
Energy
The energy index declined 1.2 percent in December after declining 4.1 percent in November.
The gasoline index, which fell 7.4 percent in November, declined 2.3 percent. It has decreased
10.1 percent since its recent peak in September. The index for fuel oil was unchanged in
December, while other major energy components increased. The natural gas index rose 1.3
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
percent in December, the same increase as in November. The index for electricity rose 0.2
percent, its fifth consecutive increase.
All items less food and energy
The index for all items less food and energy increased 0.1 percent in December, the same
increase as in November. The shelter index rose 0.1 percent in December after increasing 0.2
percent in November. The rent index rose 0.2 percent and the index for owners’’ equivalent rent
increased 0.1 percent, while the lodging away from home index declined 0.9 percent. The index
for airline fares continued to rise, increasing 1.2 percent in December. This was its fourth
consecutive increase and it has risen 6.5 percent since August. The index for medical care
increased 0.1 percent as the medical care services index rose but the index for medical care
commodities declined. The tobacco index rose 0.5 percent in December, its first increase since
September. In contrast to these increases, the recreation index declined in December, falling 0.2
percent. The index for household furnishings and operations also fell 0.2 percent, while the
index for used cars and trucks declined 0.4 percent, its sixth consecutive decrease. The indexes
for apparel and personal care both declined 0.1 percent in December. The index for new
vehicles, which rose 0.2 percent in November, was unchanged in December.
Not seasonally adjusted CPI measures
The Consumer Price Index for All Urban Consumers increased 1.7 percent over the last 12
months to an index level of 229.601 (1982-84=100). For the month, the index declined 0.3
percent prior to seasonal adjustment.
The Consumer Price Index for Urban Wage Earners and Clerical Workers increased 1.7 percent
over the last 12 months to an index level of 225.889 (1982-84=100). For the month, the index
decreased 0.3 percent prior to seasonal adjustment.
The Chained Consumer Price Index for All Urban Consumers increased 1.6 percent over the last
12 months. For the month, the index decreased 0.2 percent on a not seasonally adjusted basis.
Economic Outlook10
The median forecast called for gross domestic product growth to be 2.2 percent in 2012 on a year
over year basis, and 1.9 percent on a fourth quarter-to-fourth quarter basis. Respondents
expected fourth quarter 2012 GDP growth to dip to 1.3 percent on an annualized basis; nearly
three-fourths of respondents expected Hurricane Sandy to lower growth by up to 50 bps for the
fourth quarter, while the balance expected little to no impact to GDP. For 2013, GDP growth
was expected to remain subpar in the first quarter, at an annualized 1.3 percent, before
recovering and rising steadily to an annualized 2.8 percent in the fourth quarter of 2013.
10
SIFMA ““US End-Year 2012 Economic Outlook”” January 16, 2013. <http://www.sifma.org/econoutlook20131h/>, accessed on March 21,
2013.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Approximately two-thirds of respondents expected the continuing European debt crisis to impact
US GDP growth in 2013 by up to 100 bps, although the balance expected little to no impact.
Unemployment was expected to remain at elevated levels throughout 2012 and 2013, with levels
similar to those forecasted in mid-year 2012. Survey respondents expected the full year average
unemployment rate to drop slightly to 8.1 percent in 2012, declining to 7.7 percent in 2013. Full
year 2012 non-farm payroll employment gains were estimated to total 1.8 million jobs; the
median expectation remained unchanged for 2013, at 1.8 million jobs. Consumer spending
trends, however, were expected to weaken significantly in 2013 from mid year expectations with
personal consumption estimated to fall to 1.6 percent in 2013 (compared to the median
expectation of 2.1 percent in the mid-year survey), down from the 1.9 percent expected in 2012.
The business capital investment growth estimate for full year 2012 strengthened considerably
from the 5.8 percent forecasted at mid year 2012 to 7.2 percent. Growth was expected to weaken
considerably in 2013, however, with a median expectation of 3.1 percent growth, compared to
5.9 percent forecasted mid-year 2012. State and local government spending was expected to
shrink by 1.3 percent in 2012, and then shrink further by 0.2 percent in 2013.
The median forecast for ““headline”” inflation, measured by the personal consumption
expenditures chain price index, was 1.8 percent for full year 2012 and 1.6 percent for full year
2013. The median forecast for the core personal consumption expenditures chain price index
was 1.7 percent for full year 2012 and 1.6 percent for full year 2013.
The outlook for inflation continued to be moderate for 2013. Nearly 90 percent of respondents
believe inflation is not a concern in 2013, with one panelist expressing moderate concern and the
other expressing deep concern. Economic slack/employment featured prominently as the
dominant factor in the inflation outlook for 2013, followed by global conditions and fiscal policy
as other factors.
Economic Growth
The resolution of the US budget and deficit reduction issues took center stage for promoting
GDP growth in 2013, with approximately half the respondents considering it the most important
factor, followed by normalization of private credit markets.
The resolution of the fiscal cliff and policies, along with a recovering real estate market, were the
most oft-cited upside risks to the economic forecast. Other factors cited were the mitigation of
““the continued dysfunction in Washington,”” improved consumer spending, improved market
conditions, the resolution of the Eurozone crisis, and lower oil prices.
The continuation of the fiscal budget issues, along with the continuing risk from the Eurozone,
were the dominant factors on the downside. Respondents noted that fiscal austerity resulting
from a more onerous fiscal cliff resolution could also play a factor to the downside.
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March 29, 2013
L:
HIGHEST AND BEST USE ANALYSIS
In order to estimate the market value of a property, the appraiser must identify the highest and
best use of the property, and must assume such highest and best use as the premise of value.
Other types of value may assume other uses.
The 2012-2013 USPAP unequivocally state the imperative of appraising market value only under
the assumption of the highest and best use, in Standards Rule 1-3.
Standards Rule 1-3
““When necessary for credible assignment results in developing a market value opinion, an
appraiser must:
(a) identify and analyze the effect on use and value of existing land use regulations,
reasonably probable modifications of such land use regulations, economic supply and
demand, the physical adaptability of the real estate, and market area trends; and
Comment: An appraiser must avoid making an unsupported assumption or premise
about market area trends, effective age, and remaining life.
(b) Develop an opinion of the highest and best use of the real estate.
Comment: An appraiser must analyze the relevant legal, physical, and economic
factors to the extent necessary to support the appraiser’’s highest and best use
conclusion(s).””
Highest and Best Use
The reasonably probable and legal use of vacant land or an improved property, which is
physically possible, appropriately supported, financially feasible, and that results in the highest
value. The four criteria the highest and best use must meet are legal permissibility, physical
possibility, financial feasibility, and maximum productivity.11
Highest and Best Use of Property as Improved
The use that should be made of a property as it exists. An existing improvement should be
renovated or retained as is so long as it continues to contribute to the total market value of the
property, or until the return from a new improvement would more than offset the cost of
demolishing the existing building and constructing a new one. Highest and best use of a
property as improved pertains to the use that should be made of an improved property in light of
its improvements. The use that maximizes an investment property’’s return on a long-term basis
is its highest and best use as improved.12
11
12
The Dictionary of Real Estate Appraisal. 5th ed. Chicago, Appraisal Institute.
Ibid.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
The Four Criteria
There are four basic criteria that are considered and analyzed in determining the highest and best
use of a property:
1. Physically possible. What uses are physically possible given the constraints of the size
and physical characteristics of the site?
2. Legally permissible. What uses are permitted by zoning or other restrictions (i.e. deed
restrictions) on the property?
3. Financially feasible. Of the physically possible and legally permitted uses, which are
financially feasible in that they will produce a net return to the property owner?
4. Maximally productive. Of the financially feasible uses, which use will produce the
highest net return, or result in the highest present value of the property?
Highest and Best Use Conclusions
As Improved
The highest and best use of the Facility, as improved as of the Appraisal Date, is for its continued
use as it was built, as a natural gas fired electric generation plant, as this use is physically
possible, legally permissible, economically feasible, and all other uses would not be maximally
productive.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
M:
APPRAISAL METHODOLOGY
The generally accepted approaches to appraisal are commonly referred to as the market
approach, cost approach and income approach. Within each of these categories, a variety of
methodologies exist to assist in the estimation of market value. The following sections contain a
brief overview of the theoretical basis of each approach, as well as a discussion of the specific
methodologies relevant to the analyses performed.
Market Approach
In the market approach, recent sales and listings of comparable assets are gathered and analyzed.
If necessary, adjustments are then applied to these observations to recognize differences in
characteristics between the subject asset and the comparable assets, so as to indicate a market
value for the subject asset.
The comparative analysis performed in this approach focuses on similarities and differences
among assets and transactions that affect value including differences in the assets appraised,
motivations of buyers and sellers, financing terms, market conditions at the time of sale, size,
location, physical features, and economic characteristics. Elements of comparison are tested
against market evidence to determine which elements are sensitive to change and how they affect
value.
Cost Approach
A second approach to valuation is the cost approach. The discrete valuation of an asset using a
cost approach is based upon the concept of replacement as an indicator of value. A prudent
investor would pay no more for an asset than the amount for which he or she could replace the
asset new. The cost approach establishes value based on the cost of reproducing or replacing the
property, less depreciation from physical deterioration and functional and economical
obsolescence, if present and measurable. This approach generally provides the most reliable
indication of the value of land improvements, special-purpose buildings, special structures,
systems and special machinery and equipment.
Income Approach
The third approach to valuation is the income approach. It is based on the premise that the value
of a security or asset is the present value of the future earning capacity that is available for
distribution to the subject investors in the security or asset. The most commonly used income
approach for the valuation of securities or individual assets is a discounted cash flow method. A
DCF method involves forecasting the appropriate cash flow stream over an appropriate period
and then discounting it back to a present value at an appropriate discount rate. This discount rate
should consider the time value of money, inflation and the risk inherent in the ownership of the
asset or security being valued.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
N: SALES COMPARISON APPROACH
Introduction
The sales comparison approach is a traditional appraisal technique that is most useful when a
number of similar assets have been sold in the market, and when details on those assets and sale
transactions are publicly available for analysis. This approach arrives at an estimate of value for
a subject property by comparing the sale price of similar (comparable) assets. This is a classic
example of the principle of substitution. When a purchaser has the opportunity to acquire a
number of competing properties with similar utility and desirability, the purchaser will not
choose to pay more to acquire the subject than the reasonable market value of a substitute
property. Likewise, the seller of a property will understandably not accept an offer below the
sale price obtained for similar properties.
Ideally, research for comparable assets that have sold will yield transactions for assets identical
to the subject property in all major value-impacting categories. As a practical matter, searches
for comparables rarely results in perfect comparables. When dealing with these particular sales
which are not ideally similar, standard appraisal practice requires reconciliation of the
differences between the major value-impacting characteristics of the subject property and those
of the comparables. This is known as the adjustment process.
Transaction Universe
Our analysis focused on comparable sales of natural gas fired electricity generating power plants
that were announced and closed within the three years prior to the Appraisal Date. We identified
three transactions as appropriate for our sales comparison analysis.
Atlantic Power Corporation Acquisitions
Atlantic Power Corporation, announced that the Atlantic Power Corporation and certain of its
subsidiaries have entered into a definitive agreement with Quantum Utility Generation, LLC and
certain of its affiliates to sell the Company’’s interests in three Florida projects, Auburndale
Power Partners Limited Partners, Lake Cogen, Ltd., and Pasco Cogen, Ltd. for a purchase price,
including working capital adjustments, of approximately $136 million.
Atlantic Power expects to receive net cash proceeds of approximately $111 million in the
aggregate, after repayment of project level debt at Auburndale and settlement of all outstanding
natural gas swap agreements at Lake and Auburndale. The Company intends to use the net
proceeds from the Sale to fully repay its senior credit facility, which is expected to have an
outstanding balance of approximately $67 million at close, and for general corporate purposes.
The agreement contains representations, warranties, and indemnification obligations that are
customary in the industry. The Sale is subject to customary closing conditions and approvals,
including approval from the Federal Energy Regulatory Commission, and is expected to close in
the first quarter of 2013. Other terms of the deal were not publicly disclosed.
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March 29, 2013
Entergy Acquisition
Entergy Mississippi, Inc. purchased the 450 megawatt Hinds plant from KGen Hinds LLC. The
total expected cost is $246 million. The Hinds plant, also a combined-cycle natural gas-fired
unit, began operations in 2001 and is located in Jackson, Miss. Other terms of the deal were not
publicly disclosed.
Capital Power Corporation Acquisition
Capital Power Corporation, through a subsidiary, entered into an agreement to acquire
Bridgeport Energy, LLC, which owns the Bridgeport Energy facility, from affiliates of LS Power
Equity Advisors, LLC for $355 million, subject to working capital and other closing adjustments.
Bridgeport Energy is a natural gas fired combined cycle power generation plant located in
Bridgeport, Connecticut, with a nominal capacity of 520 megawatts. Other terms of the deal
were not publicly disclosed.
