Over the last few months, there has been a bit of a selling spree of Entergy stock. But this sell-off isn’t coming from just anybody: these sales are by some of the corporation’s top executives. Between December and early April, five Entergy execs sold off large portions of stock they hold in their employer. On December 3, 2013, Entergy CEO Leo Denault sold more than half of his Entergy stock (55.7%, or 33,949 shares valued at $2,103,480). On February 20, the Chief Financial Officer, Andrew Marsh, sold 20.7% of his stock (2,808 shares valued at $181,902). On February 27, Senior Vice President for Federal Government, Regulatory, and Policy Affairs Kimberly Despeaux sold 20.8% of her stock (3,024 shares valued at $193,113). And most recently, on April 9, Chief Accounting Officer Alyson Mount sold 45.9% of her stock (4,929 shares valued at $347,495). Also, on December 16 and October 16, Senior VP of Human Resources and Chief Diversity Officer Donald Vinci twice sold more than 16% of his Entergy holdings.
There was nothing illegal about any of this, they are all above-board transactions properly reported to the Securities and Exchange Commission and covered in the investment press. But if the three people who know most about Entergy’s finances (the CEO, CFO and CAO) and the person in charge of the company’s government and regulatory affairs—which are central to the company’s economic future (see below)—don’t feel that Entergy stock is a better long-term investment, you have to wonder whether there’s some big news on the horizon.
We have posted a lot recently about economic troubles in the nuclear garden, and the industry’s gambit to rescue itself from financial collapse (see here and here, for instance). The two largest players in this are Exelon and Entergy, the #1 and #2 nuclear operators in the country. As Wall Street has become aware of the serious problems facing the nuclear energy business over the last year, Entergy and Exelon have increasingly been named among the riskiest investments among major energy companies. In terms of gross numbers, Exelon has the greatest exposure to the economic crisis facing “merchant” nuclear reactors – that is, those operating in deregulated energy markets, where power plants sell electricity on a wholesale market rather than as part of a utility company with ratepayers. All of Exelon’s 22 reactors operate in deregulated markets, and more than 25% of them have been listed as at risk of closure.
But in some ways, Entergy may be even more at risk than Exelon, If insiders voting with their portfolios is any indication. After all, no one is reporting on Exelon executives selling stock like their counterparts at Entergy. Entergy currently owns 11 reactors, six of which are part of the corporation’s merchant power division, Entergy Wholesale Commodities (EWC); five are part of Entergy’s utility business in Arkansas, Louisiana, and Mississippi. Nearly all of the merchant reactors face some imminent threat of closure—that is, all but Vermont Yankee, which Entergy already has announced will close in 2014.
Among the others, FitzPatrick (NY) and Pilgrim (MA) have been singled out by industry analysts as two of the most economically troubled plants. Palisades (MI) is only profitable now because of a sweetheart contract with the reactor’s former owner, but has a growing list of major maintenance issues, including an embrittled reactor vessel. Indian Point’s two reactors near New York City are Entergy’s only currently profitable merchant nuclear “assets,” but are still considered vulnerable to closure due to major public and political opposition and legal challenges to their relicensing. That means within the next couple years, literally every reactor and the entirety of Entergy’s merchant power division could go belly-up.
That has investor analysts concerned. Of the thirteen investment firms “following” Entergy’s stock, two recommend investors sell their Entergy stock, eight are “neutral,” five firms have downgraded Entergy in the last year,* and only one has “upgraded” their rating. So that’s reason enough to be worried if you own Entergy stock. Entergy has had other problems recently, not least of which is the failure of a major deal to sell off the company’s electricity transmission infrastructure in the south, rejected by Mississippi regulators.
But analysts are clear that the problems with Entergy’s merchant business are severe, possibly existential to that whole part of the company, and with major implications for the whole corporation. Last year, UBS Investment Research, one of the firms that has covered Entergy most closely (and rates Entergy negatively as an investment to “sell”), noted that Entergy may need to “restructure” its entire merchant nuclear business, including closing Vermont Yankee and FitzPatrick (and possibly Pilgrim), and noting that Indian Point could end up having to close due to legal and regulatory decisions. Such “early” closures of reactors, while better for the financial health of the company, could also entail liabilities for decommissioning trust funds that may not yet have built up enough value to meet NRC requirements.
One solution for a company like Entergy might be to sell off reactors or spin off that division of the company, but unfortunately for Entergy, those doors are closed: no other power company is going to buy Entergy’s reactors, all of which are either unprofitable or embroiled in regulatory disputes; and, most significantly, Entergy already tried and failed to spin off the merchant nuclear business, in a move ultimately blocked in 2010 by the New York Public Service Commission, which rightly saw the move as an effort to shield the parent corporation from liabilities that could bankrupt the new company and leave New York State holding the bag for contaminated reactor sites.
If Entergy’s merchant power business falls apart, that would leave Entergy with only five reactors—less than half its current fleet. That would significantly undercut its ability to distribute operating and managerial costs, and potentially raise costs for running the remaining reactors. Southern utility regulators may not be happy with having to raise electricity rates to make up for Entergy’s failed excursion into merchant power markets, which could apply financial pressure throughout the rest of the company.
The stakes are high for Entergy, as they are for Exelon, which explains why they are putting so much into trying to rewrite the rules to create new subsidies for old reactors and roll back renewable energy standards. It’s not because they really believe in nuclear. It’s just that they made bad business decisions years ago that locked them into nuclear and now put their corporations at risk. It may simply be too late for them to get out now. We just can’t afford to let them take our energy future away with them. It seems, at least, like Entergy executives might see the writing on the wall.
*NOTE: The linked summary of “Analyst Ratings for Entergy Corp (ETR)” incorrectly identifies one downgrade as an upgrade (1/16/2014 by Wells Fargo).
By Tim Judson.
Tim Judson is Acting Executive Director of Nuclear Information and Resource Service
April 15, 2014
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