In UBS report, financial firm forecasts that Entergy may close Vermont Yankee

In an investment research letter, the Swiss financial services company UBS Securities anticipates Entergy Corp will retire one of its nuclear power plants in 2013, and it cites ‘ Vermont Yankee as the most tenuously positioned plant.’
UBS representatives met with Entergy’ s new leadership team on February 1, the same day Leo Denault became CEO and chair of the board for the Louisiana-based company that operates the Vermont Yankee nuclear power plant.
On Monday, UBS released a report that details fiscal portents ‘ suggesting real retirement risk for units such as Vermont Yankee and (New York’ s) Fitzpatrick in ‘ 13; we see (increased) focus on the (decommissioning) process.’
UBS goes on to say, "We see the greatest risk in decommissioning related to concerns by states such as Vermont over the protracted use of SAFSTOR periods to accrue adequate decommissioning funding." UBS is suggesting that the state will oppose a 50- or 60-year mothballing of the plant before it is dismantled. Vermont has always pushed for DECON, the immediate dismantling of the plant and remediation of the Vernon site.
This analysis comes a month after UBS released a report, which project that Entergy ‘ is unlikely to generate any meaningful cash’ from wholesale commodities in 2013 and 2014. UBS also expects the corporation to experience deficits in 2015 and 2016 if the company does not retire older, lower capacity units, like Vermont Yankee.
The February UBS report shows that Vermont Yankee is the lowest capacity plant Entergy operates, at 605 megawatts.
In the REPORT, UBS writes:
"The Nuclear Side of the Equation’¦
We reiterate expectations for nuclear retirements
We continue to believe Entergy is likely to decommission at least one of its units,
such as Vermont Yankee, in 2013. We anticipate the process of
decommissioning will become of greater importance to Entergy shareholders, as
concerns around shareholder-financed contributions to decommissioning funds
continue to garner concern. Mgmt attempted to allay these concerns, citing the
ability to use SAFSTOR configurations at its plants to allow funds to accrue for
up to 50 years in order build adequate funds, with a further 10-years for full
decommissioning. Mgmt flagged that decommissioning funds can be tapped up
to 3% for planning purposes ahead of retirement, and 20% following the filing
of a Post Shutdown Decommissioning Activities Report (PSDAR) with the NRC.
Due along with the PSDAR is a site specific cost estimate as well per recent
regulations, hopefully providing some perspective on the adequacy of funding
levels. It remains unclear what exactly ongoing costs are for a plant in
SAFSTOR; we would expect these to gradually decline after the initial years
following the moment of fuel to wet/dry separate storage. We see the greatest
risk in decommissioning related to concerns by states such as Vermont over the
protracted use of SAFSTOR periods to accrue adequate decommissioning
funding. Additionally, while plants operating through the tenor of their current
licenses are likely okay from a funding perspective (the approval of 20-year
license extensions in recent years muted much of the concern following the
financial crisis for funding levels on many of these funds); however, if a plant
retires prior to the expiration of its operating license (i.e. VY among others),
funding levels would appear to pose a more prevalent risk if states force reduced
SAFSTOR periods. That said, the NRC is likely to prove an ardent advocate of
SAFSTOR in order to ensure adequate funding throughout the decommissioning
process.
Nuclear business is sub-scale, but what to do?
It is becoming increasingly clear the company needs to gain scale in its
underlying nuclear business. We reiterate the cash flow projections suggest
relatively breakeven to negative cash flows for the EWC business under current
forwards. While a sale or transaction around EWC remains impractical at this
point in time, we see an eventual spin-merge or JV as certainly a possibility.
Additionally, we see any new structure for the nuclear business as necessarily
being part of a greater, more stable portfolio, given the regulatory uncertainty (if
not financial viability) of its EWC business. As such, we see the business as
fundamentally un-financeable on a stand alone basis, suggesting the company is
likely to continue to refinance its debt off the revolver at the HoldCo (and
maintain its Investment Grade ratings, premised off the support provided by the
regulated utilities). CEO Denault, in his first day on the job, suggested that in 5
years time, the EWC business would belong part of a bigger portfolio ‘ either
under Entergy ownership or otherwise. Overall, we believe these comments
echo similar sentiments across the integrated space; we continue to expect a
migration of generation assets towards pure-play IPPs, as these companies seek
to streamline overhead costs across large portfolios."
All of this information comes as Entergy and the state of Vermont are embroiled in legal disputes over whether Vermont Yankee should continue to operate. One case is pending before the U.S. Court of Appeals and Entergy has appealed Vermont Public Service Board decisions to the Vermont Supreme Court.
Entergy representatives were not prepared to comment on the UBS assessment of Vermont Yankee or any of the research report’ s details at the time of publication. VTDigger will provide an update once they do.
by Andrew Stein February 6, 2013 vtdigger.org Tim McQuiston of Vermont Business Magazine contributed to this report.