Entergy’s choice to close Pilgrim Nuclear will boost profits, Moody’s says

Pilgrim_nuclear PEPWR

Last Tuesday, Entergy Corp. (Baa3 positive) announced that it will close its 680 MW Pilgrim Nuclear Generating Station in Plymouth, Massachusetts, no later than June 2019.

The decision was driven by low energy prices, increased operational costs and murky prospects of market structure improvement. The announcement is credit positive for Entergy because Pilgrim’s increasing cost structure and low power prices would otherwise erode profitability, and the closure will reduce Entergy’s merchant generation exposure and improve the company’s business risk profile.

Entergy will decide the exact timing of the Pilgrim shutdown in the first half of 2016, after ongoing discussions with the independent system operator for New England, ISO-NE.

Several factors were behind Entergy’s decision to close Pilgrim. In September 2015, the Nuclear Regulatory Commission downgraded Pilgrim to a Column 4 in its Action Matrix, the lowest designation allowed for plants still in operation.

A preliminary estimate of pre-tax operating and maintenance expense (O&M) necessary to respond to enhanced NRC inspections, if Entergy had chosen to continue operations instead of shutting down Pilgrim, is $45-$60 million.

This estimate does not include additional capital investments or other costs that could have emerged from keeping the plant running. Entergy expected the increased O&M, coupled with capital investments to improve reliability, security and safety, to result in annual after-tax net losses of up to $30 million annually through 2017.

The announcement of Pilgrim’s target closure follows Entergy’s sale of its 583 MW natural gas-fired combined cycle gas plant, The Rhode Island State Energy Center, to Carlyle Power Partners (unrated) for about $490 million. Entergy also shut down the 605 MW Vermont Yankee nuclear power plant at the end of 2014, which also operated in ISO-NE.

These decisions, along with the planned shutdown of Pilgrim, allow Entergy to avoid potential incremental operating costs, reduce its exposure to merchant generation uncertainties and improve its business risk profile.

Entergy’s unregulated generation exposure consists of about 5.5 GW of generation capacity, through its unit Entergy Wholesale Commodities (unrated), the bulk of which is comprised of 4.4 GW of nuclear plants geographically concentrated in the Northeastern US. These plants, which were once profitable, are threatened by low current and forecast energy prices, driven in part by shale gas production.

Although Entergy could benefit from some form of political intervention aimed at maintaining jobs and the tax base associated with the plant, we view Pilgrim as less critical to the employment and tax base of the city of Plymouth than some other challenged generation plants that we have analyzed.

For example, Pilgrim’s 600 employees only compose around 1 percent of the city’s population and tax payments are just over 5 percent of the city’s operating revenue. By way of comparison, Entergy’s James Fitzpatrick Nuclear Plant, a similarly challenged 850 MW plant in Oswego, New York, contributes around 27 percent of local tax revenues.

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