Louisiana based Entenergy Corp is the second-largest nuclear generator in the United States. Its energy portfolio includes ten nuclear power plants, five of which it hopes to spin off to create America’s first pure nuclear energy company. But borrowing difficulties may derail these plans.
Entergy’s classic spin off structure would create a new company, Enexus Energy Corporation which would then borrow over $4bn to purchase the five nuclear reactors in New York, Vermont, Massachusetts and Michigan. Shares in Enexus would then be given to Entergy shareholders, who are free to sell or keep them.
This is a pure-play transaction hoping to free up nuclear cash flows and allow for easier borrowing. Investors will be able to price the two companies better separately, and invest in Nuclear energy without investing in Entergy’s slower growth holdings. But analysts predict difficulties in borrowing the $4bn due to the credit crunch.
“With the bond markets in disarray, the ability to consummate the spin under this scenario is questionable,” wrote Citigroup analyst Greg Gordon. With the five nuclear plants being Enexus’s only assets, their cash flows must be greater than the debt payments. An increase in the borrowing rate or unsteady cash flows could lead to default.
Sen. Peter Shumlin, D-Windham, president pro tempore of the Senate is calling out this risk: ”There’s no doubt that [tax payers of Vermont] will end up holding the financial bag if Entergy is successful in pocketing $4 billion for the stockholders and spinning these old nuclear plants to a new, highly leveraged entity… This is a junk-bond rated company.”
Junk-bonds, or high yield bonds, have suffered badly in the last few weeks. But the domestic energy gap could lead to an increase in nuclear interest as evidenced by Warren Buffett’s investment in Consteallation Energy and the sale of Advanced Power, a power station developer backed by private equity group 3i.
The The Nuclear Regulatory Commission has already approved the change, but regulators in Vermont and New York also must approve it. The outcome of the deal could be a barometer of the market’s confidence and recovery.
“We know what’s going on in the market,” said Jim Steets, spokesman for Entergy Nuclear. “But we expect that we are going to be complete the financing necessary for the spin-off by the end of the fourth quarter.”
Even if the sale falls through, issuing targeted stock could be a cheaper, easier way for Entergy to attract capital for its nuclear plants. Clearly, nuclear energy in America is gaining momentum after decades in Europe’s shadow.
