Entergy Hits Roadblock - Analyst Blog

Entergy Corporation’s (ETR) proposed spin-off of its non-utility Nuclear power business hit a regulatory road-block. The New York Public Service Commission (NYPSC) played spoilsport and rejected the spin-off request. NYPSC is apprehensive of the financial health of the resultant company (Enexus Energy Corporation).

Entergy has been contemplating the spin-off since fiscal 2007 to separate its regulated utilities and open-market generation units. The new company – Enexus Energy Corporation will take over nuclear plants located in Pilgrim in Plymouth, Massachusetts; Vermont Yankee in Vernon, Vermont; Indian Point in Westchester County, New York; Fitzpatrick in Oswego County, New York; and the Palisades plant in Covert, Michigan.

New Orleans-based Entergy is primarily engaged in electric power production and retail distribution. With 30,000MW of generating capacity, it distributes electricity to 2.6 million customers in Arkansas, Louisiana, Mississippi and Texas. Of this, 14,631MW are gas/oil based, 2,259MW coal-based, 70MW hydro-based and the rest is nuclear.

With around 13,000MW of nuclear-based energy, the company is one of the largest nuclear power generators in the U.S. The company also distributes natural gas to 240,000 customers in Louisiana.

Earlier in Feb 2010, NYPSC expressed its apprehension that the long-term unsecured bonds worth $3.5 billion that Entergy plans to issue for the spin-off will depress the bond rating of the new company, affecting its financial capacity.

Enexus would have been responsible for almost 15% of the state of New York’s electricity needs, which the commission feels would be difficult to replace if the company becomes insolvent.

Entergy subsequently agreed to reduce the debt load of Enexus from $3.5 billion to $3 billion. The company also agreed to contribute up to $300 million to New York’s energy efficiency fund, if future power prices witness an upsurge.

Entergy earlier hinted that if the spin-off does not take off it would maximize shareholder value by accelerating its ongoing $750 million share repurchase program along with a hike in dividend which has been stagnant over the past two fiscals (2008-09).

Going forward, stable earnings from regulated utilities and significant free cash flow available for share repurchases – dividend hikes and/or debt retirement collectively support management’s focus on creating shareholder value.

Entergy ended fiscal 2009 with cash and cash equivalents of $1.7 billion. The company generated $2.9 billion of cash from operating activities in fiscal 2009. Long-term debt decreased to $10.7 billion at fiscal-end 2009 from $11.2 billion at fiscal-end 2008.

Presently the Entergy stock based on forward earnings estimates is trading at a discount to its peer group – Consolidated Edison Inc. (ED), Pepco Holdings Inc. (POM) and Xcel Energy Inc. (XEL).

However, lower electricity sales, an expected slide in power prices, negative rate case outcomes, and pending regulatory approvals are areas of concern. This justifies our Neutral recommendation for the stock. Also, the quantitative Zacks Rank for Entergy is currently “3″ (Hold), indicating no clear directional pressure on the performance of the shares in the near term.