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Morningstar | Entergy Announces Sale of Last Merchant Nuclear Site; Path to Fully Regulated Utility Is Now Clear

We are reaffirming our $98 per share fair value estimate for Entergy after it announced an agreement to sell the three nuclear units at Indian Point in New York to a Holtec International subsidiary for decommissioning.

We expected an announcement after Entergy management indicated during its 2018 year-end earnings conference call on Feb. 20 that they expected to complete an agreement before year-end. Entergy plans to shut down Unit 2 in April 2020 and Unit 3 in April 2021. The sale likely will close in the third quarter of 2021 after Unit 3 is defueled. Unit 1 has been shut down and in safe storage since the early 1970s.

We expect the deal will receive the necessary approvals and support from the Nuclear Regulatory Commission, New York regulators, and New York Gov. Andrew Cuomo, who pushed to close the plant. We believe the NRC and New York will find a proposal similar to Entergy's decommissioning deals involving two other nuclear plants, Vermont Yankee and Pilgrim, very attractive.

The Northstar Group, a Holtec competitor, committed to decommissioning the Vermont Yankee plant in 10 years, 45 years less than Entergy planned. Holtec has committed to decommissioning the Pilgrim plant by 2027 if it receives approval of its interim spent fuel storage site in New Mexico and can transfer the spent fuel to this facility. Entergy planned to place the spent fuel in dry storage at Pilgrim until 2080.

If the transaction is similar to the Pilgrim agreement, we expect Entergy to de-risk its Indian Point nuclear decommissioning trusts. The cumulative assets of the three NDTs were greater than the estimated asset retirement liabilities at year-end 2018 and likely benefited from the strong first-quarter market performance. The transaction should generate a small amount of cash for Entergy but result in a noncash financial loss on its $265 million net investment as of year-end 2018.

Management indicated in February that they expect the exit from their merchant nuclear business to be cash-flow-positive. The Palisades Nuclear Plant is Entergy's last merchant nuclear plant without a decommissioning deal. It is 99% hedged through its May 2022 shut-down date. We have a high level of confidence that the exit will be cash-flow-positive based on the Indian Point announcement and the recent strength of equity markets on the NDTs.

For more detail, see our report "Entergy on Path to Remove Nuclear Plant Albatross."