Despite regulatory approval through 2032 and investments worth $400 million over the last 10 years, Entergy Corp. (ETR - Free Report) intends to shut down its Vermont Yankee nuclear power plant in the fourth quarter of 2013.
This crucial decision came on the wake of shale gas induced supply glut that has lowered the wholesale energy prices, high costs for the plant relative to its size, and wholesale market design flaws that led to artificially low energy and capacity prices in the region.
Entergy has sufficient time to properly plan for a safe and orderly shutdown and prepare filings with the Nuclear Regulatory Commission regarding shutdown and decommissioning. The company plans to set up a decommissioning planning organization that will be responsible for planning and execution for efficiently dismantling the facility. Post shut down, the workers will de-fuel the reactor and place the plant into SAFSTOR. This is a process under which a nuclear facility is placed and maintained in a condition that allows it to be safely secured, monitored and stored.
The plant had begun commercial operations in 1972 and was acquired by Entergy in 2002 from Vermont Yankee Nuclear Power Corp. In Mar 2011, NRC had renewed the station's operating license for an additional 20 years until 2032.
Post shut down, Entergy expects to incur an after-tax impairment charge of approximately $181 million in third quarter of 2013. Going forward, the company expects to incur charges in the range of $55 million to $60 million related to the future severance and employee retention costs through the end of 2014.
The company expects operational earnings from the plant to breakeven in 2013 and decline going forward. Moreover, the company expects cash flow to increase approximately in the range of $150 million to $200 million through 2017. The amount required to meet the NRC minimum for decommissioning financial assurance for license termination is $566 million.
We note that tightening regulation, shale gas induced supply glut and a sluggish economy have put tremendous pressure on the power companies with significant exposure to coal and nuclear power, resulting in a series of recent high-profile nuclear plant closures.
Last month, FirstEnergy Inc. (FE - Free Report) announced to cease operations at the Hatfield’s Ferry Power Station in Masontown and Mitchell Power Station in Courtney. The decision comes in the wake of more stringent environmental policies being implemented in the U.S. Earlier in June, Edison International (EIX - Free Report) decided to permanently shut down Units 2 and 3 of its San Onofre Nuclear Generating Stations in Calif. as a result of mounting maintenance charges along with regulatory impediments and investigations faced by the company.
However, natural gas prices might not stay as low as they are today. Per the U.S. Energy Information Administration, supply growth has begun to rise and if this continues, the closure of the plant would act as an upside for the companies like Exelon Corp. (EXC - Free Report) which is the largest operator of commercial nuclear plants in the U.S.
Entergy is well positioned due to its geographically-diverse mix of regulated and merchant operations, along with strong balance sheet. However, price fluctuations in the wholesale power markets and pending regulatory cases remain matters of concern. The company presently retains a short-term Zacks Rank #3 (Hold).