Analyst says it's ‘Unlikely' Entergy will continue Vermont Yankee

Monday January 7, 2013

BRATTLEBORO -- An equity analyst at UBS Investment Bank has concluded it may not be in Entergy's best financial interests to continue to operate its Vermont Yankee nuclear power plant in Vernon.

"It looks increasingly unlikely that they would opt to do so," said Julien Dumoulin-Smith.

The white paper issued by UBS is meant to advise its customers prior to making investment decisions, he said, adding Entergy stock has been given a "neutral rating" by UBS.

He was quick to add that he is not privy to all the information

Entergy might have at its fingertips when making decisions on what actions would best benefit its bottom line.

Nonetheless, said Dumoulin-Smith, his reading of documents such as Entergy's quarterly reports, lead him to conclude that Entergy's market nuclear power plants -- such as Yankee -- are unlikely to generate "any meaningful cash in ‘13/'14, with cash deficits projected for ‘15/'16" following the expiration of purchase price agreements negotiated prior to the recent boom in natural gas production.

Rob Williams, a spokesman for Yankee, said he had no comment on the contents of the report.

"Our nuclear units are important sources of clean, reliable power, and we remain fully focused on the safe operation of our plants today and into the future," said Williams. "As a matter of policy, Entergy does not comment on the financial performance of individual plants."

Dumoulin-Smith focuses on utility stocks and issues reports on whether or not UBS' customers should consider buying, selling or reducing their stake in certain companies.

"We track issues with Vermont Yankee, looking at what is the financial value of the company, what it makes," he said. "If you aggregate across various business segments for Entergy, Vermont Yankee is a very small piece."

Entergy's merchant plants, those that sell directly to market and are not regulated by a state utilities commission, are a particular sticking point for Entergy's profitability, said Dumoulin-Smith.

"How profitable is the nuclear segment? It's not very. Entergy's nuclear portfolio doesn't generate a lot of cash."

Along with Yankee, Entergy's other merchant plants include Fitzpatrick and Indian Point in New York, Pilgrim in Massachusetts, and Palisades in Michigan.

"There are certain plants that don't seem to generate much of anything by way of cash," said Dumoulin-Smith.

"Notably, we believe both its NY Fitzpatrick and Vermont Yankee plants are at risk of retirement given their small size," stated the report.

Dumoulin-Smith said that Entergy will most likely continue to pursue the continued operation of Indian Point, just north of New York City in the Hudson Valley, because of its access to the lucrative power market of the metropolitan area.

"Power prices are higher in more congested areas," he said.

The New England market, however, of which Yankee is a part through its affiliation with ISO New England, is not a particularly constrained market, said Dumoulin-Smith, meaning the 2 percent Yankee contributes to the grid could be replaced from an alternate source rather easily.

Dumoulin-Smith was also quick to note that even though there has been a lot of talk about the natural gas renaissance, one major factor may contribute to Entergy's decision to keep Yankee open.

"New England has a lot of gas capacity on paper, but does it have enough pipeline and infrastructure to meet the increased demand?

There's not an obvious answer anymore. That may ultimately become a limiting item for future plant retirements of any sort in New England."

There is also the question of whether ISO New England, which, according to its website oversees and ensures "the fair administration of the region's wholesale electricity markets," would even allow Entergy to close Yankee.

"If push came to shove, would ISO New England let Vermont Yankee retire with the uncertainty over gas supply?" asked Dumoulin-Smith.

Another factor Entergy will be considering is legislation that was passed last year in the Vermont Statehouse that increased the revenue generation tax that Entergy pays from $5 million to $12.5 million a year. Entergy has filed a federal lawsuit against the state contending the state is violating the U.S. Constitution.

"If this plant is breaking even, a new tax will decisively make it unprofitable," said Dumoulin-Smith, who said he believes the legislation was crafted to force Entergy to close Yankee. "It's a tax that is unpalatable."

What could keep Entergy from shuttering the plant is liability costs related to the decommissioning of the plant, he said, and whether it would have to immediately begin cleaning up the site upon closure or if it could mothball Yankee until the decommissioning fund accrues enough cash to get the job done.


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