Sales Comparison Approach Conclusions
Historically, the sales comparison approach has not been employed to value electric generating
plants, primarily due to the lack of sales data. Publicly available sales information often
excludes the details necessary to perform a thorough analysis. Nevertheless, market participants
are attempting to track and incorporate sales information into their acquisition and disposition
due diligence.
Confidentiality provisions and non-full disclosure of sale terms preclude an appraiser from
adjusting comparable sales to make adequate comparisons. In the sales comparison approach,
we analyzed transactions involving natural gas fired power plants in the marketplace. The
number of transactions indicates the existence of a competitive, open market for natural gas fired
electric generation facilities. However, the data regarding the sales also suggests that these sales
involve considerations beyond the physical assets. These generation asset sales may be affected
by PPAs, location, and future development potential. PPAs assure that the electricity generated
by a plant will be purchased for a guaranteed price. Thus, the purchaser will have a guaranteed
future income. The terms of the PPA are a major determinant in computing a purchase price,
and lend additional credibility to the income approach as the most reliable estimate of value.
The true market value may be significantly higher or lower than the reported purchase price.
As previously stated, transactions involving the sale of generating assets are extremely
confidential and most important details are simply not made available to the public. Based on
uncertainty and the lack of specificity of information available, as well as the resulting inability
to make reasonable adjustments in the absence of this information, the sales comparison
approach cannot be relied upon to determine the market value of a natural gas fired power plant,
as of the Appraisal Date.
Our sales comparison approach analyzed three completed transactions in the marketplace over a
three year period prior to the Appraisal Date. We derived two primary conclusions from our
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March 29, 2013
sales comparison approach. First, an active market exists for the transfer of natural gas fired
power plants. Second, certain necessary adjustments could not be made to the comparable sales,
and a comparison analysis to precisely derive a market value estimate could not be meaningful
completed. Thus, our value conclusion considering the sales comparison approach is
inconclusive.
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March 29, 2013
O: COST APPROACH
Introduction
The basis of the cost approach, as applied for these purposes, is reproduction. How much would
it cost to build an asset or group of assets? The cost to develop/build or redevelop/rebuild a
property is estimated and reconciled to value. The cost approach is based on the ““principle of
substitution.”” This principle supports the position that a prudent seller would not sell for less,
nor would a prudent buyer pay more for a specific property than the cost of building an asset
offering the same utility. The same utility means the same potential capacity, condition, life, and
operational usefulness as the subject property over a similar remaining useful life.
The basic concern surrounding the cost approach is that cost may not equal value. When
applicable, the cost approach reflects market thinking by recognizing that market participants
sometimes relate value to cost. Buyers tend to judge the value of an improved property by
considering the cost to create the improvements. Moreover, buyers adjust their contemplated
acquisition prices by estimating the costs to bring an existing structure up to the physical
condition and functional utility they desire. Generally, when making such an analysis, frequently
referred to as a feasibility analysis, the property owner or buyer compares such cost to the
revenue that will be produced with an expected rate of return included on such an investment.
There is more than one method to estimate the cost to develop electric generating assets;
however, these methods tend to fall into either the general category of the reproduction cost
approach or the replacement cost approach. Using the reproduction cost, the appraiser is
concerned with issues surrounding an exact duplicate of the subject property, whereas, using the
replacement cost, the appraiser is concerned with issues surrounding the replacement of
functionality or utility.
When assets are new, the market value of those assets is usually closely related to the cost
expended to develop and construct those assets or groupings of assets. Buyers of older
properties will often measure the price they are willing to pay for the subject assets against the
cost of developing new assets (less adjustments for depreciation and/or the cost to bring the
existing asset up to standard). Therefore, the cost approach is applicable in situations where
sellers and buyers view ““market value”” to be closely related to ““actual cost.””
The cost approach is also often considered useful for complex appraisal situations such as when
an asset has a large quantity of tangible assets associated with it, when a distinction needs to be
made between real and personal property, when a grouping of assets is not frequently traded in
the market, and when an asset is considered unique, such as a ““special purpose”” or ““specialty””
asset. Although electric generating assets are often traded in the market and are not considered
unique, the cost approach is still a viable appraisal technique.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Cost Approach Procedure
““After gathering all relevant information and analyzing data on the market area, site, and
improvements, an appraiser follows a series of steps to derive a value indication by the cost
approach. The appraiser will:
1. Estimate the value of the land as though vacant and available to be developed to its
highest and best use.
2. Determine which cost basis is most applicable to the assignment: reproduction cost or
replacement cost.
3. Estimate the direct (hard) and indirect (soft) costs of the improvements as of the effective
appraisal date(s).
4. Estimate an appropriate entrepreneurial profit or incentive from analysis of the market.
5. Add estimated direct costs, indirect costs, and entrepreneurial profit or incentive to arrive
at the total cost of the improvements.
6. Estimate the amount of depreciation in the structure and, if necessary, allocate it among
the three major categories:
ƒ
ƒ
ƒ
Physical deterioration
Functional obsolescence
Economic obsolescence
7. Deduct estimated depreciation from the total cost of the improvements to derive an
estimate of their depreciated cost.
8. Estimate the contributory value of any site improvements that have not already been
considered.
9. Add land value to the total depreciated cost of all the improvements to arrive at the
indicated value of the property.
10. Adjust the indicated value of the property for any personal property (e.g., furniture,
fixtures, and equipment) or any intangible asset value that may be included in the cost
estimate. If necessary, this value, which reflects the value of the fee simple interest, may
be adjusted for the property interest being appraised to arrive at the indicated value of the
specific interest in the property.””
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Reproduction Cost
According to the Appraisal of Real Estate, ““Reproduction Cost”” is defined as:
““...the estimated cost to construct, at current prices as of the effective date of the appraisal, an
exact duplicate or replica of the building (or asset) being appraised, using the same materials,
construction standards, design, layout, and quality of workmanship and embodying all the
deficiencies, superadequacies, and obsolescence of the subject building (or asset).””13
We relied upon the projected construction cost detail provided by Southern to estimate the
reproduction cost of the Facility, as of the Appraisal Date.
Trended Original Cost Method
For generation assets, reproduction cost is routinely based on trending original cost dollars to
restate dollar cost levels as of the effective date of the appraisal. This methodology is well
recognized by appraisers as an acceptable means to value generation assets. The usefulness of
the trended original cost method of the reproduction cost is contingent on the accuracy and
completeness of historical pricing information and the trending method utilized. To use the
trended original cost method, the costs by date of expenditure (generally by year) must be
reliable and available for each class of asset. Since the facility is a new construction, it was not
appropriate to trend the original construction costs.
Reproduction Cost New
For newly constructed plants, reproduction cost new is equivalent to the estimated cost to
construct at current prices as of the effective date of the appraisal. Table O––1 displays the
Reproduction Cost New of the Facility, as of January 1, 2013.
Table O–1
Reproduction Cost New
As of January 1, 2013
Facility
Highwood Generating Station
Reproduction Cost New
$ 91,000,000
Traditionally agencies have relied upon this approach because it is functionally sound,
consistent, appropriate, supportable, and fairly objective.
13
Appraisal Institute, Appraisal of Real Estate, Thirteenth Edition, 2008, page 385.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
In addition to the reproduction cost approach, it is important to consider the replacement cost
approach.
Replacement Cost
According to the Appraisal of Real Estate ““Replacement Cost”” is defined as:
““……the estimated cost to construct, at current prices as of the effective appraisal date, a
substitute for the building (or asset) being appraised using modern materials and current
standards, design, and layout.””14
While many consider the theoretical base of the cost approach to be the reproduction cost, as
previously discussed, the replacement cost can be much easier to use and defend, particularly
where there is a substantial technological difference between the subject assets and the substitute
state-of-the-art assets used for comparison in estimating value. This ease-in-use and improved
defensibility occurs as a number of the adjustments (although not all of the adjustments),
typically obsolescence, usually required for the reproduction costs are eliminated when using the
replacement cost approach.
Replacement cost is a widely accepted and practiced method for estimating the value of
industrial facilities in a competitive market. We utilized the following Cost per Unit Capacity
Method in our analysis to compute the overall replacement cost of the Facility.
Cost Per Unit Capacity Method
The cost per capacity method is useful in deriving a replacement cost by utilizing an estimated
““dollars per unit of capacity,”” expressed in $/kW unit cost. Total cost is estimated by
multiplying unit cost by the number of units. In the case of an electric generating station, the
number of units is the capacity of the plant, typically quantified in megawatts. The unit cost can
be developed from a variety of sources including research publications, the government,
contractor estimates, manufacturer estimates, owner estimates, and the comparative-unit method.
The cost per capacity method is relatively practical, and is considered and often utilized by many
market participants.
The apparent simplicity of the cost per capacity method can be misleading. To develop
dependable unit cost values, an appraiser must exercise judgment and carefully compare the
subject assets with similar or standard assets for which actual costs are available. Appropriate
cost adjustments need to be made to account for differences between the various cost sources and
the subject Facility. Erroneous data can result if an appraiser concludes a ““unit cost”” that is not
applicable to the subject assets. When it is correctly applied, the cost per capacity method
produces accurate estimates of cost.
14
Appraisal Institute, Appraisal of Real Estate, Thirteenth Edition, 2008, page 385.
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Overall Replacement Cost of the Facility
The US Energy Information Administration publishes current and future costs of energy related
capital projects, including but not limited to new electric generating plants. EIA updates its cost
and performance assumptions annually. The EIA estimates the total overnight cost to construct a
combustion turbine station located in Montana to be $963 per kilowatt (in 2010 dollars).
However, the conclusion of an overnight capital cost does not complete the cost per capacity
approach. Generating stations cannot be constructed overnight; they take time to build. We used
a construction period of 11 months, which is the amount of time it took to substantially complete
the construction of the Facility. We used a construction loan interest rate of 3.25 percent when
calculated the time related cost factor for calculation of Replacement Cost New of the Facility.
In order to trend the EIA 2010 cost dollars to restate the dollar cost levels as of the effective date
of the appraisal, we used the Handy –– Whitman Index. HW is the most commonly accepted and
widely acknowledged trend index within the electric utility industry. Whitman, Requardt, and
Associates, LLP biannually publishes the HW Index from Public Utility Construction Costs.
The Facility is located in the Plateau Region of the US, as defined by HW. This region
corresponds to section E-5 of HW, which is the section we utilized to obtain the appropriate
indices. The HW Index gives index numbers for various construction, material, and labor costs
of building, electric utility, and gas utility construction for six different regions in the US from
1912 to present.
Once we have determined an accurate, current unit cost for the Facility as of the Appraisal Date,
the next step is to multiply the unit cost by the capacity of the Facility. The capacity of
Highwood Generating Station is 46 MW, or 46,000 kW.
Table O––2 provides our Replacement Cost New. Appendix 5 details the Replacement Cost New
Analysis.
Table O–2
Replacement Cost New
As of January 1, 2013
Facility
Highwood Generating Station
MR Valuation Consulting, LLC
Replacement Cost New
(Rounded)
$
48,300,000
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Discrepancy between Reproduction Cost New and Replacement Cost New
Our calculated Reproduction Cost New is substantially higher than our calculated Replacement
Cost New for the Facility. The following is a listing of the reasons for the excess costs
associated with the Reproduction Cost New of the Facility:
1. The HGS project was a unique project from the beginning with several obstacles along
the way. The project began as a 250 MW coal fired plant and later changed to a 46 MW
gas fired plant. This caused the length of time and development, and thus costs, to be
greater than it would have been if it simply started out as a gas plant.
2. Challenges with Financing –– Plant developers initially sought Rural Utilities Service
financing, but due to the lack of funding for coal plants, they looked to the private
financing sector.
3. Rezoning –– the issue of zoning was something that the plant developers had not
anticipated and it ended up adding costs to the project. The land which HGS sits on was
rezoned from agricultural to heavy industrial back in 2007, which prompted a lawsuit
from several neighboring landowners. After a lengthy legal battle, a memorandum of
understanding was signed by all parties which would allow for a special use permit for
the gas fired plant. This MOU had various stipulations including (but not limited to)
noise reduction measures and ongoing testing of adjacent agricultural lands. These noise
mitigation measures included building an acoustical barrier wall, which added costs to
engineering, equipment, construction, and legal costs. The various issues with soil
sampling and acoustical testing also added costs.
4. Lewis and Clark Mitigation –– Another challenge brought about by concerned citizens and
environmental groups was the site of the Lewis and Clark Trail, which is adjacent to the
HGS site. Efforts were made with the landscaping designs to incorporate native grass
and shrubbery. There were also efforts made to reduce visibility of the plant from Salem
Road.
