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Entergy to Close Nuclear Plants; Focus on Regulated Business

Zacks

Entergy Corporation ETR announced its decision to shut down two operating units at the Indian Point Energy Center between 2020 and 2021. Even though these units are capable of provide pollution-free energy for a long period, the wind-down came as part of a settlement with New York State to drop legal challenges and support renewal of the operating licenses for Indian Point.

Under the settlement, Entergy will continue to pursue license renewal unopposed by the state for the remaining years of the plants’ operations. The company will also chalk out a plan to ease the economic impact of the shutdown on its employees and the community.

Weak Wholesale Energy Prices

The decision to shut down the nuclear unit, which had requisitioned an investment of nearly $1.3 billion by Entergy over the last 15 years, was primarily due to a drop in wholesale energy prices. Wholesale energy prices have declined significantly in the last decade due to abundance of cheap natural gas from the Marcellus Shale.

Not only is energy produced by nuclear facilities much more expensive, but costs of operating nuclear units also increase exponentially due to licenses renewals.

Entergy to Exit Wholesale Energy Business

Per the agreement, Indian Point Units 2 and 3 will be shut down by Apr 30, 2020 and Apr 30, 2021, respectively. This will mark Entergy’s exit from the merchant power business due to persistently low wholesale energy prices.

The company’s strategy to exit the wholesale energy business appears promising as regulated operations offer a secure rate of return. In addition, many U.S. nuclear operators, including Entergy, are grappling with challenges such as low natural gas and power prices in the competitive markets.

Long-Term Plans

Entergy stated its plans to invest $10.3 billion in the 2017–2019 time frame, including $4.36 billion for generation, $2.84 billion for distribution and $2.45 billion for transmission. The company expects grid upgrades, asset replacement, and industrial load growth to drive earnings.

The company is concentrating on expanding its regulated business and lowering the footprint of Entergy Wholesale Commodities (EWC). The EWC business currently contributes around 8.2% to the company’s top line, which is expected to shrink to 5% in 2018.

Much like Entergy, PPL Corporation PPL has completed the spin-off of its competitive energy business, taking the final step to focus solely on its regulated utilities in the U.S. and the UK.

Price Movement

Entergy has underperformed the Zacks categorized Utility Electric- Power industry over the last 12 months. The company’s current rate of return is 5.3%, compared with the industry’s average of 7.1%.



Entergy, to some extent, depends on the wholesale power market for its financial performance. Price fluctuations in wholesale power markets could be a growth deterrent until the company completely exits this space in 2021.

Zacks Rank & Key Picks

Entergy currently has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in this space include Ameren Corporation AEE and Exelon Corporation EXC. Both the companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ameren’s 2017 estimates improved 0.4% to $2.77 from $2.76 over the last 60 days. Shares of the company gained 19.5% in the last 12 months, outperforming the broader industry.

Exelon’s 2017 estimates inched up 2.3% to $2.62 from $2.56 over the last 60 days. Its shares gained 25.7% in the last 12 months, outperforming the broader industry.

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