What if a third of the power supply for an entire US state were suddenly shut off? Would its residents find themselves in the dark, as they do routinely in developing nations?
Vermonters may find that out as soon as March 2012, when the Vermont Yankee nuclear plant’s operating license runs out. One of the oldest nukes in the nation, Vermont Yankee is owned and operated by Entergy Corp (NYSE: ETR), the giant Mid-South-based electric utility that’s also America’s second-largest operator of nuclear power plants.
Over the past decade-plus Entergy has acquired nuclear plants in four states outside its Arkansas/Mississippi/Louisiana/Texas base. The company has dramatically improved the plants’ safety and operating performance, including at Vermont Yankee. That’s enriched shareholders and provided low-cost power to the wholesale markets in those states, holding down rates to consumers.
For the past several years the company has systematically re-licensed its plants, winning almost routine approvals from state and federal regulators. Vermont Yankee is next up, with the company applying for another 20 years to 2032. Like the other nukes, that process that requires approval from the Nuclear Regulatory Commission (NYSE:NRC). But uniquely, it’s also required the OK from the Vermont legislature, under a prior deal struck by the company to store waste on site.
This week the Vermont state senate dealt at least a temporary setback to Vermont Yankee re-licensing, voting 26 to 4 to reject it. The vote was in response to the furor over the appearance of the element tritium in sample water wells on the plant’s site and the company’s admission that it’s uncovered leaks in its underground piping system. Tritium has been shown to increase the risk of cancer, and critics have accused Entergy of misleading state officials on the risks at the plant.
Rejection by the state senate doesn’t necessarily doom the Vermont Yankee to closure in 2012. Vermont’s upper house can take up the issue again in the future, at which time the company may well have resolved its tritium challenge, and more importantly its public relations problems. Governor Jim Douglas and the state’s utilities are major proponents of relicensing, and so is the NRC.
Entergy CEO Wayne Leonard addressed the Vermont Yankee situation during the company’s fourth-quarter earnings conference call, indicating the governor’s call for a “timeout” on relicensing efforts. That seemed to indicate at least a tacit agreement between the governor and the company to allow investigations to be completed and give Entergy time to “restore trust and credibility,” i.e. to repair what had become a severe public relations problem.
My view is that Governor Douglas will be able to work a deal to get the Vermont legislature to approve re-licensing and extend the plant’s operations several more decades. For one thing, the stakes are too high for the state to abandon a plant that not only provides more than a third of its electricity but is also its lowest-cost source, by far, of energy--particularly during a recession.
To be sure, power could be replaced with a combination of out-of-state purchases, conservation measures and renewable energy construction. Unfortunately, though they’re very popular, renewables and conservation can in no way make up more than a sliver of what’s needed, particularly given the ridiculously short deadline of two years.
That leaves massive purchases from out-of-state producers to pick up the slack. That would tighten up the power market in New England quite dramatically, a huge plus for the region’s biggest producer, Dominion Resources (NYSE: D). But it also means sharply higher prices for electricity in Vermont, as such purchases will be made at much higher prices than the below market rate Vermont Yankee is currently locked into until March 2012. And the cost of new wind and solar would be several times higher.
Of course, Vermont has that reputation of being so green that its residents will be willing to take that hit, in the name of shutting down an allegedly dangerous nuclear power plant. And judging from the media coverage of the proceedings, that’s exactly what at least a very vocal minority of its residents want to see.
Overcoming that will be a major hurdle for Governor Douglas. Then there’s the fact that Entergy says it hasn’t been covering its cost of capital to operate the plant and could shut it down without taking a hit to earnings. To date, those comments have almost certainly been little more than a bargaining chip for the company in its negotiations to fetch a higher price for Vermont Yankee’s output after relicensing. But it’s also a pretty clear signal from management that it will not accept a sharply lower return on its investment in the plant just to keep it open--which is likely the easiest way to get state politicians to agree to keep it open.
The most likely scenario is for a deal to be worked out to keep Vermont Yankee open and selling power at a price that keeps electricity rates steady for Vermonters and also allows Entergy a reasonable return. But such an outcome is by no means certain. Consequently, it makes sense for investors to take stock on the likely winners and losers, depending on how this plays out.
Obviously, the company in the bull’s-eye of this situation is Entergy. As noted, the utility has been effectively losing money running Vermont Yankee the past several years. And the cost of keeping the plant running past 2012 will almost surely be making what could be major upgrades to infrastructure to settle concerns about potential tritium leaks.
As anyone who has followed the nuclear industry knows, operators of plants have borne a heavy burden of proof in the US since the Three Mile Island accident in 1978. And despite the vastly improved safety record of the industry--thanks mainly to dramatic consolidation of ownership over the past 10 to 15 years--the level of distrust still runs very deep among some Americans.