5. One of Southern’’s members filed a lawsuit in December 2007 with the intent to get out of
their wholesale power contract with Southern. During the process of obtaining financing
for HGS, the lenders cited issues related to this disgruntled member and the lawsuit as a
reason for higher interest rates. Additionally, to separate the project development from
this same member who no longer wished to be involved with HGS a new entity was
created SME Electric Generation and Transmission Cooperative, Inc. This entity was
unable to obtain financing and the project development was eventually transferred back
to Southern Montana so the members' contracts could serve as collateral within the
financing arrangements.
For these reasons, the excess capital costs associated with the Facility were determined to be
Functional Obsolescence. Moving forward into the depreciation analysis portion of the cost
approach, we used Replacement Cost New of the Facility as our starting point, which equals
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Reproduction Cost New less Functional Obsolescence due to excess capital costs. Replacement
Cost New considers the most modern and cost efficient technology available, excluding any
superadequacies or deficiencies that may be inherent in the Reproduction Cost New.
Depreciation
According to the Appraisal Institute ௅ The Dictionary of Real Estate Appraisal, ““Depreciation”” is
defined as:
““In appraising, a loss in property value from any cause: the difference between the
reproduction or replacement cost of an improvement on the effective date of the appraisal
and the market value of the improvement on the same date.””
This is essentially the same definition as that used by the American Standards Board in its
publication of Uniform Standards of Professional Appraisal Practice. The above definition
implies that the difference or loss in value includes all forms of depreciation. For an appraiser,
the question becomes how to categorize and measure the various motivations in the market in a
way that explains and classifies this difference.
Several mathematical processes have been developed to accomplish and explain depreciation;
however, it is well to remember that because market value is ultimately based on the judgment of
both the buyer and the seller, depreciation is also ultimately based on the judgment of both the
buyer and the seller or in the case of an appraisal, depreciation is ultimately based on the
judgment of the appraiser. For this reason, in determining depreciation, one factor to consider is
the physical observation of the assets, which aids the knowledgeable appraiser to bring the
various depreciation processes into perspective.
For the appraiser, the quantification and classification of depreciation is needed for directly
developing a value indicator under the various cost approaches. Of course, the income and sales
approaches indirectly consider depreciation in terms of revenue, expenses, or market sales.
Typical depreciation techniques can be as simple as the estimate of a single age over life ratio or
as complicated as the breakdown of the subject assets depreciation into its various components
for individual consideration. The selection of the appropriate depreciation model(s) by the
appraiser will be based on the type and amount of data available. While depreciation models are
plentiful, the model(s) selected must be commensurate with the types of depreciation occurring
in the assets.
Models based on the economic age life method are probably the best known and easiest
understood of depreciation techniques. These models provide an estimate of the total
depreciation for either single or groups of assets. In simplest form, the economic age life method
arrives at an estimate of accrued depreciation by using the ratio of the effective age over the
effective age plus the remaining service life. Often the effective age plus the remaining useful
life is equivalent to the service life. The effective age is the measure of the condition of the asset
with respect to the expected life, which may or may not be the actual or chronological
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
(historical) age. It should also be recognized the expected remaining service life of an asset
might change during the life cycle of the asset.
Age
Historical age is the appraisal year less the placed in service year or the year in which the plant
became fully operational. HGS was placed in service in February of 2012.
Improvements over time can contribute to an asset being effectively younger than its historical
age. Conversely, abnormal wear can contribute to an asset effectively being older than its
historical age. See Table O––3 for the effective age of the Facility. For our analysis, we
determined effective age to be equal to historical age. This age was used to compute the
depreciation percentage of the Facility.
Table O–3
Age
As of January 1, 2013
Description
Highwood Generating Station
Age (in Years)
1
Average Service Life
Typically, past experience gives an indication of the conditions that can be anticipated in the
future, and, thus, can be useful as a major element in estimating the average service life of an
asset. While this will likely continue to be the situation for many electric generation facilities,
the appraiser should be aware that deregulation may change market conditions and, therefore, the
appraiser should not blindly accept this premise of continued depreciation as usual.
Factors other than age that contribute to the average service life include the effect of wear and
tear on the asset, preventative maintenance procedures, operating and capital expenditure policy,
thermal cycling, changing technology, changing regulatory and environmental requirements, and
obsolescence.
The average service lives we incorporated in our analysis are not accounting lives, but are lives
based upon industry experience. An asset may survive longer or shorter than its average service
life. An average service life is the estimated number of years that an asset is expected to remain
in service, based upon past experience and anticipated future expectations. Physical life may be
longer than the average service life, but it may not accurately represent the usefulness of the
service of an asset. The average service life does represent the anticipated usefulness and years
of service of an asset. We assigned a 40 year service life to the Facility.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Physical Deterioration
Physical deterioration is the physical wear and tear due to age that diminishes the value of an
asset. Physical deterioration can be estimated by the straight line method, by the age life
method, using mortality dispersion techniques, and by property observation.
The straight line depreciation technique is commonly accepted and used in the appraisal of
electric generation assets. The technique is used in our analyses not simply because it is
common accounting tool, but rather because it is the most accurate technique in the cost
approach valuation of electric generation assets, as an appraisal tool and as an economic reality.
The following equation defines straight line depreciation:
Depreciation (percent) = Age (years) / Service Life (years) x 100 percent
However, we utilized the following alternative straight line depreciation equation (where Age
and Remaining Life are both expressed in years):
Depreciation (percent) = Age / (Remaining Life + Age) x 100 percent
Correspondingly, the percent good of an asset can be defined as the complement of depreciation:
Percent Good (percent) = 1 - Depreciation (percent)
Therefore, we multiplied the reproduction cost new of each asset by its estimated percent good
factor. That factor was based on the historical age, service life, and remaining life of each asset.
Table O––4 lists the Physical Depreciation for the Facility.
Table O–4
Physical Depreciation
As of January 1, 2013
Description
Highwood Generating Station
Physical Depreciation (Rounded)
($ 1,200,000)
Functional Obsolescence
Functional obsolescence is the loss of value due to functional deficiencies, overcapacity, excess
capital costs, lack of functional utility, excess operating costs, or inadequacies within the
property itself. An improvement is functionally obsolete, when the improvement requires an
operation, use, or activity to be completed in a way that current replacement improvements
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
would not. Some types of functional obsolescence are curable if the costs to repair, modify, or
add are offset by the increased value of the asset. Typical examples of functional obsolescence
issues involve the current costs to construct new replacement assets, efficiencies, and the cost to
maintain the assets or improve operations based on changes in available technology.
Functional obsolescence can be characterized by:
x
x
x
x
Deficiencies requiring an addition – Not currently included in the estimate of cost
new and is currently desired or required in the market.
Deficiencies requiring a modification – Included in the estimate of cost new but is not
adequate or outmoded.
Super-adequacies – Included in the reproduction cost (likely not in replacement cost)
and are cost components that surpass current market standards.
Deficiencies requiring additional operating cost.
Functional Obsolescence due to excess capital costs is quantified as the amount by which
Reproduction Cost New exceeds Replacement Cost New. For this analysis, Functional
Obsolescence due to excess capital costs was determined to be $42,700,000. Replacement Cost
New considers the most modern and cost efficient technology available, excluding any
superadequacies or deficiencies that may be inherent in the Reproduction Cost New.
Economic Obsolescence
Economic obsolescence is the loss of earnings and value due to factors external to the property.
Changes in market demand, federal or state law, the economy, and/or any operational constraints
external to the asset that are detrimental to the earnings of an asset can be measured by
capitalizing the expected losses in the earnings over the period that the condition is expected to
exist.
In the broadest sense, the capital improvements made in the past may no longer have the ability
to produce the originally expected return on the investment. This loss in potential may be a form
of economic obsolescence.
Our income approach valuation was performed with consideration of the highest and best use of
the Facility: its current use as electric generating stations. The projected cash flows generated by
the Facility are found to not support the support the rate of return on tangible assets that a
knowledgeable investor would expect based on reproduction cost new less excess capital costs
and depreciation values.
With current fuel prices, electricity prices, and Facility
reproduction/replacement costs, as of the Appraisal Date, replacement of the Facility would not
be economically feasible. We attribute this to economic obsolescence. Since an investor would
pay no more for an asset than the present value of the future free cash flow that the asset
generates, economic obsolescence related to the Facility was quantified by the difference in the
income approach value and reproduction cost new less physical depreciation and functional
obsolescence.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Land
Earlier in this cost approach, we estimated the value of the improvements at the Facility. To
complete the cost approach, we typically add the value of the underlying land or land lease to the
reproduction cost new less depreciation of the improvements. For this analysis, we used the land
value as provided by the Client from the original HGS site land acquisition, which is $1,181,000.
Conclusion – Cost Approach
In our determination of the values of the individual assets, we applied cost approach
methodology to each asset, including depreciation on an individual basis. We then applied
depreciation to the Facility based upon its effective age and average service life.
The cost approach to value is considered to be one of the primary indicators of value. As
summarized in Table O––8, we conclude the cost approach value for the Facility, as of January 1,
2013. Our concluded cost approach value represents the Replacement Cost New less physical
depreciation, and all forms of obsolescence. A detailed analysis of the cost approach may be
found in Appendix 6.
Table O–6
Cost Approach Value
As of January 1, 2013
Description
Highwood Generating Station
MR Valuation Consulting, LLC
Cost Approach Value (Rounded)
$ 5,600,000
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
P: INCOME APPROACH
The basic principle underlying the income approach is that value is directly related to the
benefits of ownership, specifically the benefit of receiving the income generated by the
conversion of natural gas to electricity. MRV Consulting utilized a discounted cash flow
analysis. The discounted cash flow analysis is a set of procedures through which an analyst
derives a value indication for a business enterprise by converting its cash flow into market value.
Through this procedure, the annual cash flows are discounted at a specified discount rate.
Income Approach Procedures
The income approach employs a discounted cash flow analysis to estimate the market value of
the Facility. To complete the DCF analysis, an analyst must work down from revenue to total
cash flow. To do this, the analyst must:
1. Research the income and expense data for the Facility and comparables.
2. Estimate lost capacity and downtime to adjust the potential gross generation.
3. Estimate the total revenue by adding all sources of revenue (energy and capacity).
4. Estimate the total operating expenses for the Facility by adding fuel, fixed, variable,
other, and corporate expenses. Subtract these estimates from total revenue to calculate
EBITDA.
5. Estimate non-cash expenses (depreciation, amortization, and depletion) and subtract these
from EBITDA to arrive at EBIT, then subtract taxes (effective federal and state taxes) to
arrive at debt free net income.
6. Net income must be positively adjusted by adding non-cash expenses and negatively
adjusted by subtracting changes in working capital and capital expenditures to arrive at
an estimate of cash flow.
7. Discount future cash flows to generate an estimate of market value.
Holding Period
Our DCF approach began with research and analysis to determine an appropriate holding (or
analysis) period. The holding period is the time period for which investors (or analysts) expect
to hold the investment. This is sometimes driven by physical considerations or legal/contractual
obligations, and often is limited by the common practice among market participants. We utilized
a 40 year holding period for the Facility.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Reversionary Value
In most DCF analyses, there exists a reversionary value. This value captures the income
generated after the holding period and is typically calculated by utilizing a direct capitalization
method and then discounting that value to the Appraisal Date. Our assumption is that the
Facility will be decommissioned at the end of the holding period; therefore, we have concluded
that no reversionary value exists.
Cash Flows
Following the basic premise of the income approach, the gross and net income for the Facility
were estimated through the analysis of historical financial statements as well as market forecasts
provided by Management. Based upon an analysis of this information, forecasts, and income
and expense ratios of other market participants and competing facilities, we calculated cash
flows for the Facility and then capitalized them into an indication of market value. The details of
this analysis are included in the DCF models within Appendix 2 of this report.
Installed Capacity
Installed capacity is the total capacity depicted on the nameplate rating on the generator at the
Facility. The total nameplate capacity of the Facility can be found in the production forecasts of
the cash flow model and is the designated average MW output of the Facility. The installed
capacity multiplied by the total number of hours in a year equals the total potential annual MWh
output for the Facility.
Capacity Factor
A capacity factor is the ratio of electrical energy produced by a generating unit over a period of
time relative to the electrical energy that could have been produced at continuous full power
operation during the same period.
Energy Revenues
We have relied on energy price forecasts provided by Aces in our DCF analysis. These forecasts
were as of December 31, 2012.
Expenses
MRV Consulting began the analysis of expenses by reviewing historical financial statements of
the Facility. We also reviewed expense forecasts provided by the Client and comparable
expense data from similar power plants to assist with our expense forecasts. The detailed
expense forecast is provided in Appendix 2.
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Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Taxes
When forecasting the effective tax rate for the Facility, MRV Consulting considered a federal tax
rate of 40.0 percent. The tax rate is provided in Appendix 2.
Capital Expenditures
We reviewed historical expenses and forecasts within the internal models of the Client as well as
interviews with Management (see Appendix 2).
Depreciation
The cost approach identifies the market value of the tangible assets, and their appropriate
MACRS depreciation categories. The complete depreciation forecasts for the Facility are
presented in Appendix 2.
