[Starvid]

Entergy is a big US utility with a considerable ownership in nuclear power. But the thing is, Entergy is actually more like two companies. One is the ordinary utility. Regulated, pretty low risk, pretty low returns. Solid.

On the other hand Entergy has a presence as a merchant generator in the deregulated markets in the Northeast USA. Now Entergy has decided to spin off its six merchant nukes (5000 MW) in the Northeast into a new company called Enexus. The shares will be handed out to the shareholders of Entergy and they will then be traded the ordinary way.

Now, to me, this seems like the holy grail of US power generation. Here's why:
* The plants are located in an area which has been ravaged by deregulation. Deregulation means that power is priced on the margin, that is, the most expensive power sets the price of all power. Your profit is the difference between the price of power and your costs.
* This marginal price setter is usually gas.
* The Northeast has a very large degree of gas- and oil(!)-fired power generation.
* Coal and especially nuclear (and especially old nuclear) are the cheapest forms of power generation. On top of this, nuclear generating costs are extremely stable due to the dirt cheap fuel and the high capital costs. Low operating costs and high or very high prices makes for a comfortable mix profitwise.
* The only way to lower power prices in an area with marginal price setting (deregulation) is by building new coal and nuclear power plants. Good luck with this in the Northeast!
* This is by far the most profitable part of Entergy. While these six reactors make up just 21% of Entergys assets and generate only 18 % of the revenue, the margins must be fabulous as they bring in 48 % of the profits.
* The company will be indebted. It will take on $4.5 in debt and give the money to Entergy as a payment for these plants. This might seem much, but building 5000 MW of new nuclear would cost you about three times as much as Enexus will pay.

* The project might seem risky from a conventional point of view as the company will have pretty much debt, work on a free unregualted market and be 100 % nuclear. The fuel mix is not diverse, earnings will be heavily reliant on fossil fuel prices (cheap oil=bad profits) and the credit rating will not be wonderful. I see it the opposite. To quote Warren Buffet, diversification is an insurance against stupidity. I don't want oil and gas in my generation portfolio to reduce my risk - I believe it will do the opposite. Working on the free market should not be a risk for this company - everywhere power markets have been deregulated prices have gone up, and stayed there. And the credit rating... Well. With the subprime debacle being what it is, it seems those rating agencies weren't very good anyway.

* As an added bonus, the reactors will not be run, only owned by Enexus. They will be run by a new service company called Equagen. This is probably a way for the management to squeeze workers pay and benefits. Not very moral but... Well, as this is such a very capital intensive business, it will probably not even be noticed by the shareholders on the bottom line. But as an American CEO I guess it is your duty to bring pain to the little people, or something.

Anyway, see more here: http://www.theadvertiser.com/apps/pbcs. ... /805030303

So, any comments?

PS. I learnt about this venture during the latest "This Week in Nuclear" podcast, episode 56. Check it out here: http://thisweekinnuclear.blogspot.com/

Let me quote him a bit:

$this->bbcode_second_pass_quote('', '[')b]So is this a good idea? Well, I guess that depends on whether or not you believe that a 100% nuclear generating company in the Northeast USA is a good business idea. If you use recent financial performance as a measure, the new company will have assets worth about $10 B (or more), debts of about $4.5 B, and annual revenues of about $2 B. Remember those plants generated about one-half of Entergy's earnings last year (about $500 Million), so theoretically in the future they should be able to generate about $500 million in profits on $2 Billion in revenues. If the price of electricity goes up, then they stand to make more. If any kind of carbon legislation gets passed, then you could expect the market price of electricity to go up, and these plants would benefit.

On the down side, if you believe there is any risk that license renewals for Pilgrim, Vermont Yankee, or Indian Point will not get approved, then Enexus's assets would be worth considerably less.

[cube]

Is this "deregulated" plan anything similar to the one which helped lead to the California energy fiasco?

[Starvid]

No, not really. This deregulation is just a way to rip off consumers. The California fiasco resulted when utilities couldn't pass their increased costs on to consumers. It is very possible to do that in the Northeast... and then some.

[Starvid]

Not much interest around here...

[cube]

It was a confusing topic.
Maybe I was getting lazy because I didn't read the whole thing so I wasn't really sure what was being proposed. If I gathered correctly this seems to have something to do with offloading utility services onto the private sector that was once provided by the state. I think we're going to see much more of this in the future.

here's the cube scenario:
As PO approaches, government budgets will be strained. What was once provided with relative ease (water, sewage, roads) will be lacking. I find it interesting that people almost NEVER mention this point. I lost count how many times people argue (like a broken record) high fuel prices will make driving a car more expensive, but what would happen if government could no longer afford to maintain the freeways?

We have more or less a socialistic system right now. It does not matter if you're poor or rich everybody gets access to things like electricity and roads. I think in the future we'll have a (have and have not) society where if you don't have enough money then too bad --> you don't get these services.

my 2 cents

[MrBill]

$this->bbcode_second_pass_quote('cube', 'I')s this "deregulated" plan anything similar to the one which helped lead to the California energy fiasco?

[cube]

$this->bbcode_second_pass_quote('MrBill', '.')..
Governments deregulate because they do not have the money to expand needed capacity and cannot pass those costs onto taxpayers via higher taxes. Or they deregulate because they do not want those operating costs/losses and pension liabilities on their own overstretched books. If consumers end up paying more afterwards it is usually because costs have gone up and/or there was a hidden subsidy in there in the first place. Or they refuse to operate at a loss, which is quite natural.
...

[MrBill]

$this->bbcode_second_pass_quote('cube', 'a')hh gotcha
Well if that's the case then I expect to see a lot more "deregulation" in the future. It makes perfect sense now, if a politician is faced with a politically unpopular decision that MUST be made then the solution is simple --> offload the "hot potato" onto someone else's lap and let them take the heat.

So here's the 10 trillion dollar question?
How much would utility services: water, sewage, power cost if it was priced at "fair market" and not subsidized? I guess we're all going to find out pretty soon!
BTW even out here in California (highways are called freeways for a reason) there's a push for private toll roads.

[Gerben]

So if governments in the Norht East don't like rising electricity prices due to rising cost of oil, gas and coal, they can set a maximum electricity price and make you lose all your money. Buying those shares sounds like a risky bet to me.

The cost of nuclear plants are not only building them, but also building up a reserve fund for the safe disposal of the remaining nuclear waste. Is there such a fund or will they just declare bankruptcy once they close the plants?

[Starvid]

$this->bbcode_second_pass_quote('cube', 'I')f I gathered correctly this seems to have something to do with offloading utility services onto the private sector that was once provided by the state.

[Starvid]

$this->bbcode_second_pass_quote('Gerben', 'S')o if governments in the Norht East don't like rising electricity prices due to rising cost of oil, gas and coal, they can set a maximum electricity price and make you lose all your money. Buying those shares sounds like a risky bet to me.

[Starvid]

OK, guys, the latest news on Enexus is both good and bad. The bad thing is that New York is making trouble for the spinoff. The good thing is that the reason they are doing it is strengthening the investment case here.

$this->bbcode_second_pass_quote('', '
')Opponents say the plan would enrich Entergy and its stockholders at the expense of New York consumers while allowing the company to avoid responsibility and liability for the plants.

[ThunderChunky]

$this->bbcode_second_pass_quote('MrBill', '
') Also, the Golden State locked-in unfavorable contracts when prices were high. They then balked at paying those high prices when spot prices fell. In essence defaulting on their commercial obligations. That fleet footed power traders made money at their expense is kind of besides the point. That is what arbitragers do. California designed the system, while players gamed the system.