As I’ve pointed out in this space, the Obama administration--with Energy Secretary Stephen Chu as point man--is now aggressively pushing the construction of new nuclear power plants in the US as a way to increase energy independence and reduce carbon dioxide (CO2) emissions from burning fossil fuels. In fact, anyone with a calculator and a basic knowledge of decimals can clearly see that only nuclear is capable of producing enough megawatts (MW) to replace a meaningful amount of coal anytime soon.
Nuclear power, however, is still an intensely emotional issue in some quarters. That’s why greenfield development is virtually out and why the only new nukes in this country for the next decade at least will be on sites of existing plants, such as the Vogtle site in Georgia being developed by Southern Company (NYSE: SO) and its partners.
Nuclear emotionalism makes it almost a sure thing that Entergy will have to bend to get re-licensing approval for Vermont Yankee. The company, however, is motivated in one way to make a deal, mainly if re-licensing is coupled with approval of its plans to spin off the six reactors it holds outside of its core Mid-South territory as a separate entity dubbed Enexus.
In the works now for well over a year, the Enexus spinoff has won all needed regulatory approvals except Vermont and New York, where regulators continue to delay their decision. Enexus would remain majority owned and operated by Entergy, with shares dished out to current Entergy shareholders. The new company would have about 5,000 (MW) of capacity serving unregulated markets in Massachusetts, Michigan, New York and Vermont. It’s also announced plans to buy more plants after the spinoff to boost its scope and reduce financial and credit risk.
When the Enexus spinoff was initially announced, Entergy stock was bid up to $120 a share. Since then, the financial markets turmoil and regulatory delays have reduced the perceived value of the new company sharply. In fact, with Entergy shares now selling for less than $80, the market value of a future Enexus is arguably less than zero, particularly considering the improving prospects of the regulated Mid-South utility operation.
The lack of perceived value for Enexus means that risk to Entergy shares from a complete failure of the spinoff is basically nil. The same goes for the risk of a closure of Vermont Yankee, which management confirmed in its fourth quarter conference call by stating that such a move would not have a “significant impact on earnings.”
That leaves only upside for Entergy shareholders at this point. If Vermont Yankee is re-licensed and the company strikes a power sales deal with the state’s utilities, the Enexus spinoff can move ahead and the plant will begin adding to profits again. That, in turn, will lift the earnings and market value of both Enexus and Entergy. If no deal can be reached and Vermont Yankee is shut, the Enexus spinoff can still go through. And, because profits will be little affected, the market value will hold up as well.
The only way Entergy shareholders can be hurt is if Vermont’s actions are copied by other states. Even this, however, shouldn’t have any real impact, as the federal government remains supportive of re-licensing efforts, and other states don’t have veto power--this includes New York, where the Indian Point nuke remains controversial with some voters.
If Vermont does wind up shutting Vermont Yankee, it would tighten up power markets throughout the region. That would surely benefit Dominion Resources, which has considerable capacity in New England especially. We’d almost certainly see more imports from Canada, to the enrichment of power producers operating there such as Brookfield Renewable Power Fund (TSX: BRC-U, BRPFF).
As for the nuclear power industry in general, permanent closure of the Vermont Yankee plant would almost certainly galvanize die-hard activists around the country. But with most environmentalists far more concerned about rescuing CO2 reduction efforts--and the Obama administration avowedly pro-nuclear--they’re not likely to make much headway elsewhere.
The biggest potential losers are Vermont’s utilities, including Central Vermont Public Service (NYSE: CV), which are hugely dependent on purchases of energy from Vermont Yankee. The companies have been able to purchase power cheaply from the plant for over a decade as part of the deal under which they sold their ownership interests to Entergy. Losing that would dramatically ramp up their costs and force them to ask Vermont regulators to compensate, certainly no sure thing, particularly if the economy is still sluggish as they line up other sources.
Investors are best served avoiding the hot spots if possible--unless the risks are contained, as is the case with Entergy. But where new plants do get built, they’ll boost their owners’ earnings while locking in huge, long-term sources of power with no CO2 concerns and very low variable costs. That’s a winning formula to enrich investors for years to come.
Question of the Week
Here’s my answer to a question I’ve received from readers this week. Please send your queries to firstname.lastname@example.org.
- You list several stocks with five-letter symbols in your portfolio, some of which sport very attractive yields. Unfortunately, I can’t find any other source to back this up. Take CLP Holdings (OTC: CLPHY), for example. Yahoo! Finance says it pays no dividend. In fact, I’ve held this security for some time and have not received a dividend. What’s going on here?
Two things. First, a five-letter symbol generally indicates a stock that trades in the US on the pink sheets rather than a major exchange. That’s the case with CLP.
When I started in this business, trading on the pink sheets carried an extremely negative connotation. Quotes were actually printed out on sheets of paper that were the color pink. Trading was often by appointment only, and the majority of the companies listed were hardly substantial, if they truly existed at all.