Discount Rate
Market value is calculated by discounting projected cash flows at an appropriate discount rate.
The sum of the discounted cash flows equals the net present value, or the market value of the
Facility, as of a specific date.
There are several methods utilized in estimating discount rates, including market surveys, market
sales extractions, and various mathematical formulas. We researched market sales for the
extraction of yield rates, but were unable to obtain adequate data. This was expected because
even in highly active markets, such as office building or retail mall markets, such data is rarely
available. We were able to successfully employ alternate methods.
Weighted Average Cost of Capital
We completed a formula based analysis of the discount rate for the Facility known as the
Weighted Average Cost of Capital. The basic elements of discount rates are debt and equity
investment. Specifically, these elements are the debt yield and the equity yield. When
combined, they indicate the overall investment yield. This cost of capital analysis is ““weighted””
because it incorporates the percentage of the total investment that debt contributes and the
percentage that equity contributes, which is a weighted average concept. Appendix 3 has the
details and support for the WACC analysis.
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March 29, 2013
Debt and Equity Ratio Analysis
Our capital structure analysis is based on independent power producers within the electric power
industry. We analyzed the debt to equity ratios of comparable companies to determine an
appropriate capital structure of 50/50, which was assumed as the debt to equity ratio for our
WACC analysis (see Table P––1). See capital structure support in Appendix 3.
Table P–1
Capital Structure Analysis
Debt (%)
50
Equity (%)
50
Debt Analysis for WACC
In determining the debt rate to be incorporated in the WACC analysis, we analyzed triple––A
rated industrial and Baa rated corporate and long––term government bond rates, as of January 1,
2013. We concluded the Baa rated corporate bond best reflected the risk characteristics
applicable to the Facility, and then conservatively added an additional risk adjustment of 2.00
percent to incorporate the fact that the Facility is an asset that exist outside of a diversified
portfolio. The resultant was our concluded debt rate of 6.60 percent for use in our WACC
analysis (see Table P––2). This is also in the range of several corporate utility bond yields we
researched.
The cost of debt is unique when compared to equity financing in that interest expense is tax
deductible. Therefore, when calculating the effective cost of debt financing, we must adjust for
this benefit by ““tax affecting”” the debt yield, or multiplying the cost of debt by one minus the
effective tax rate (1––t).
Table P–2
Debt Yield Analysis
As of January 1, 2013
20 Year Treasury Bond
Baa Corporate
2.48%
4.63
Indicated Debt Rate
Additional Risk Compensation
4.63
2.00
Concluded Debt Rate
MR Valuation Consulting, LLC
6.60%
Page 44
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Equity Yield Analysis for WACC
The equity component was determined by calculating the cost of equity using the Capital Asset
Pricing Model.
The cost of equity was computed using the following formula:
Equity Rate of Return: Rf + (Rm – Rf) ß + Rs + Ru
Rf = The risk free rate was determined based on the 20 year treasury bond yield, as of the
Appraisal Date.
(Rm–Rf) = The equity risk premium (““Rm””) computed as the difference between the
expected market return and the risk free rate (““Rf””). The equity risk premium was
estimated by Morningstar.
ß = Beta is the measure to which a given stock fluctuates in relation to the overall stock
market. The median Beta was determined for the guideline companies utilizing data from
Hoovers and Yahoo Finance.
Rs = Small capitalization equity size premium, applied to adjust for the size of the Power
Plant. The premium was based on Morningstar’s Valuation Edition 2012.
Ru = Unsystematic risk or power plant specific risk premium.
The cost of equity for the Facility was calculated to be 11.21 percent based on the above inputs.
Conclusion –– Weighted Average Cost of Capital Analysis
The data considered for the WACC calculation were obtained from similar companies and
nuclear plants located throughout the US. MRV Consulting concluded a 7.59 percent WACC.
Table P––3 presents our complete WACC calculation.
Table P–3
Weighted Average Cost of Capital Analysis
As of January 1, 2013
Source of
Weight
Capital
Debt
50%
Equity
50%
Indicated Discount Rate
Concluded Discount Rate
MR Valuation Consulting, LLC
After-Tax
Market Cost
3.96%
11.21%
Weighted After Tax
Market Cost
1.98%
5.61%
7.59%
7.59%
Page 45
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Rate Adjustments to Yield Rates
The equity and debt rates concluded in the preceding section are applicable to conventional cash
flows. As discussed previously, our cash flow estimates exclude property taxes, but we adjusted
the indicated normal discount rates by adding to them the effective property tax rate. The
effective property tax rate is the nominal tax rate multiplied by the assessment ratio (assessed
value / market value).
In Table P––4, we present our effective property tax rate adjusted yield rate.
Table P–4
Property Tax Adjusted Yield Rate
Discount Rate Adjustment
Unadjusted Discount Rate
2013
7.59%
Property Tax Rate
Assessment Ratio
Effective Property Tax Rate
Add: Concluded WACC
Tax Adjusted Discount Rate
1.43%
59.00%
0.84%
7.59%
8.40%
Concluded Discount Rate
8.40%
Market Value Conclusion
MRV Consulting developed a DCF model to determine the market value of the PP&E of the
Facility. The following Table P––5 summarizes the indicated market value of the PP&E of the
Facility utilizing the DCF method of the income approach.
Table P–5
Income Approach Values
As of January 1, 2013
Power Plant
Highwood Generating Station
MR Valuation Consulting, LLC
Income Approach Value
$ 5,600,000
Page 46
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Q: RECONCILIATION AND MARKET VALUE CONCLUSION
There are two considerations one must weigh when applying various approaches to value. First,
appraisers should use those approaches commonly utilized by market participants (the buyers
and sellers of power plants). Second, the supply of data within a sub-market, or within a
particular time frame, may necessitate the exclusion of approaches commonly employed in the
larger market or at different points in time. Currently, the US electricity industry is experiencing
dramatic changes as it transitions from a highly regulated market to a deregulated competitive
market. Following appropriate appraisal methodology, we have considered the three basic
approaches to value: sales comparison, cost, and income.
As illustrated in the tables below, differences exist in the value conclusions of these approaches.
One of the reasons for these differences is the shift of the electrical industry to a competitive
restructured market. Previously, under government regulation, the cost approach was the
primary method of appraisal. In the current deregulated market, the primary method of appraisal
for these market-based income-producing properties is the income approach.
Sales Comparison Approach
When considering the three traditional appraisal approaches to value, it is not uncommon for one
of these approaches to be inappropriate and unreliable for a particular appraisal assignment.
Historically, the sales comparison approach was not employed to determine the value of electric
generating facilities. For reasons described previously in this report, publicly available data on
the terms of these does not allow for accurate adjustments and a reliable sales comparison
analysis for the Appraisal Date.
The reasons behind our inability to make adjustments to other sales in the marketplace include
the confidentiality provisions, the non-full disclosure of terms surrounding acquisitions, the
mixed portfolios of assets involved in acquisitions, and the fact that real property values could
not be separated from personal or intangible assets.
Our sales comparison approach analyzed sales of natural gas fired power facilities in the US
marketplace. We derived two conclusions concerning the sales comparison approach. First, it is
our opinion that an active market exists for the sale of natural gas fired power facilities.
Secondly, appropriate adjustments could not be made to the comparable sales because of
confidentiality provisions regarding the sales. Thus, a value conclusion considering this
approach was unreliable and inconclusive.
Cost Approach
For this appraisal, we determined a Reproduction Cost New and Replacement. As developed
within this report and detailed in Appendix 6, our value conclusion utilizing the cost approach to
value for the Facility is summarized in Table O––1.
MR Valuation Consulting, LLC
Page 47
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Table Q–1
Indicated Value – Cost Approach
Highwood Generating Station
As of January 1, 2013
$ 5,600,000
Income Approach
In the current market, the income approach is the primary method utilized by market participants.
The fundamental assumption with regard to the income approach is the value of the Facility is
based upon its anticipated earnings over the service life of the Facility. The principle underlying
the income approach is that the benefits of receiving income, as well as the quality and duration
of that income in the future, prescribes the market value of the Facility.
Considering the income approach, we relied on the discounted cash flow method. We concluded
the overall market value of Highwood Generating Station employing the income approach, as
summarized in Table Q––2 and detailed in Appendices 2 through 4.
Table Q–2
Indicated Value – Income Approach
Highwood Generating Station
As of January 1, 2013
$ 5,600,000
MR Valuation Consulting, LLC
Page 48
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Final Conclusion of Market Value
In today’’s competitive market, buyers and sellers of electric generation facilities typically
develop analyses of income and expense (cash flows) to arrive at an arms-length (agreed-upon)
acquisition price. Our income approach analysis emulates a cash flow analysis that a typical
market participant would develop and utilize for their due diligence.
The cost approach was developed based on the Replacement Cost New of the Facility. We
identified physical deterioration using an age/life calculation, and functional obsolescence by
quantifying the difference between Reproduction Cost New and Replacement Cost New. We
then quantified economic obsolescence related to the Facility by comparing our Replacement
Cost New less physical deterioration and functional obsolescence with conclusions obtained
through the income approach.
The results are detailed throughout our report and in the attached appendices. Our conclusion for
the market value of the Facility is summarized in Table Q––3.
Table Q–3
Conclusion of Market Value
Highwood Generating Station
As of January 1, 2013
$ 5,600,000
MR Valuation Consulting, LLC
Page 49
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Mr. Lee Freeman
Appraisal Analysis of Highwood Generating Station, As of January 1, 2013
March 29, 2013
APPENDIX 1:
PROFESSIONAL QUALIFICATIONS
MR Valuation Consulting, LLC
Page 50
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Mark Rodriguez, ASA, MRICS
This project was managed and performed under the direct supervision of Mr. Mark Rodriguez.
Mark participated in the site visit, reviewed and assisted with the preparation of the analyses and
with the narrative report. Mr. Rodriguez is the Managing Partner of MR Valuation Consulting,
LLC. He is a mechanical engineer, an Accredited Senior Appraiser with the American Society of
Appraisers, a Member of the Royal Institution of Chartered Surveyors, and has a Masters Degree
in Managerial Accounting. Mr. Rodriguez has 23 years of experience as an international
valuation specialist, including five years as a Senior Manager in the Valuation Group of Deloitte
located in New York City, plus five years as a construction project manager.
Mr. Rodriguez has supervised and performed a diversity of valuation and consulting
engagements, including the valuation of intangible assets such as IPR&D, trademarks, trade
names, developed software, engineering drawings, customer relationships, and goodwill, and
tangible assets such as electric generating/transmission/distribution facilities (including
renewable and nuclear) and systems, water systems and facilities, healthcare facilities and
operations, commercial buildings, real estate and complex manufacturing, process and industrial
facilities. His experience includes both domestic and international transactions. Many of these
transactions included the valuation of tangible assets, intangible assets, and goodwill for
purchase price allocations for tax and financial reporting including compliance with FASB
Accounting Standards Codification and International Financial Reporting Standards.
Scott McMahon, ASA, MRICS
Scott participated in the site visit, reviewed and assisted with the income and market approach
analyses and in the preparation of the narrative report. Scott McMahon is a Senior Manager
within the Business Valuation group of MRV Consulting. Mr. McMahon is an Accredited
Senior Appraiser with the American Society of Appraisers designed in the discipline of Business
Valuation. He holds an MBA in Finance and is a Member of the Royal Institution of Chartered
Surveyors.
Mr. McMahon has 11 years experience with international valuations and appraisals. He has been
involved in a broad range of transactions including business valuations, intangible asset
valuations, purchase price allocations, commercial real estate appraisals, property tax disputes,
bankruptcies, divestitures, dispositions, recapitalizations, divorces, estate tax planning,
financings and refinancings, syndicated loans, and other corporate finance consulting
assignments. Mr. McMahon has a particular focus on serving electricity, gas, and water utility
companies, oil and gas companies, telecommunication companies, healthcare facilities, casinos
& hotels, software related companies and other large industrial related clients. His technical
skills include business and intangible asset valuations, competitive and risk analysis, and
financial modeling.
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Steven Munson
Steven participated in the site visit and in the cost approach analysis; he also assisted with the
preparation of the narrative report. Steven Munson is a Consultant within the Machinery and
Technical Specialties group of MR Valuation Consulting, LLC. He holds a Bachelor of Science
degree in Mechanical Engineering from Rutgers University, with a minor in Economics. Steven
is a licensed Engineer in Training in the State of New Jersey. He is also a Candidate Member in
the American Society of Appraisers. He has successfully completed the 15-hour National
USPAP (Uniform Standards of Professional Appraisal Practice) course and three of the four
Machinery and Technical Specialties classes with the American Society of Appraisers.
Steven specializes in the appraisal and valuation of machinery and equipment, and other tangible
assets to support business valuations, appraisals, property tax, and litigation support projects.
