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Early Retirement for Nukes

By Ari Charney on August 26, 2016

Among the features in the next issue of Utility Forecaster is an article giving the state of the union of the U.S. fleet of nuclear-power plants. Unfortunately, when it comes to nukes, the state of the union is poor.

One of the greatest indicators of how far nuclear power’s status has fallen is the fact that speculation over one well-known utility’s eventual retirement of the crown jewel of its nuclear fleet helped prompt an analyst upgrade.

Earlier this week, Guggenheim Securities boosted its rating on Louisiana-based Entergy Corp. (NYSE: ETR) to “Buy” from “Neutral,” which is equivalent to a “Hold.” The analyst also set a 12-month target price at $86.00, which suggests potential appreciation of 11.2% above the current share price.

Under normal circumstances, we don’t give a single ratings change all that much attention. After all, most companies have dozens of analysts tracking them. Indeed, Entergy currently has 22 analysts on Wall Street providing ratings and target prices for the stock.

The difference here is that Guggenheim’s bold call is the only unabashed “Buy” rating the stock has right now. By contrast, Goldman Sachs’ rating is a weaselly “Buy/Neutral,” which is especially confusing considering that the analyst’s target price, at $90, is even higher than the one set by Guggenheim.

The other 19 analysts who track Entergy currently rate it a “Hold,” while one analyst rates it a “Sell.” And the consensus 12-month target price is $82.63, which is about 6.7% above the current share price.

Though Guggenheim’s recommendation certainly stands out from the crowd, the fact that the analyst suggested that Entergy might retire its 2,100-megawatt Indian Point nuclear power plant, which supplies 25% of the New York metro area’s power, also caught our eye.

Entergy has been in a contentious battle with state and federal regulators, politicians, and local stakeholders over its bid for a 20-year license renewal of the plant.

Meanwhile, the utility has already shuttered a substantial portion of its nuclear fleet and has plans to retire or divest most of the rest of it. At one point, Entergy’s fleet of nuclear power plants had a nameplate capacity of 10,000 megawatts, making the company the second-largest nuclear operator in the U.S.

But turning away from nuclear should ultimately be a good thing for Entergy. That’s because its nuclear fleet primarily sells power into volatile wholesale markets, which were already depressed even before the energy crash deepened their downturn.

Cheap natural gas and regulatory momentum toward renewables could further upend wholesale-market dynamics that once made nuclear power a cash cow for utilities.

Although nuclear plants technically generate zero carbon emissions, U.S. policymakers have offered the industry few carrots in recent years, perhaps in part due to fresh memories of the Fukushima Daiichi disaster in Japan.

Despite its merchant-generation woes, Entergy’s regulated utilities are steady eddies. And while the nuclear fleet has been an earnings drag in recent years, its share of the company’s total revenue is now just 16.9%.

Even with the negatives of its nuclear fleet, yield-hungry investors have pushed Entergy shares up 26.2% over the trailing year. The stock yields an attractive 4.4%, and management finally boosted the dividend late last year after a five-year hiatus.

Also of note, Entergy’s valuation is still well below that of the average utility. And while its earnings are expected to decline sharply in 2017, in part due to one-time items that helped inflate earnings this year, Entergy’s future valuation multiples are still well below that of many of its peers.

In fact, that cheap valuation and a shift toward a fully regulated fleet is what truly drove Guggenheim’s upgrade. As for us, we’re still on the fence right now, even if the market doesn’t share our caution.

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