Tuesday, March 26, 2013

Vermont Yankee Financial Analysis: The Write-Down and More

Vermont Yankee : Value Written Down from $518 Million to $162 Million 

In April of 2012, Entergy wrote down the value of the Vermont Yankee power plant from $517 million to $162 million.  Andrew Stein's article at Vermont Digger provides a summary of events and speculation, and many useful links: Entergy document cites drastic fall in value of Vermont Yankee nuclear power plant, raising questions about its viability.

The Stein article is well-written and well-referenced, but I found aspects of it confusing.  I decided to put together my own timeline and some comments.

April 2012: Entergy writes down plant value.

Entergy  announced a "write-down" of the value of the Vermont Yankee plant in an earnings call on April 26. 2012.  For some reason, this was not widely reported.  I have files of "important articles" and I can't find an article about this one.  I didn't blog about it--I wonder if I noticed it.

However, the Entergy announcement was picked up by some of the business news services. Here's Yahoo Finance, April 26, 2012 Entergy swings to loss on write-down, warm winter.

Personal Comment: When I worked for a major software company at one point, I came in to work one morning and discovered that our earnings call the day before had shown a loss of (I think) $200 million dollars on revenues of (?) $100 million for the quarter.  I was terrified.  Did I still have a job?  Were we on the brink of folding?  Massive lay-offs ahead?

The old-timers reassured me that if the company had a moderately bad quarter, it would take every write-off it could take, that same quarter, and things would look terrible. But they weren't terrible.  They weren't good, but the company was just setting up so that nothing would get in the way of the next quarter, which would look like a spectacular rebound.

If you note, in the Entergy call above, they were showing less earnings because of a warm winter.  Here's an article today by an analyst at Seeking Alpha, Natural Gas Prices Bode Well for 2 U.S. Producer Chesapeake Energy.  Here's a brief quote: From the April 20, 2012 natural gas price nadir of $1.90/Mcf, natural gas prices have risen to $3.96/Mcf today March 25, 2013. That's more than double.  In other words, if you had an asset that whose value depends partially on natural gas prices, since April 2012 was the low point for natural gas prices, it was a great time to take a write-down.

By the way, I am NOT an investment advisor of any kind.  I know some things about energy, but only a little about corporate decision making such as write-downs.

November 2012: Entergy Files with the Security Exchange Commission 

In November 2012, Entergy filed a letter with the Securities and Exchange Commission, which referenced the VY write-down.  Stein at VTDigger links to this letter, and here's the link (caution--it's a long document,  and may be slow to load). Most of the summary material that concerns Vermont Yankee is on page 12 and following: Entergy Wholesale Commodities (mostly the nuclear plants).  Page 14 shows the Asset Impairment figure (write-down of Vermont Yankee value).   Page 16 shows that the net revenue for the nuclear fleet decreased from $1,541 million to $1,391 million (2011 to 2012) or about 10%. Page 17 shows revenue per MW decrease from $55.20 to $49.84 in the same time period.  (Remember, however, that 2012 was the nadir for natural gas prices, which have since doubled, bringing electricity prices up with them.)

Personal Comment: In looking through the rest of this report, I cannot see any reason to believe that the nuclear plants were operating at a loss in 2012, though they certainly were not making big a profit as they made in 2011 (or that they will make with rising gas prices in 2013).  Entergy's forward-looking guidance for the nuclear plants is on page 28 and looks profitable, to me at least. However, I am not a financial analyst, and I welcome reader input on this issue.

January 2013: UBS Analyzes Entergy and Says that Vermont Yankee is vulnerable to closure

Once again, there is a well-referenced article by Andrew Stein at Vermont Digger on the UBS Analyst report, which includes a link to the report itself. Page 4 includes a chart showing the nuclear fleet as contributing to Earnings Per Share (EPS) for the next five years.  It also refers (same page) to the "recent rally" in natural gas prices, but seems to think that ISO-NE and FERC will alleviate "the perceived supply constraint."

Personal Comment:  This UBS report does not mention the asset write-down of VY.  It also seems to claim that the rise in natural gas prices are a glitch, easily remedied by ISO-NE action.  In my opinion, it is not easy to get a pipeline built in the Northeast.  I think the analyst doesn't live around here!

I expect natural gas prices to rise overall, and especially here.  Supporting this,  I recommend the Seeking Alpha analysis linked above.  I also recommend Vermont Electric Cooperative CEO's Hallquist's guest post on my blog about natural gas, wind and the grid.  I recommend Matt Wald of the New York Times article about gas prices: In New England,  A Natural Gas Trap.  I am not a financial analyst, but even to me, this UBS analysis seems very incomplete. The overall rise of natural gas prices is not just a "perceived supply constraint."

Note: Yes, I know am not up to March 2013 yet in this analysis.  But this post is long enough.  I will do another one soon--January to March.

Postscript:  I have a post up today at ANS Nuclear Cafe about Framing the Discourse.  It describes nuclear opponents "framing" and word-choice, and calls for short frames written by nuclear advocates.  I will write a post about this on my own blog in a few days, but right now, I hope people will submit a lively comment stream of frames at the ANS blog.   Stop by the ANS Nuclear Cafe post and add your two cents (actually, add your five words).

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