Steven has experience performing cost approach valuations, purchase price allocations, and cost
segregation studies of industrial/manufacturing facilities, apartment buildings, hotels, medical
centers, office buildings, restaurants, and shopping centers. Mr. Munson also has experience in
valuations of assets related to the health care, hospitality, retail, commercial, and energy and
utility industries.
Anthony Castagna
Anthony participated in the income and market approach analyses and assisted in the preparation
of the narrative report. Anthony Castagna is a Business Valuation Analyst within the Business
Valuation Services group of MR Valuation Consulting, LLC. Mr. Castagna holds a Bachelor of
Science degree in Business Administration with a concentration in Finance, minor in Accounting
from Seton Hall University.
Anthony focuses on the valuation of business entities and assets for financial and management
reporting purposes, federal tax reporting, estate planning, property tax and transfer tax,
acquisitions and divestures. Mr. Castagna specializes in business valuations including income
approach analyses such as discounted cash flow models and direct capitalization models and the
market approach. His experience includes the valuation of both tangible and intangible assets for
business interests, as well as company and economic research across multiple industry sectors.
His experience also includes the valuation of family limited partnerships and limited liability
companies for financial and tax planning. The business valuation of closely-held entities
requires the ability to quantify minority discounts and control premiums, lack of marketability
discounts, and various other discounts.
MR Valuation Consulting, LLC
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Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
APPENDIX 2:
DISCOUNTED CASH FLOW ANALYSIS
MR Valuation Consulting, LLC
Page 53
Horowitz & Burnett, P.C.
Highwood Generating Station
11-62031-RBK Doc#: 816-1 Filed: 04/19/13
Entered:
04/19/13 14:43:20 Page 57 of 76
Discounted Cash Flow
Analysis
Appendix 2
As of January 1, 2013
1
2013
For the Year Ending December 31,
Nameplate Capacity (MW)
Days per Year
Hours per Year
Gross Generation (MWh)
Capacity Factor
Net Generation (MWh)
2
2014
40
365
8,760
350,400
0.0%
-
3
2015
40
365
8,760
350,400
0.0%
-
4
2016
5
2017
6
2018
7
2019
8
2020
9
2021
10
2022
40
365
8,760
350,400
7.9%
27,360
40
366
8,784
351,360
19.5%
68,704
40
365
8,760
350,400
31.1%
108,832
40
365
8,760
350,400
31.3%
109,440
40
365
8,760
350,400
23.4%
82,688
40
366
8,784
351,360
23.4%
82,688
40
365
8,760
350,400
11.7%
41,344
40
365
8,760
350,400
19.5%
68,704
11
2023
40
365
8,760
350,400
23.2%
82,080
Energy Revenues
Year to Year Change
$
$
N/A
$
N/A
1,225,558 $
N/A
3,282,333 $
N/A
5,457,492 $
66.27%
5,840,484 $
7.02%
4,701,862 $
-19.50%
4,955,079 $
5.39%
2,404,137 $
-51.48%
4,279,518 $
78.01%
5,453,701
27.44%
Total Revenues
Growth %
$
$
N/A
$
N/A
1,225,558 $
N/A
3,282,333 $
N/A
5,457,492 $
66.27%
5,840,484 $
7.02%
4,701,862 $
-19.50%
4,955,079 $
5.39%
2,404,137 $
-51.48%
4,279,518 $
78.01%
5,453,701
27.44%
Fuel Expense
Average Natural Gas Price
Heat Rate
$/MWh
Year to Year Change
$
$
$4.44
8,300
0.00
N/A
$
$4.93
8,300
0.00
N/A
1,164,697 $
$5.13
8,300
N/A
N/A
3,031,033 $
$5.32
8,300
44.12
N/A
4,993,549 $
$5.53
8,300
45.88
64.75%
5,251,561 $
$5.78
8,300
47.99
5.17%
4,159,098 $
$6.06
8,300
50.30
-20.80%
4,361,960 $
$6.36
8,300
52.75
4.88%
2,297,745 $
$6.70
8,300
55.58
-47.32%
4,027,157 $
$7.06
8,300
58.62
75.27%
5,057,362
$7.42
8,300
61.62
25.58%
Fixed O&M
$/kW
Year to Year Change
520,000
$13.00
N/A
530,400
$13.26
2.00%
541,008
$13.53
2.00%
551,828
$13.80
2.00%
562,865
$14.07
2.00%
574,122
$14.35
2.00%
585,604
$14.64
2.00%
597,317
$14.93
2.00%
609,263
$15.23
2.00%
621,448
$15.54
2.00%
633,877
$15.85
2.00%
Variable O&M
$/MWh
Year to Year Change
0
$1.50
N/A
0
$1.53
N/A
42,698
$1.56
N/A
109,364
$1.59
N/A
176,705
$1.62
61.58%
181,246
$1.66
2.57%
139,680
$1.69
-22.93%
142,474
$1.72
2.00%
72,662
$1.76
-49.00%
123,161
$1.79
69.50%
150,083
$1.83
21.86%
520,000 $
N/A
530,400 $
N/A
1,748,403 $
N/A
3,692,225
$53.74
($522,844)
N/A
($409,892)
-12.49%
Total Expenses
S/MWh
$
EBITDA
Margin
($520,000)
N/A
($530,400)
N/A
$
5,733,118
$52.68
$
($275,626)
-5.05%
6,006,929
$54.89
$
($166,446)
-2.85%
4,884,383
$59.07
$
($182,521)
-3.88%
5,101,750
$61.70
$
($146,672)
-2.96%
2,979,669
$72.07
$
($575,532)
-23.94%
4,771,766
$69.45
$
($492,249)
-11.50%
5,841,322
$71.17
($387,621)
-7.11%
Interest Expense
$1,415,342
$1,527,268
$1,508,644
$1,488,753
$1,467,509
$1,444,819
$1,420,585
$1,394,703
$1,367,060
$1,337,536
$1,306,004
Depreciation & Amortization
$2,291,300
$4,353,832
$3,920,181
$3,532,253
$3,180,896
$2,861,534
$2,711,574
$2,712,701
$2,718,418
$2,714,997
$2,720,760
EBIT
($2,811,300)
($4,884,232)
($4,443,025)
($3,942,145)
($3,456,522)
($3,027,980)
($2,894,095)
($2,859,373)
($3,293,950)
($3,207,246)
($3,108,381)
EBT
($4,226,643)
($6,411,501)
($5,951,669)
($5,430,898)
($4,924,031)
($4,472,799)
($4,314,680)
($4,254,076)
($4,661,011)
($4,544,783)
($4,414,386)
$0
$0
$0
($4,226,643)
$0
$0
($10,638,143)
$0
$0
($16,589,813)
$0
$0
($22,020,711)
$0
$0
($26,944,742)
$0
$0
($31,417,540)
$0
$0
($35,732,221)
$0
$0
($39,986,297)
$0
$0
($44,647,308)
$0
$0
($49,192,090)
$0
$0
Loss Carryover
Taxable Income
Income Taxes
Net Income
Cash Flow Adjustments
Add: Depreciation & Amortization
Add: Interest Expense
Less: Capital Expenditures
Less: Change in Working Captial
Free Cash Flow
Percent of Cash Flow
Period to Discount
Present Value Factor
Present Value of Cash Flow
$
(4,226,643) $
(6,411,501) $
(5,951,669) $
(5,430,898) $
(4,924,031) $
(4,472,799) $
(4,314,680) $
(4,254,076) $
(4,661,011) $
(4,544,783) $
(4,414,386)
$
$2,291,300
$1,415,342
$21,000
$0
(541,000) $
$4,353,832
$1,527,268
$21,420
$0
(551,820) $
$3,920,181
$1,508,644
$21,848
$61,278
(605,971) $
$3,532,253
$1,488,753
$22,285
$102,839
(535,016) $
$3,180,896
$1,467,509
$22,731
$108,758
(407,115) $
$2,861,534
$1,444,819
$23,186
$19,150
(208,781) $
$2,711,574
$1,420,585
$23,649
($56,931)
(149,239) $
$2,712,701
$1,394,703
$24,122
$12,661
(183,455) $
$2,718,418
$1,367,060
$24,605
($127,547)
(472,590) $
$2,714,997
$1,337,536
$25,097
$93,769
(611,115) $
$2,720,760
$1,306,004
$25,599
$58,709
(471,929)
100%
0.50
0.9605
($519,616)
100%
1.50
0.8860
($488,938)
100%
2.50
0.8174
($495,312)
100%
3.50
0.7540
($403,426)
100%
4.50
0.6956
($283,195)
100%
5.50
0.6417
($133,977)
100%
6.50
0.5920
($88,347)
100%
7.50
0.5461
($100,187)
100%
8.50
0.5038
($238,087)
100%
9.50
0.4648
($284,017)
100%
10.50
0.4287
($202,334)
Fair Market Value
$5,600,000
$142 /kW
MR Valuation Consulting,
www.MRValuation.com
LLC
Page 54
Horowitz & Burnett, P.C.
Highwood Generating Station
11-62031-RBK Doc#: 816-1 Filed: 04/19/13
Entered:
04/19/13 14:43:20 Page 58 of 76
Discounted Cash Flow
Analysis
Appendix 2
As of January 1, 2013
12
2024
For the Year Ending December 31,
13
2025
40
366
8,784
351,360
46.9%
164,768
Nameplate Capacity (MW)
Days per Year
Hours per Year
Gross Generation (MWh)
Capacity Factor
Net Generation (MWh)
14
2026
40
365
8,760
350,400
46.7%
163,552
$
40
365
8,760
350,400
46.7%
163,552
$
40
365
8,760
350,400
46.9%
164,160
$
40
366
8,784
351,360
46.5%
163,552
$
40
365
8,760
350,400
46.7%
163,552
$
$
11,909,968 $
118.38%
11,909,968 $
0.00%
12,183,905 $
2.30%
12,554,721 $
3.04%
12,984,010 $
3.42%
13,328,579 $
2.65%
Fuel Expense
Average Natural Gas Price
Heat Rate
$/MWh
Year to Year Change
$
10,642,320
$7.78
8,300
64.59
110.43%
11,059,376
$8.15
8,300
67.62
3.92%
11,605,264
$8.55
8,300
70.96
4.94%
12,045,362
$8.84
8,300
73.38
3.79%
12,486,843
$9.20
8,300
76.35
3.67%
12,772,180
$9.41
8,300
78.09
2.29%
$
13,328,579
2.65%
19
2031
40
365
8,760
350,400
46.8%
164,160
Total Revenues
Growth %
$
12,984,010
3.42%
18
2030
11,909,968
118.38%
$
12,554,721
3.04%
17
2029
$
$
12,183,905
2.30%
16
2028
Energy Revenues
Year to Year Change
$
11,909,968
0.00%
15
2027
$
$
14,726,258
10.49%
$
20
2032
21
2033
22
2034
23
2035
40
365
8,760
350,400
46.7%
163,552
40
366
8,784
351,360
46.7%
164,160
40
365
8,760
350,400
46.7%
163,552
40
365
8,760
350,400
46.7%
163,552
40
365
8,760
350,400
46.7%
163,552
15,230,794
3.43%
$ 15,638,173
2.67%
$ 16,173,194
3.42%
$ 16,602,548
2.65%
$ 18,344,398
10.49%
24
2036
40
366
8,784
351,360
46.7%
164,768
$
18,901,311
3.04%
14,726,258 $
10.49%
15,230,794 $ 15,638,173 $ 16,173,194 $ 16,602,548 $ 18,344,398 $
3.43%
2.67%
3.42%
2.65%
10.49%
18,901,311
3.04%
13,091,130
$9.61
8,300
79.75
2.50%
13,399,523
$9.87
8,300
81.93
2.36%
$ 13,693,797
$10.05
8,300
83.42
2.20%
$ 13,891,506
$10.23
8,300
84.94
1.44%
$ 14,271,833
$10.51
8,300
87.26
2.74%
$ 14,663,804
