Time to Pull the Plug on Entergy Corporation?

The company could be forced to shut down other nuclear power plants in the Northeast if the license for Indian Point isn't extended.

Jan 29, 2014 at 3:35PM

Another rejection for Entergy Corporation (NYSE:ETR) looks to be imminent, and yet the company's executives appear confident they can win a protracted legal fight with New York state regulators and elected officials. Of course, if they do then Entergy's share price is likely headed higher, but if history repeats itself, investors could find themselves cursing the darkness as the best nuclear power plant in the Northeast shuts down.

Entergy disappoints shareholders, yet again
After two years of work on a plan in which Entergy would spin off and merge its power transmission business with ITC Holdings (NYSE:ITC), the two companies in mid-December said they were giving up on the transaction. The announcement came just three days after Mississippi regulators rejected the proposed merger.

A very expensive deal to lose
Had the sale been done according to plan, Entergy would have received $1.78 billion and never have needed to worry about $2 billion in maintenance expense over the next five years. Entergy also would have netted hundreds of millions of dollars in savings from avoided costs.

The upgrades ITC would have made to the Entergy transmission business it sought to acquire were to eliminate congestion points, allowing Entergy and other ITC transmission customers to buy larger amounts of wholesale electric power during peak demand times. This would have cost much less than the backup power generation capacity Entergy must currently maintain. Peter Fox-Penner in his 2010 book, Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities, explains the potential financial benefit from avoided cost.

One of the largest quantifiable benefits from the Smart Grid is avoided capital costs—the costs saved by either deferring or never building more upstream generators, transmission lines, or distribution systems. For the types of distributed generation (DG) that provide energy mainly at peak times, the value of the avoided capital can easily be five to ten times as large as the saved energy.

Entergy has been a disappointment to shareholders before
In 2010, the New York Public Service Commission rejected Entergy's plan to divest its nuclear business. "The spin-off of the plants, mostly located in the Northeast, would have created the nation's first, stand-alone nuclear generation company," reported The Wall Street Journal.

Regulators, however, rejected the plan because they were concerned Entergy was loading the spinoff with too much debt.

Some state regulators and elected officials in New York want Indian Point shut down. Among this group is current New York governor Andrew Cuomo. He has led the charge to expedite the review and approval process for new transmission lines. The aim is to lessen southern New York's dependence on Indian Point. The nuclear power plant right now generates about 30% of the electric power consumed by New York City and Westchester County ratepayers.

There are 3 nuclear reactors at Indian Point
Reactor 1 was retired in 1974. Reactor 2 is in service pending the outcome of an application to extend its license for 20 years. The original 40-year license expired in September 2013. Reactor 3 faces license expiration in December 2015.

Indian Point Energy Center Buchanan

Source: Entergy

The Indian Point fight
The New York Department of Environmental Conservation rejected Indian Point's water quality permit application, which is a problem. The state water quality permit is a prerequisite to any federal extension of the license. The environmental regulator says it rejected the application because the Indian Point water cooling system is not compliant with the Federal Clean Water Act. Entergy argues its water cooling system is grandfathered.

The cost of compliance may exceed the value of Indian Point
Were Entergy to build the stadium-size water cooling system demanded for a water quality permit, it would run something in the order of "$1.1 billion and would require shutting both reactors down entirely for 42 weeks," reported The New York Times. Moreover, some industry experts question whether such an investment might force Entergy to shut down Indian Point for economic reasons, which they say would likely produce a ripple effect.

"'The early closure of Entergy's 'crown jewel' among the nuclear portfolio, as the only asset producing any material cash flow ... would likely necessitate the closure or sale of its entire remaining [northern states] nuclear portfolio,'" explained UBS analyst Julian Dumoulin-Smith for Platts Nucleonics Week.

Entergy investors might be plugged in through a surge protector
No application to extend a nuclear power plant license in the U.S. has been denied. Furthermore, although New York governor Andrew Cuomo has called for the shutdown of Indian Point and for the construction of new transmission lines to reduce southern New York state's dependence on the power plant, these things are unlikely to change the need for Indian Point. And as the Poughkeepsie Journal reported, there is already opposition to the construction of new transmission lines:

"The plans ignited controversy along its routes, notably in northern Dutchess County as well as in Columbia, where lines sometimes run near homes and farms. One fear was potential seizure of private land through eminent domain if a plan were chosen that would require a wider right-of-way to increase capacity."

And as far as shutting down Indian Point goes, this too seems unlikely. Per the company's 2012 annual report to shareholders:

[A]t a Manhattan Institute event held in September 2012, economist Jonathan Lesser, President of Continental Economics, gave a report that concluded closing Indian Point would result in an increase in annual electric costs in New York state by $1.5 billion to $2.2 billion between 2016 and 2030; the loss of 26,000 to 40,000 jobs annually; violation of reliability standards and rolling blackouts; and a total economic impact of $1.8 billion to $2.7 billion per year. According to Lesser, all replacement scenarios for Indian Point result in electric rate increases for residential, commercial and industrial customers.

Final thoughts
Entergy could be forced to shut down Indian Point if the price of a 20-year license extension is a $1.1 billion water cooling system. Also, opposition to the Indian Point nuclear power plant is somewhat higher-profile than what has been seen elsewhere in the country by other nuclear power plants that have sought to extend their operating licenses. This means federal regulators may take into consideration other factors in their decision on whether or not to extend the life of Indian Point.

Kells Hetherington owns shares of ITC Holdings (NYSE: ITC). The Motley Fool recommends ITC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers