Entergy deal good for shareholders; others wary

The Associated Press
Published: August 18, 2008

NEW ORLEANS: Power provider Entergy Corp. is advancing its plans to spin off nuclear plants that generate free-market electricity, a deal that may be a boon for shareholders but a potential burden for taxpayers, according to critics.
If approved by regulators, Enexus Energy Corp., to be based in Jackson, Mississippi, will become a separate, publicly traded company in the next several months.
Stockholders of New Orleans-based Entergy would receive Enexus shares on a pro-rata basis. The exact number has not been determined.
But there is concern over debts of as much as $4.5 billion that the new company would take on, including up to $3.5 billion paid to Entergy for the plants and other assets.
There is also the dismantling or mothballing of nuclear reactors at the end of their life spans, which critics say Enexus may be unable to pay. That could leave taxpayers with billions in cleanup costs should the company become insolvent. The plants range in age from 32 years to 37 years.

Plants have a life span of between 30 and 40 years, according to the International Atomic Energy Agency, but can be retrofitted to last longer.
Enexus would control five nuclear plants: Pilgrim Nuclear Station near Plymouth, Massachusetts, the James A. Fitzpatrick station in Oswego County, New York, two units at the Indian Point Energy Center in Westchester County, New York, Vermont Yankee in Vernon, Vermont, and Palisades Power Plant in Covert, Michigan.
All sell nonregulated power on the wholesale market, where prices can skyrocket as utilities try to cover shortfalls in peak-demand periods.
Entergy currently sells a mix of power in nonregulated and regulated regions. It has regulated utilities in Louisiana, Mississippi, Arkansas and Texas which serve 2.7 million customers. The company purchased the wholesale reactors intended for Enexus between 1999 and 2007.
Chief executive Wayne Leonard says the wholesale reactors have focused on fixed-price, long-term delivery contracts for retail sellers rather than the spot market, where there is potential for greater profits, but also greater risk.
Yet prices on the spot market can fall as quickly as they can rise — which could lead to credit downgrades and higher interest costs for Entergy, Leonard said.
"These two companies don't belong together," he said.
The spinoff would be good for Entergy shareholders, according to analysts like Macquarie Research Equities.
As long-term contracts at below-market prices expire, Enexus plants should generate earnings before interest, taxes, depreciation and amoritization of $2.5 billion in 2012, up from the $800 million in 2007, Macquarie said.
Deutsche Bank said because of Entergy's plan for an extended stock buyback, per-share profits are only going up.
Others, however, are not so bullish on the payoff for consumers.
Under the Enexus plan, the plants would be owned by independent subsidiaries, each legally responsible for their own books and assets — including the cost of decommissioning plants.
Critics say that separation is a financial shield for Enexus.
Decomissioning can cost hundreds of millions. Plant owners are federally required to set aside funds to cover those costs.
When Hurricane Katrina hit in 2005, the Entergy New Orleans unit, a subsidiary, filed for bankruptcy when faced with millions in damages and the loss of its customer base.
The unit was reorganized and received $200 million in federal relief funds. All creditors were paid in full.
Entergy said in 2007 that its decommissioning funds totaled $3.3 billion, up from $2.86 billion in 2006.
When the spinoff was approved in July, the Nuclear Regulatory Commission rejected arguments that Enexus was taking on too much debt. Enexus agreed to put up $700 million toward operational and maintenance costs, plus a $1 billion line of credit for the plants.
The use of subsidiaries to shield a nuclear parent company from liability is becoming more common, according to the Nuclear Information and Research Service — a trend that could put taxpayer money at risk in the worst-case scenario.
"If you have an accident and cleanup costs and the decommissioning fund isn't full, who pays for it?" asked Michael Marriotte, executive director of the anti-nuclear group. "It could be the taxpayers as well as the ratepayers."
New York Attorney General Andrew Cuomo has come out against the plan, and said the deal will cost the New York Power Authority, which sold Fitzpatrick and Indian Point 3 to Entergy in 2000 for $967 million, about $360 million in revenue sharing with Entergy.
The spinoff will cut away access to about 80 percent of the financial resources that Indian Point and Fitzpatrick currently have under Entergy ownership, Cuomo said.
Also, because of a plan for Entergy and Enexus plants to be joint partners in another company that will maintain and operate both Enexus plants and Entergy's regulated nuclear generators, Entergy would have "veto power" over the operation and maintenance of Enexus plants, while having "no responsibility for the consequences of that control," Cuomo said.
In Vermont, the other state where the law requires state regulators to sign off on the spinoff, lawmakers passed a bill earlier this year calling for the Public Service Board to require Entergy to make additional financial guarantees to a decommissioning fund before approving the spinoff.
But Gov. Jim Douglas vetoed the measure, saying Entergy might raise electric rates after its current contract expires in 2012.
Vermont also is the only state in which state law gives lawmakers an up-or-down vote on nuclear relicensing. The license for Vermont Yankee, the state's lone reactor, expires in 2012; the Legislature is expected to vote in the winter or spring of 2009 whether to approve relicensing.
Decisions on the deal are expected later this year in Vermont and by the New York Public Service commission. Entergy also must get the approval of the Securities and Exchange Commission.