$10.80
8,300
89.66
2.75%
15,179,809
$11.10
8,300
92.13
3.52%
$
$
Fixed O&M
$/kW
Year to Year Change
646,555
$16.16
2.00%
659,486
$16.49
2.00%
672,675
$16.82
2.00%
686,129
$17.15
2.00%
699,852
$17.50
2.00%
713,849
$17.85
2.00%
728,126
$18.20
2.00%
742,688
$18.57
2.00%
757,542
$18.94
2.00%
772,693
$19.32
2.00%
788,146
$19.70
2.00%
803,909
$20.10
2.00%
819,988
$20.50
2.00%
Variable O&M
$/MWh
Year to Year Change
307,302
$1.87
104.76%
311,135
$1.90
1.25%
317,358
$1.94
2.00%
324,908
$1.98
2.38%
330,179
$2.02
1.62%
336,783
$2.06
2.00%
344,795
$2.10
2.38%
350,389
$2.14
1.62%
358,725
$2.19
2.38%
364,545
$2.23
1.62%
371,835
$2.27
2.00%
379,272
$2.32
2.00%
389,734
$2.37
2.76%
14,492,600
$88.61
$ 14,810,064
$90.22
$ 15,028,743
$91.89
$ 15,431,815
$94.35
$ 15,846,985
$96.89
$562,207
3.82%
$738,194
4.85%
$828,110
5.30%
$1,144,451
7.08%
$1,170,733
7.05%
$2,497,413
13.61%
$2,511,781
13.29%
Total Expenses
S/MWh
$
EBITDA
Margin
11,596,177
$70.38
$
$313,791
2.63%
12,029,997
$73.55
$
($120,029)
-1.01%
12,595,298
$77.01
$
($411,393)
-3.38%
13,056,399
$79.53
$
($501,678)
-4.00%
13,516,874
$82.65
$
($532,864)
-4.10%
13,822,812
$84.52
$
($494,233)
-3.71%
14,164,051
$86.28
$
$
16,389,530
$99.47
Interest Expense
$1,272,327
$1,236,358
$1,197,942
$1,156,913
$1,113,092
$1,066,290
$1,016,304
$962,917
$905,898
$845,000
$779,958
$710,492
$636,300
Depreciation & Amortization
$2,717,386
$2,723,197
$2,719,872
$2,725,732
$1,371,357
$21,589
$22,948
$24,333
$25,747
$26,720
$27,244
$27,779
$28,324
($2,403,596)
($2,843,226)
($3,131,265)
($3,227,410)
($1,904,222)
($515,823)
$539,259
$713,860
$802,363
$1,117,731
$1,143,489
$2,469,634
$2,483,457
EBIT
EBT
Loss Carryover
Taxable Income
Income Taxes
Net Income
Cash Flow Adjustments
Add: Depreciation & Amortization
Add: Interest Expense
Less: Capital Expenditures
Less: Change in Working Captial
Free Cash Flow
Percent of Cash Flow
Period to Discount
Present Value Factor
Present Value of Cash Flow
($3,675,922)
($4,079,584)
($4,329,207)
($4,384,322)
($3,017,314)
($1,582,113)
($477,045)
($249,056)
($103,535)
($53,606,476)
$0
$0
($57,282,398)
$0
$0
($61,361,982)
$0
$0
($65,691,188)
$0
$0
($70,075,511)
$0
$0
($73,092,824)
$0
$0
($74,674,937)
$0
$0
($75,151,981)
$0
$0
($75,401,038)
$0
$0
$
(3,675,922) $
(4,079,584) $
(4,329,207) $
(4,384,322) $
(3,017,314) $
(1,582,113) $
$
$2,717,386
$1,272,327
$26,111
$322,813
(35,133) $
$2,723,197
$1,236,358
$26,633
$0
(146,662) $
$2,719,872
$1,197,942
$27,166
$13,697
(452,256) $
$2,725,732
$1,156,913
$27,709
$18,541
(547,928) $
$1,371,357
$1,113,092
$28,263
$21,464
(582,592) $
$21,589
$1,066,290
$28,828
$17,228
(540,290) $
100%
11.50
0.3955
($13,896)
100%
12.50
0.3649
($53,512)
100%
13.50
0.3366
($152,226)
100%
14.50
0.3105
($170,137)
100%
15.50
0.2864
($166,882)
100%
16.50
0.2643
($142,772)
(477,045) $
$22,948
$1,016,304
$29,405
$69,884
462,918
100%
17.50
0.2438
$112,847
$
$272,731
(249,056) $
(103,535) $
$24,333
$962,917
$29,993
$25,227
682,974
$25,747
$905,898
$30,593
$20,369
777,148
100%
18.50
0.2249
$153,590
$
100%
19.50
0.2075
$161,225
$363,531
($75,504,573)
$0
$0
$
272,731
$26,720
$845,000
$31,205
$26,751
1,086,495
100%
20.50
0.1914
$207,935
($75,231,842)
$0
$0
$
363,531
$
$27,244
$779,958
$31,829
$21,468
1,117,436
100%
21.50
0.1766
$197,285
$1,759,143
$1,847,157
($74,868,311)
$0
$0
($73,109,168)
$0
$0
$
1,759,143
$
$27,779
$710,492
$32,466
$87,093
2,377,855
100%
22.50
0.1629
$387,281
$
1,847,157
$
$28,324
$636,300
$33,115
$27,846
2,450,820
100%
23.50
0.1502
$368,234
Fair Market Value
$5,600,000
$142 /kW
MR Valuation Consulting,
www.MRValuation.com
LLC
Page 55
Horowitz & Burnett, P.C.
Highwood Generating Station
11-62031-RBK Doc#: 816-1 Filed: 04/19/13
Entered:
04/19/13 14:43:20 Page 59 of 76
Discounted Cash Flow
Analysis
25
2037
For the Year Ending December 31,
26
2038
40
365
8,760
350,400
46.7%
163,552
Nameplate Capacity (MW)
Days per Year
Hours per Year
Gross Generation (MWh)
Capacity Factor
Net Generation (MWh)
27
2039
40
365
8,760
350,400
46.7%
164,160
23,544,142 $
3.03%
24,350,565 $
3.43%
25,001,872 $
2.67%
25,762,803 $
3.04%
28,567,925 $
10.89%
Fuel Expense
Average Natural Gas Price
Heat Rate
$/MWh
Year to Year Change
$
15,484,139 $
$11.41
8,300
94.67
2.00%
15,971,601 $
$11.72
8,300
97.29
3.15%
16,353,077 $
$12.05
8,300
99.99
2.39%
16,807,061 $
$12.38
8,300
102.76
2.78%
17,339,026 $
$12.73
8,300
105.62
3.17%
17,756,738 $
$13.08
8,300
108.57
2.41%
18,111,872 $
$13.34
8,300
110.74
2.00%
18,542,787 $
$13.61
8,300
112.96
2.38%
Fixed O&M
$/kW
Year to Year Change
836,387
$20.91
2.00%
853,115
$21.33
2.00%
870,177
$21.75
2.00%
887,581
$22.19
2.00%
905,333
$22.63
2.00%
923,439
$23.09
2.00%
941,908
$23.55
2.00%
Variable O&M
$/MWh
Year to Year Change
394,595
$2.41
1.25%
403,983
$2.46
2.38%
410,536
$2.51
1.62%
418,747
$2.56
2.00%
428,710
$2.61
2.38%
435,664
$2.66
1.62%
444,378
$2.72
2.00%
EBITDA
Margin
Interest Expense
Depreciation & Amortization
EBIT
EBT
Loss Carryover
Taxable Income
Income Taxes
Net Income
Cash Flow Adjustments
Add: Depreciation & Amortization
Add: Interest Expense
Less: Capital Expenditures
Less: Change in Working Captial
Free Cash Flow
Percent of Cash Flow
Period to Discount
Present Value Factor
Present Value of Cash Flow
$
18,673,069
$113.75
$
$
24,350,565
3.43%
19,115,841
$116.88
$
$
25,001,872
2.67%
19,498,158
$119.22
$
$
$5,503,713
22.01%
25,762,803
3.04%
30,218,885 $
3.04%
31,254,214
3.43%
18,843,592 $
$13.88
8,300
115.21
1.62%
19,220,464 $
$14.16
8,300
117.52
2.00%
19,677,754 $
$14.44
8,300
119.87
2.38%
20,071,309
$14.73
8,300
122.27
2.00%
960,746
$24.02
2.00%
979,961
$24.50
2.00%
999,560
$24.99
2.00%
1,019,552
$25.49
2.00%
1,039,943
$26.00
2.00%
454,950
$2.77
2.38%
462,331
$2.83
1.62%
471,577
$2.88
2.00%
482,797
$2.94
2.38%
492,453
$3.00
2.00%
$5,804,319
22.53%
$
$8,282,041
28.99%
29,328,508
2.66%
20,691,601
$126.51
$2,907,169
14.82%
$2,843,436
14.17%
$3,124,678
15.05%
$4,737,250
20.73%
$4,871,074
20.69%
$5,234,724
21.50%
$557,060
$472,429
$382,040
$285,502
$182,396
$73,096
$0
$0
$0
$28,880
$29,448
$30,026
$30,616
$31,219
$31,805
$30,980
$28,848
$26,880
$2,878,288
$2,813,988
$3,094,652
$4,706,634
$4,839,855
$5,202,919
$5,472,733
$5,775,471
$8,255,162
$8,611,845
$
$
$8,636,906
29.45%
30,218,885
3.04%
40
365
8,760
350,400
46.7%
164,160
29,328,508 $
2.66%
20,285,884
$124.03
$
40
365
8,760
350,400
46.7%
164,160
31,254,214
3.43%
$
28,567,925
10.89%
36
2048
$
19,958,483
$121.58
$
35
2047
40
365
8,760
350,400
46.7%
163,552
22,850,640 $
10.08%
18,113,389
$110.75
23,544,142
3.03%
40
365
8,760
350,400
46.7%
163,552
20,758,469 $
3.42%
$
$
40
365
8,760
350,400
46.7%
164,160
34
2046
20,072,135 $
2.29%
17,633,791
$107.82
22,850,640
10.08%
40
365
8,760
350,400
46.7%
163,552
33
2045
19,622,290 $
3.81%
$
$
40
365
8,760
350,400
46.7%
163,552
32
2044
$
17,228,699
$104.95
20,758,469
3.42%
40
365
8,760
350,400
46.7%
164,160
31
2043
Total Revenues
Growth %
$
$
40
366
8,784
351,360
46.7%
163,552
30
2042
19,622,290
3.81%
16,715,121
$102.20
20,072,135
2.29%
40
365
8,760
350,400
46.7%
163,552
29
2041
$
$
$
28
2040
Energy Revenues
Year to Year Change
Total Expenses
S/MWh
Appendix 2
As of January 1, 2013
21,180,102
$129.02
$
21,603,704
$131.60
$9,038,782
29.91%
$9,650,510
30.88%
$0
$0
$0
$25,062
$23,383
$0
$9,015,399
$9,650,510
$2,321,229
$2,341,560
$2,712,612
$4,421,132
$4,657,459
$5,129,822
$5,472,733
$5,775,471
$8,255,162
$8,611,845
$9,015,399
$9,650,510
($71,262,011)
$0
$0
($68,940,782)
$0
$0
($66,599,223)
$0
$0
($63,886,611)
$0
$0
($59,465,479)
$0
$0
($54,808,020)
$0
$0
($49,678,197)
$0
$0
($44,205,464)
$0
$0
($38,429,993)
$0
$0
($30,174,831)
$0
$0
($21,562,987)
$0
$0
($12,547,588)
$0
$0
$
2,321,229
$
$28,880
$557,060
$33,777
$36,049
2,837,342
100%
24.50
0.1386
$393,273
$
2,341,560
$
$29,448
$472,429
$34,453
$22,492
2,786,491
100%
25.50
0.1279
$356,296
$
2,712,612
$
$30,026
$382,040
$35,142
$34,317
3,055,220
100%
26.50
0.1180
$360,385
$
4,421,132
$
$30,616
$285,502
$35,845
$104,609
4,596,797
100%
27.50
0.1088
$500,207
$
4,657,459
$
$31,219
$182,396
$36,562
$34,675
4,799,837
100%
28.50
0.1004
$481,828
$
5,129,822
$
$31,805
$73,096
$37,293
$40,321
5,157,110
100%
29.50
0.0926
$477,576
$
5,472,733
$
$30,980
$0
$38,039
$32,565
5,433,109
100%
30.50
0.0854
$464,147
$
5,775,471
$
$28,848
$0
$38,799
$38,047
5,727,473
100%
31.50
0.0788
$451,378
$
8,255,162
$
$26,880
$0
$39,575
$140,256
8,102,210
100%
32.50
0.0727
$589,050
$
8,611,845
$
$25,062
$0
$40,367
$38,029
8,558,510
100%
33.50
0.0671
$574,007
$
9,015,399
$
$23,383
$0
$41,174
$44,519
8,953,089
100%
34.50
0.0619
$553,940
$
9,650,510
$
$0
$0
$41,998
$51,766
9,556,746
100%
35.50
0.0571
$545,470
Fair Market Value
$5,600,000
$142 /kW
MR Valuation Consulting,
www.MRValuation.com
LLC
Page 56
Horowitz & Burnett, P.C.
