Spinning Vermont Yankee

I had a great opportunity today to be a guest on WDEV to talk about the proposed spin-off of Vermont Yankee (and five other nuclear plants) from its current corporate parent, Entergy. The specific topic was the recent agreement between the Department of Public Service (DPS) and Entergy that led to the DPS dropping its objection to the deal, which still requires the approval of the state Public Service Board.

What I enjoyed was the opportunity to explore the deal and gain a better understanding of what it is all about. I had made some previous comments here about the deal, based on my newspaper reading. Based on that reading, I thought Energy was merely rejiggering its family tree of subsidiaries in an effort to separate its affiliates more fully from any liabilities associated with Vermont Yankee.

I was wrong. What Entergy is really doing is spinning off the part of its business that involves owning nuclear power plants, while retaining a 50 percent interest in the part of its business that involves running nuclear plants. The nuclear owner would be called Enexus; the nuclear operator would be called EquaGen.

Keep in mind that because this is a spin-off, one minute before and one minute after the deal is consummated, the owners of the nuclear plant will be the same -- Entergy's current shareholders. In one sense, what the nuclear plants (and their shareholders) will be shedding is Entergy's management. Of course that's a pyrrhic victory if you don't like Entergy because Entergy is maintaining a 50 percent (but not a controlling) stake in the business (EquaGen) that will actually run the nukes.

More importantly, a big part of the spin-off involves a significant cash-out by Entergy with respect to nuclear ownership. Enexus plans to issue $3.5 billion in non-investment grade securities (i.e., "junk bonds," which means borrowing money at a relatively high interest rate) and remit the proceeds to Entergy in exchange for the nuclear plants. Entergy gets to invest the $3.5 billion in something else and Enexus gets -- well, a fleet of aging nuclear plants including one, Vermont Yankee, whose operation after March 2012 is not a foregone conclusion.

Senate President Peter Shumlin, a fervent Vermont Yankee foe who has just formally announced his 2010 gubernatorial candidacy, has denounced this deal as too highly leveraged. I won't presume to be the judge of that. According to the October 26, 2009 written testimony of Dean Keller, Entergy's executive vice president for finance (and Enexus's putative CFO), Enexus would have approximately $832 million in shareholder equity on its balance sheet compared to $3.5 billion in longterm debt.

That's a debt to equity ratio of approximately 4.2. Entergy's debt-to-equity ratio was 1.31 as of July 1, according to Forbes.com.

Keller's testimony is that "Wall Street investment-research firms" have estimated that the "enterprise value" of Enexus is actually "in excess of $10 billion." I earnestly hope that the DPS has asked Mr. Keller to substantiate that claim and that, ultimately, the Public Service Board likewise requires Entergy to substantiate the contention that after spinoff Enexus will really be worth more than twice what its balance sheet says it's worth.

Maybe Keller's use of the phrase "in excess" accounts for the name Entergy chose for the spinoff entity? But I digress.

The issues over which Entergy and the DPS negotiated concern the extent to which the present and future owners of Vermont Yankee are willing to back up the nuclear plants liabilities, including its obligation to fund the plant's expensive (and critical) decommissioning. If those guarantees are actually stronger post-spinoff than they are today, the deal is arguably a good one for Vermonters.

Keep in mind that under either scenario, Vermont Yankee and its five sibling nukes are separated from their ultimate owners by multiple layers of corporate entities. Essentially, either Enexus or Entergy is the parent of a parent of a parent company of the entity that owns or will own Vermont Yankee (or, likewise, the company that operates or will operate it).

This is important because the very essence of corporate existence is that any corporation's owners are insulated from being liable for the debts and obligations of the corporation. If your pension fund was invested in General Motors, the investment may have been wiped out but at least the company's creditors can't raid your pension in an effort to make themselves whole. So, too, with the owner of Vermont Yankee, the owner of the owner, and the owner of the owner of the owners of Vermont Yankee.

It is interesting to compare the proposed Entergy-Enexus transaction to last year's Verizon-Fairpoint deal whereby Verizon cashed out its northern New England landline business and Fairpoint took on a vast pile of debt it was ultimately unable to service. Unlike Enexus, Fairpoint was a preexising company with its own coterie of shareholders, but apart from that the structure of the two deals are similar.

Among Fairpoint's biggest woes is that it is losing its customer base as landline users migrate to cellular communications and competitive landline providers. Enexus isn't likely to suffer that kind of customer attrition as long as it is able to crank out relatively inexpensive and reliable electricity. Of course lots of people in Vermont think Vermont Yankee's owners should lose that very ability, at least as to Vermont Yankee, in March of 2012 . . . .