In evaluating the spin-off and related transactions, the central question is whether the acquisition by Enexus of controlling interests in Entergy Nuclear Vermont Yankee, LLC (EVY) and Entergy Nuclear Operations, Inc. (ENO) promotes the public good.
EVY and ENO were issued a Certificate of Public Good for EVY to own and ENO to operate the VY Station. There are few more important public trusts than that assumed by the direct and indirect owners of nuclear power plants to ensure their competent and reliable operation and decommissioning. The financial capabilities and resources of the owner are an important consideration, along with technical knowledge, experience, ability and managerial competence.
When it comes to the transfer of ownership of a nuclear power plant, the Public Service Board regards the relative financial capability and resources of the new owner as compared with the current owner as a more important consideration than it may be in the context of other acquisitions, particularly in light of the capital-intensive requirements of reliably operating and maintaining a nuclear plant.
In this case, the relative financial capability of Enexus as compared with Entergy to support EVY and to make necessary investments to ensure the reliable operation of the VY Station is central to the Board's review.
The purpose of the spin-off is to separate the ownership and business operations of six merchant nuclear plants, including the VY station, from the rest of Entergy through a distribution of Enexus common stock to Entergy's stockholders. Three of the other five plants are located in New York, one is in Massachusetts and one is in Michigan.
No one disputes that Enexus will be a smaller and less diversified parent corporation than Entergy now is. Enexus will have fewer assets, less revenue, and less income. Its core business will be the sale of power generated by merchant nuclear plants.
While the focus of Enexus on merchant nuclear power may be attractive to potential equity investors, the dependence of Enexus on a non-diversified revenue stream from six 34-to-39-year-old nuclear plants is a source of concern in assessing the public good for Vermont.
What raises even more concern is the anticipated non-investment-grade credit rating of Enexus and the amount of debt and the degree of leverage Enexus will assume as part of the spin-off to fund payments to Entergy. All these factors create potential constraints on Enexus' relative ability to support the VY Station as compared with Entergy.
The petitioners argue that not only will Enexus “be financially strong but that it will be better able to deploy its substantial financial and other resources to the VY station” and its other facilities because of its core business focus on the operation of merchant nuclear plants and because of various support arrangements that would be available to EVY and the VY station.
A core business focus on the operation of merchant nuclear plants by its ultimate parent company may have some benefits for the support of the VY station, but it is not at all apparent how real or significant those benefits would be or how to weigh them against the benefits of having a parent company with more assets and a larger and more diversified cash flow, revenue and income stream.
The need to demonstrate tangible benefits is heightened even more when considering the risks associated with a parent company that is expected to have a non-investment-grade credit rating and a significant debt burden to service following the Spin-off. Financial and economic developments since the July 2008 technical hearing in this docket have elevated the Board's concerns about such risks.
Many of the concerns associated with a financially weaker parent company could be overcome by strong support arrangements that ensured that funds for reliability investments at VY Station would both be available and would be certain to be drawn upon when needed.
However, based on the petitioners' own interpretations of contemplated support arrangements, it appears that the actual benefits of some of the most important of these proposed arrangements are largely illusory in the parent-subsidiary context.
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The petitioners have ameliorated some concerns. And the petitioners also correctly point out that Entergy's regulated utility business imposes constraints on its ability to support its merchant nuclear business.
Yet, in the end, the petitioners have not met their burden of demonstrating that the proposed actions are in the public good. Demonstrating that ownership by a spun-off Enexus may not be as risky as one may fear is not the same as demonstrating that such ownership is less financially risky and more beneficial than the current ownership structure.
Given the relative financial strength of Enexus, its anticipated credit rating, the amount of its debt leverage, its debt service and refinancing needs, and the many uncertainties related to its future business and the financial environment in which it will operate, the Board is unable to conclude that Enexus will be as capable as Entergy of providing financial support to EVY as necessary to fund investments and maintain the reliable operation of the VY Station. Overall, there is more potential risk, more uncertainty and less potential benefit for Vermont in approving the proposed actions than in denying approval.
Even the petitioners do not contend that Enexus will be as financially strong as Entergy. Their argument portrays Enexus as a financially strong and focused parent company, but one that relies heavily on improved financial support arrangements for EVY to make the case that the spin-off and related transactions will promote the public good.
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In summary, the petitioners have not demonstrated that an acquisition of a controlling interest in EVY by Enexus will promote the public good.
In particular, the board has significant concerns about the relative financial strength of Enexus, its anticipated credit rating, the amount of its debt leverage, its debt service and refinancing needs, and the adequacy of proposed support arrangements. These concerns are heightened by uncertainties related to the future business and the financial environment in which Enexus will operate.
Based on these considerations, Enexus may be less capable than Entergy of providing financial support to EVY as necessary to fund investments to maintain the reliable operation of the VY station.