Highwood Generating Station
11-62031-RBK Doc#: 816-1 Filed: 04/19/13
Entered:
04/19/13 14:43:20 Page 60 of 76
Discounted Cash Flow
Analysis
37
2049
For the Year Ending December 31,
38
2050
40
365
8,760
350,400
46.7%
164,160
Nameplate Capacity (MW)
Days per Year
Hours per Year
Gross Generation (MWh)
Capacity Factor
Net Generation (MWh)
39
2051
40
365
8,760
350,400
46.7%
163,552
Energy Revenues
Year to Year Change
$
32,208,412
3.05%
Total Revenues
Growth %
$
32,208,412 $
3.05%
Fuel Expense
Average Natural Gas Price
Heat Rate
$/MWh
Year to Year Change
$
20,472,735
$15.03
8,300
124.71
2.00%
$
$
37,250,829
15.66%
40
2052
40
365
8,760
350,400
46.7%
163,552
$
$
59,660,943
26.81%
37,250,829 $
15.66%
47,048,287 $
26.30%
59,660,943
26.81%
20,804,848
$15.33
8,300
127.21
1.62%
21,220,945
$15.63
8,300
129.75
2.00%
21,806,296
$15.95
8,300
132.35
2.76%
$
47,048,287
26.30%
40
365
8,760
350,400
46.7%
164,768
$
Fixed O&M
$/kW
Year to Year Change
1,060,741
$26.52
2.00%
1,081,956
$27.05
2.00%
1,103,595
$27.59
2.00%
1,125,667
$28.14
2.00%
Variable O&M
$/MWh
Year to Year Change
502,302
$3.06
2.00%
510,450
$3.12
1.62%
520,659
$3.18
2.00%
535,021
$3.25
2.76%
$
Total Expenses
S/MWh
22,035,778
$134.23
$
22,397,255
$136.94
$
22,845,200
$139.68
$
23,466,985
$142.42
$10,172,633
31.58%
$14,853,574
39.87%
$24,203,087
51.44%
$36,193,959
60.67%
Interest Expense
$0
$0
$0
$0
Depreciation & Amortization
$0
$0
$0
$0
EBIT
$10,172,633
$14,853,574
$24,203,087
$36,193,959
EBT
$10,172,633
$14,853,574
$24,203,087
$36,193,959
Loss Carryover
Taxable Income
Income Taxes
($2,897,078)
$7,275,555
$2,910,222
$0
$14,853,574
$5,941,430
$0
$24,203,087
$9,681,235
$0
$36,193,959
$14,477,584
EBITDA
Margin
Net Income
Cash Flow Adjustments
Add: Depreciation & Amortization
Add: Interest Expense
Less: Capital Expenditures
Less: Change in Working Captial
Free Cash Flow
Percent of Cash Flow
Period to Discount
Present Value Factor
Present Value of Cash Flow
Appendix 2
As of January 1, 2013
$
7,262,411
$
$0
$0
$42,838
$47,710
7,171,864
100%
36.50
0.0527
$377,627
$
8,912,144
$
$0
$0
$43,694
$252,121
8,616,329
100%
37.50
0.0486
$418,528
$
14,521,852
$
$0
$0
$44,568
$489,873
13,987,411
100%
38.50
0.0448
$626,773
$
21,716,375
$
$0
$0
$45,460
$630,633
21,040,283
100%
39.50
0.0413
$869,751
Fair Market Value
$5,600,000
$142 /kW
MR Valuation Consulting,
www.MRValuation.com
LLC
Page 57
Depreciation and Amortization Schedule
As of January 1, 2013
Horowitz & Burnett, P.C.
Highwood Generating Station
Years Ending December 31
Appendix 2
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 61 of 76
1
2013
2
2014
3
2015
4
2016
5
2017
6
2018
7
2019
8
2020
9
2021
10
2022
11
2023
12
2024
13
2025
14
2026
15
2027
16
2028
17
2029
18
2030
19
2031
20
2032
RCNLD
$47,000,000
Tangible Assets
3- Year Assets
5-Year Assets
7-Year Assets
10-Year Assets
15- Year Assets
20-Year Assets
39-Year Assets
Land
$47,000,000
$0
$0
$0
$0
$45,800,000
$0
$20,000
$1,180,000
100.000%
0.000%
0.000%
0.000%
0.000%
97.447%
0.000%
0.043%
2.511%
Depreciation Rate
3- Year Assets
5-Year Assets
7-Year Assets
10-Year Assets
15- Year Assets
20-Year Assets
39-Year Assets
33.330%
20.000%
14.290%
10.000%
5.000%
3.750%
2.564%
44.450%
32.000%
24.490%
18.000%
9.500%
7.219%
2.564%
14.810%
19.200%
17.490%
14.400%
8.550%
6.677%
2.564%
7.410%
11.520%
12.490%
11.520%
7.700%
6.177%
2.564%
11.520%
8.930%
9.220%
6.930%
5.713%
2.564%
5.760%
8.920%
7.370%
6.230%
5.285%
2.564%
8.930%
6.550%
5.900%
4.888%
2.564%
4.460%
6.550%
5.900%
4.522%
2.564%
6.560%
5.910%
4.462%
2.564%
6.550%
5.900%
4.461%
2.564%
3.280%
5.910%
4.462%
2.564%
5.900%
4.461%
2.564%
5.910%
4.462%
2.564%
5.900%
4.461%
2.564%
5.910%
4.462%
2.564%
2.950%
4.461%
2.564%
4.462%
2.564%
4.461%
2.564%
4.462%
2.564%
4.461%
2.564%
$0
$0
$0
$0
$2,290,000
$0
$513
$2,290,513
$0
$0
$0
$0
$4,351,000
$0
$513
$4,351,513
$0
$0
$0
$0
$3,915,900
$0
$513
$3,916,413
$0
$0
$0
$0
$3,526,600
$0
$513
$3,527,113
$0
$0
$0
$0
$3,173,940
$0
$513
$3,174,453
$0
$0
$0
$0
$2,853,340
$0
$513
$2,853,853
$0
$0
$0
$0
$2,702,200
$0
$513
$2,702,713
$0
$0
$0
$0
$2,702,200
$0
$513
$2,702,713
$0
$0
$0
$0
$2,706,780
$0
$513
$2,707,293
$0
$0
$0
$0
$2,702,200
$0
$513
$2,702,713
$0
$0
$0
$0
$2,706,780
$0
$513
$2,707,293
$0
$0
$0
$0
$2,702,200
$0
$513
$2,702,713
$0
$0
$0
$0
$2,706,780
$0
$513
$2,707,293
$0
$0
$0
$0
$2,702,200
$0
$513
$2,702,713
$0
$0
$0
$0
$2,706,780
$0
$513
$2,707,293
$0
$0
$0
$0
$1,351,100
$0
$513
$1,351,613
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
Intangible Assets
Implied Value from Cost Approach
Depreciation Rate (15-Year SL)
Depreciation Expense
$0
6.667%
$0
6.667%
$0
6.667%
$0
6.667%
$0
6.667%
$0
6.667%
$0
6.667%
$0
6.667%
$0
6.667%
$0
6.667%
$0
6.667%
$0
Assets Installed Throughout Holding Period
Capital Expenditures
$21,000
$21,420
$21,848
$22,285
$22,731
$23,186
$23,649
$24,122
$24,605
$25,097
$25,599
$26,111
$26,633
$27,166
$27,709
$28,263
$28,828
$29,405
$29,993
$30,593
$788
$2,319
$3,768
$5,140
$6,443
$7,682
$8,862
$9,989
$11,125
$12,285
$13,467
$14,674
$15,904
$17,159
$18,439
$19,745
$21,077
$22,435
$23,821
$25,234
$2,291,300
$4,353,832
$3,920,181
$3,532,253
$3,180,896
$2,861,534
$2,711,574
$2,712,701
$2,718,418
$2,714,997
$2,720,760
$2,717,386
$2,723,197
$2,719,872
$2,725,732
$1,371,357
$21,589
$22,948
$24,333
$25,747
$788
$788
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$2,319
$1,516
$803
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$3,768
$1,402
$1,546
$819
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$5,140
$1,297
$1,430
$1,577
$836
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$6,443
$1,200
$1,323
$1,459
$1,609
$852
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$7,682
$1,110
$1,224
$1,350
$1,488
$1,641
$869
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$8,862
$1,026
$1,132
$1,248
$1,377
$1,518
$1,674
$887
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$9,989
$950
$1,047
$1,155
$1,273
$1,404
$1,548
$1,707
$905
$0
$0
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$11,125
$937
$969
$1,068
$1,178
$1,299
$1,432
$1,579
$1,741
$923
$0
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$12,285
$937
$956
$988
$1,089
$1,201
$1,325
$1,461
$1,611
$1,776
$941
$0
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$13,467
$937
$956
$975
$1,008
$1,111
$1,225
$1,351
$1,490
$1,643
$1,812
$960
$0
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$14,674
$937
$956
$975
$994
$1,028
$1,133
$1,250
$1,378
$1,520
$1,676
$1,848
$979
$0
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$15,904
$937
$956
$975
$994
$1,014
$1,048
$1,156
$1,275
$1,406
$1,550
$1,709
$1,885
$999
$0
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$17,159
$937
$956
$975
$994
$1,014
$1,035
$1,069
$1,179
$1,300
$1,434
$1,581
$1,743
$1,923
$1,019
$0
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$18,439
$937
$956
$975
$994
$1,014
$1,034
$1,055
$1,091
$1,203
$1,326
$1,462
$1,613
$1,778
$1,961
$1,039
$0
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$19,745
$937
$956
$975
$994
$1,014
$1,035
$1,055
$1,076
$1,113
$1,227
$1,353
$1,492
$1,645
$1,814
$2,000
$1,060
$0
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$21,077
$937
$956
$975
$994
$1,014
$1,034
$1,055
$1,076
$1,098
$1,135
$1,251
$1,380
$1,522
$1,678
$1,850
$2,040
$1,081
$$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$22,435
$937
$956
$975
$994
$1,014
$1,035
$1,055
$1,076
$1,098
$1,120
$1,158
$1,276
$1,408
$1,552
$1,712
$1,887
$2,081
$$1,103
,
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$23,821
$937
$956
$975
$994
$1,014
$1,034
$1,055
$1,076
$1,098
$1,120
$1,142
$1,181
$1,302
$1,436
$1,583
$1,746
$1,925
$$2,123
,
$1,125
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$25,234
$937
$956
$975
$994
$1,014
$1,035
$1,055
$1,076
$1,098
$1,120
$1,142
$1,165
$1,204
$1,328
$1,464
$1,615
$1,781
$$1,963
,
$2,165
$1,147
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Depreciation Expense
3- Year Assets
5-Year Assets
7-Year Assets
10-Year Assets
15- Year Assets
20-Year Assets
39-Year Assets
Total Depreciation Expense
Depreciation Expense - Assets Installed
Total Depreciation and Amortization Expense
Depreciation Expense for Assets Installed in Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
MR Valuation Consulting, LLC
www.MRValuation.com
Page 58
Depreciation and Amortization Schedule
As of January 1, 2013
Horowitz & Burnett, P.C.
Highwood Generating Station
Years Ending December 31
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 62 of 76
21
2033
22
2034
23
2035
24
2036
25
2037
26
2038
27
2039
28
2040
29
2041
30
2042
31
2043
32
2044
33
2045
34
2046
Appendix 2
35
2047
RCNLD
Tangible Assets
3- Year Assets
5-Year Assets
7-Year Assets
10-Year Assets
15- Year Assets
20-Year Assets
39-Year Assets
Land
Depreciation Rate
3- Year Assets
5-Year Assets
7-Year Assets
10-Year Assets
15- Year Assets
20-Year Assets
39-Year Assets
2.231%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
2.564%
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
$0
$0
$0
$0
$0
$0
$513
$513
Assets Installed Throughout Holding Period
Capital Expenditures
$31,205
$31,829
$32,466
$33,115
$33,777
$34,453
$35,142
$35,845
$36,562
$37,293
$38,039
$38,799
$39,575
$40,367
$41,174
Depreciation Expense - Assets Installed
$26,207
$26,731
$27,266
$27,811
$28,367
$28,935
$29,513
$30,104
$30,706
$31,292
$30,467
$28,335
$26,367
$24,549
$22,871
Total Depreciation and Amortization Expense
$26,720
$27,244
$27,779
$28,324
$28,880
$29,448
$30,026
$30,616
$31,219
$31,805
$30,980
$28,848
$26,880
$25,062
$23,383
$26,207
$469
$956
$975
$994
$1,014
$1,034
$1,055
$1,076
$1,098
$1,120
$1,142
$1,165
$1,188
$1,228
$1,354
$1,494
$1,647
$$1,816
,
$2,003
$2,209
$1,170
$0
$0
$0
$0
$0
$0
$0
$0
$0
$26,731
$0
$478
$975
$994
$1,014
$1,035
$1,055
$1,076
$1,098
$1,120
$1,142
$1,165
$1,188
$1,212
$1,253
$1,382
$1,524
$$1,680
,
$1,853
$2,043
$2,253
$1,194
$0
$0
$0
$0
$0
$0
$0
$0
$27,266
$0
$0
$487
$994
$1,014
$1,034
$1,055
$1,076
$1,098
$1,120
$1,142
$1,165
$1,188
$1,212
$1,236
$1,278
$1,409
$$1,554
,
$1,714
$1,890
$2,084
$2,298
$1,217
$0
$0
$0
$0
$0
$0
$0
$27,811
$0
$0
$0
$497
$1,014
$1,035
$1,055
$1,076
$1,098
$1,120
$1,142
$1,165
$1,188
$1,212
$1,236
$1,261
$1,304
$$1,437
,
$1,585
$1,748
$1,928
$2,125
$2,344
$1,242
$0
$0
$0
$0
$0
$0
$28,367
$0
$0
$0
$0
$507
$1,034
$1,055
$1,076
$1,098
$1,120
$1,142
$1,165
$1,188
$1,212
$1,236
$1,261
$1,286
$$1,330
,
$1,466
$1,617
$1,783
$1,966
$2,168
$2,391
$1,267
$0
$0
$0
$0
$0
$28,935
$0
$0
$0
$0
$0
$517
$1,055
$1,076
$1,098
$1,120
$1,142
$1,165
$1,188
$1,212
$1,236
$1,261
$1,286
$$1,312
,
$1,356
$1,495
$1,649
$1,818
$2,005
$2,211
$2,438
$1,292
$0
$0
$0
$0
$29,513
$0
$0
$0
$0
$0
$0
$528
$1,076
$1,098
$1,120
$1,142
$1,165
$1,188
$1,212
$1,236
$1,261
$1,286
$$1,312
,
$1,338
$1,383
$1,525
$1,682
$1,855
$2,046
$2,255
$2,487
$1,318
$0
$0
$0
$30,104
$0
$0
$0
$0
$0
$0
$0
$538
$1,098
$1,120
$1,142
$1,165
$1,188
$1,212
$1,236
$1,261
$1,286
$$1,312
,
$1,338
$1,365
$1,411
$1,556
$1,716
$1,892
$2,086
$2,300
$2,537
$1,344
$0
$0
$30,706
$0
$0
$0
$0
$0
$0
$0
$0
$549
$1,120
$1,142
$1,165
$1,188
$1,212
$1,236
$1,261
$1,286
$$1,312
,
$1,338
$1,365
$1,392
$1,439
$1,587
$1,750
$1,930
$2,128
$2,346
$2,588
$1,371
$0
$31,292
$0
$0
$0
$0
$0
$0
$0
$0
$0
$560
$1,142
$1,165
$1,188
$1,212
$1,236
$1,261
$1,286
$$1,312
,
$1,338
$1,365
$1,392
$1,420
$1,468
$1,619
$1,785
$1,968
$2,171
$2,393
$2,639
$1,371
$30,467
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$571
$1,165
$1,188
$1,212
$1,236
$1,261
$1,286
$$1,312
,
$1,338
$1,365
$1,392
$1,420
$1,449
$1,497
$1,651
$1,821
$2,008
$2,214
$2,441
$2,639
$28,335
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$583
$1,188
$1,212
$1,236
$1,261
$1,286
$$1,312
,
$1,338
$1,365
$1,392
$1,420
$1,448
$1,478
$1,527
$1,684
$1,857
$2,048
$2,258
$2,441
$26,367
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$594
$1,212
$1,236
$1,261
$1,286
$$1,312
,
$1,338
$1,365
$1,392
$1,420
$1,449
$1,477
$1,507
$1,558
$1,718
$1,894
$2,089
$2,258
$24,549
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$606
$1,236
$1,261
$1,286
$$1,312
,
$1,338
$1,365
$1,392
$1,420
$1,448
$1,478
$1,507
$1,537
$1,589
$1,752
$1,932
$2,089
$22,871
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$618
$1,261
$1,286
$$1,312
,
$1,338
$1,365
$1,392
$1,420
$1,449
$1,477
$1,507
$1,537
$1,568
$1,621
$1,787
$1,932
Depreciation Expense
3- Year Assets
5-Year Assets
7-Year Assets
10-Year Assets
15- Year Assets
20-Year Assets
39-Year Assets
Total Depreciation Expense
Intangible Assets
Implied Value from Cost Approach
Depreciation Rate (15-Year SL)
Depreciation Expense
Depreciation Expense for Assets Installed in Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
MR Valuation Consulting, LLC
www.MRValuation.com
Page 59
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 63 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
APPENDIX 3:
WEIGHTED AVERAGE COST OF CAPITAL
MR Valuation Consulting, LLC
Page 60
Horowitz & Burnett, P.C.
Highwood Generating Station
Ticker
Guideline Companies:
PPL
AEE
D
FE
DUK
NEE
PPL Corporation
Ameren Corporation
Dominion Resources
First Energy
Duke Energy
NextEra Energy, Inc.
11-62031-RBK Doc#: 816-1 Filed: 04/19/13
Entered:
04/19/13 14:43:20 Page 64 of 76
Weighted Average Cost
of Capital
CAPM Model
Unlevered Equity Beta
Debt-to-Equity
Selected Subject Tax Rate
Relevered Equity Beta
Risk Free Rate: 20-Year Treasury Security
Equity Risk Premium
Levered Equity Beta
Cost of Equity Capital
Unsystematic Risk Factors:
Size Premium
Company-Specific Risk
Subject's Cost of Equity Capital
20-Year Treasury Security
Aaa Corporate Bond Yield
Baa Corporate Bond Yield
Indicated Pre-Tax Cost of Debt Capital
Additional Risk Compensation
Concluded Pre-Tax Cost of Debt Capital
Tax Rate
After-Tax Cost of Debt
Debt-to-Capital
Equity-to-Capital
Conclusion
Weighted Average Cost of Capital
Appendix 3
As of January 1, 2013
Total Book Value of LT Debt
$
$
$
$
$
$
17,993,000,000
6,677,000,000
17,394,000,000
16,185,000,000
18,679,000,000
20,810,000,000
Share Price
$
$
$
$
$
$
29.09
31.32
52.92
41.98
65.01
70.52
Market
Capitalization
Shares Outstanding
581,700,000
242,630,000
574,610,000
418,220,000
704,240,000
423,000,000
$
$
$
$
$
$
16,921,653,000
7,599,171,600
30,408,361,200
17,556,875,600
45,782,642,400
29,829,960,000
Total Market Value of
Capital
$
$
$
$
$
$
34,914,653,000
14,276,171,600
47,802,361,200
33,741,875,600
64,461,642,400
50,639,960,000
Debt to Capital Equity to Capital
51.53%
46.77%
36.39%
47.97%
28.98%
41.09%
Average
Median
Selected
0.29
100.00%
40.00%
0.46
48.5%
53.2%
63.6%
52.0%
71.0%
58.9%
42.1%
43.9%
50.0%
57.9%
56.1%
50.0%
Effective Tax Rate
31.39%
37.08%
34.31%
39.77%
30.50%
21.57%
32.4%
32.9%
40.00%
Levered Equity Beta
Unlevered Equity Beta
0.41
0.55
0.44
0.40
0.31
0.51
0.24
0.35
0.32
0.26
0.24
0.33
---
0.29
0.29
0.29
Unlevered Equity Beta = Levered Equity Beta / [1 + (1 - Tax Rate) x Debt-to-Equity]
Levered Equity Beta = Unlevered Equity Beta x [1 + (1 - Tax Rate) x Debt-to-Equity]
2.48%
6.14%
0.46
5.32%
Source: Ibbotson Associates 2012
Ibbotsons SBBI (2012), as of the Valuation Date
Relevered Equity Beta = Unlevered Equity Beta x [1+ (1-Selected Subject Tax Rate) x Debt-to-Equity]
Cost of Equity Capital = CAPM = Risk Free Rate + Levered Equity Beta x Equity Risk Premium
3.89%
2.00%
Source: Ibbotson Associates 2012, Size Premium Mid-Cap, Decile 3
Based on qualitiative observations of subject facility and market comparables
11.21%
2.48%
3.85%
4.63%
4.63%
2.00%
6.60%
Source: Ibbotson Associates 2012
Based on Aaa rate as of the Valuation Date. Source: Federal Reserve.
40.00%
3.96%
50.00%
50.00%
7.59%
7.59%
WACC = [(Debt-to-Capital x Cost of Debt x (1 - Tax Rate)] + [Equity-to-Capital X Cost of Equity Capital]
Notes:
(1) Book value of debt used as an approximation of market value. For purposes of calculating capital structure preferred equity, if any, was added to debt at book value.
(2) Represents current stock price times common shares outstanding.
Source: Hoovers, GOOGLE Finance
MR Valuation Consulting, LLC
www.MRValuation.com
Page 61
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 65 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
APPENDIX 4:
PROPERTY TAX ADJUSTED WEIGHTED
AVERAGE COST OF CAPITAL
MR Valuation Consulting, LLC
Page 62
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 66 of 76
Horowitz & Burnett, P.C.
Property Tax Adjusted Weighted Average Cost of Capital
Highwood Generating Station
As of January 1, 2013
Appendix 4
Property Tax Adjusted WACC - Discount Rate for Cash Flows
EXCLUDING Property Tax Expense
Nominal Property Tax Rate
Assessment Ratio
Adjusted Property Tax Rate
Add: Concluded WACC
Property Tax-Adjusted WACC
MR Valuation Consulting, LLC
www.MRValuation.com
1.43%
59.00%
0.84%
7.59%
8.40%
Page 63
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 67 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
APPENDIX 5:
REPLACEMENT COST NEW ANALYSIS
MR Valuation Consulting, LLC
Page 64
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 68 of 76
Horowitz & Burnett, P.C.
Highwood Generating Station
Replacement Cost New Analysis
Appendix 5
REPLACEMENT COST NEW - SIMPLE CYCLE COMBUSTION TURBINE
January 1, 2013
1
2
3
4
5
Subscriber making survey
Name of Facility
Located at
Client
Date
S. Munson
Highwood Generating Station
369 Salem Road, Great Falls, MT
Horowitz & Burnett, P.C.
1/31/2012
6 Type of Facility
7 Reference Document
8 Reference Section
Combustion Turbine
EIA Updated Capital Cost Estimates… (11/10)
Section 8
9 EIA Total Project Cost (October 1, 2010 $/kW) For CT Plant in MT
$
963
TIME RELATED COSTS
10 Time To Construct Plant (Years)
11 Average Period In Which Loan Is Outstanding (Years)
12 Construction Loan Interest
13
Time Related Cost Factor:
0.92
0.46
3.25%
1.01
REPLACEMENT COST NEW
14
15
16
17
18
19
Handy Whitman Trend Factor E5 - 2010
Handy
y Whitman Trend Factor E5 - Current
Trend Factor Adjustment: Line 17 / Line 16
Concluded Cost Per Unit Capacity: $
Capacity (kW)
MR Valuation Consulting, LLC
www.MRValuation.com
Replacement Cost New: $
560
602
1.08
1,051
46,000
48,300,000
Page 65
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 69 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
APPENDIX 6
COST APPROACH ANALYSIS
MR Valuation Consulting, LLC
Page 66
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 70 of 76
Horowitz & Burnett, P.C.
Cost Approach Analysis
Highwood Generating Station
Appendix 6
As of January 1, 2013
Replacement Cost New (Excluding Land)
Less: Functional Obsolescence Due to Excess Capital Cost
Replacement Cost New - Modern Simple Cycle Plant
$
$
$
91,000,000
(42,700,000)
48,300,000
$
$
$
(1,200,000)
(42,700,000)
(43,900,000)
Replacement Cost New Less Depreciation - Highwood Generating Station
$
4,400,000
Add: Land
$
1,181,000
$
5,600,000
Less: Depreciation
Physical (Age / Life = 1 Year / 40 Years)
External Obsolescence
3%
Subtotal Accrued Depreciation
Cost Approach To Value - Highwood Generating Station
MR Valuation Consulting, LLC
www.MRValuation.com
Page 67
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 71 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
APPENDIX 7
PHOTOGRAPHS
MR Valuation Consulting, LLC
Page 68
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 72 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Photograph 1: Highwood Generating Station
Photograph 2: Noise Mitigation Wall
Photograph Date: February 13, 2013
MR Valuation Consulting, LLC
Page 69
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 73 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Photograph 3: Fire Water Pump House and Tank
Photograph 4: Fuel Gas Compressor
Photograph Date: February 13, 2013
MR Valuation Consulting, LLC
Page 70
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 74 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Photograph 5: Gas Turbine: (Left to Right) HP Compressor, Hydraulic Starter/Stop
System, LP Compressor
Photograph 6: Gas Turbine– (Left to Right) Turbine, Combustion Chamber, HP
Compressor
Photograph Date: February 13, 2013
MR Valuation Consulting, LLC
Page 71
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 75 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Photograph 7: Turbogenerator
Photograph 8: Turbogenerator Nameplate
Photograph Date: February 13, 2013
MR Valuation Consulting, LLC
Page 72
11-62031-RBK Doc#: 816-1 Filed: 04/19/13 Entered: 04/19/13 14:43:20 Page 76 of 76
Mr. Lee Freeman
Appraisal of the Highwood Generating Station, As of January 1, 2013
March 29, 2013
Photograph 9: Turbine Air Intake
Photograph 10: Wind Sock
Photograph Date: February 13, 2013
MR Valuation Consulting, LLC
Page 73