I’d still be suspicious of most securities traded on the pink sheets. But there’s another group of companies traded over the counter (OTC) that are anything but fly-by-night outfits. That’s the growing number of foreign-based companies that have become fed up with US regulation, particularly since the passage of Sarbanes-Oxley following the 2000-02 bear market.
These companies, which include some of the oldest and strongest outfits in the world, have de-listed their securities from the New York Stock Exchange (NYSE) and other exchanges. As a result Americans can only buy them in their home markets, or they can buy those home market shares here in the US using the over-the-counter/pink sheets market.
CLP Holdings is actually one of the easiest of these to trade. The power producer’s home market is Hong Kong, where it trades under the prestigious symbol “2”. But it also still carries an American Depositary Receipt (ADR), traded as “CLPHY” in the US, where it’s done an average of roughly 25,000 shares trading daily for the past several weeks.
Unfortunately, if you look up CLP on Yahoo! Finance, you won’t find anything other than basic pricing information. And the same is true for every other OTC-listed company, including giant GDF Suez (FP: GSZ, OTC: GDSZF).
The reason certainly has nothing to do with risk. One of the world’s largest energy companies, France’s GDF Suez has a market capitalization of nearly $100 billion and has been around since the time of Napoleon Bonaparte. CLP’s not quite that big but is still sizeable at a $16.5 billion market cap.
It’s also a lot bigger and more substantial than the vast majority of US companies that are listed on major exchanges like the NYSE. Moreover, CLP’s three-year total return is 4.1 percent, more than 20 percentage points better than the S&P 500.
Clearly, where a stock is listed is no indication of risk. Rather, dividend and other information simply isn’t collected for OTC-listed foreign stocks in the US. To get it, you’ve got to go to a source that’s plugged into the home market.
That’s what we do in Canadian Edge. A growing number of Canadian companies, including income trusts that have converted to corporations, are either in the process of listing on major US exchanges or have already done so. However, an even larger number, including many of the most attractive for yield, are listed here only as OTC/pink sheets--and therefore don’t have dividend information posted at Yahoo! Finance and most other sources. CE’s How They Rate table provides live price quotes and dividend information, translated into US dollars for easy reference.
Will Yahoo! Finance and other quote services ever provide accurate dividend information for OTC-listed foreign stocks? Don’t count on it anytime soon. Americans certainly need to invest some of their money overseas now. It’s where the growth is, and it’s the best way to protect yourself from a decline in the US dollar--and there are now a number of brokerages that will help you.
On the other hand, some of the biggest brokerages apparently are actively discouraging foreign investment. One has even told its clients that it will no longer execute trades for investors who want to buy Canadian income trusts. That’s a firing offense in my opinion. But as long as investors let the big boys get away with it, they’ll keep doing it. After all, it’s another way to squeeze out profits in an otherwise tough market. But it will be difficult for some investors to get quote and yield information on foreign-listed securities traded OTC until they demand it.
Your second point about not receiving a dividend is more specific to CLP but also applies to most foreign stocks in general. Simply, most don’t pay dividends US-style, i.e. a set amount quarterly or every three months. Rather, they generally pay an “interim dividend” in the middle of their fiscal year, based on what they expect to earn for the full year. Roughly six months later they will then pay a “final dividend,” based on the full year’s profits. The notable exceptions are Canadians, many of which pay out regular monthly dividends.
As a result, it’s not uncommon to buy a foreign stock and not receive an actual distribution for several months. The tradeoff is you’ll get a half year’s worth of dividends when you do get paid.
In the case of your CLP shares, however, I suspect you have a problem with your broker. The company does actually pay four dividends a year to holders of its ADRs. Over the last 12 months, these have been on May 6, June 22, September 22 and December 22. The May payment was the largest, a total of 11.869 US cents per ADR, while the other three payments were 6.707 cents per ADR. The next payment is scheduled for May, at the same rate as the year ago level.
The ex-dividend dates--when you needed to own CLP to receive the next dividend--were April 14 for last May’s payment, May 29 for the June payment, September 1 for the September payout and November 30 for the December disbursement. Consequently, if you were holding CLP shares before Nov. 30, 2009, you should by now have received a dividend payment--and you have an issue with your broker. If not, look forward to your first payment in early May.
Race to the Summit
How best to ride this market? Join me and my colleagues GS Early, Elliott Gue, Yiannis Mostrous, and Benjamin Shepherd at the historic Hotel del Coronado for the 2010 Wealth Society Member Summit.
You’ll have the extraordinary opportunity to meet one-on-one with me, Elliott Gue, Yiannis Mostrous, Benjamin Shepherd and GS Early and ask anything you want about how to keep and grow your nest egg.
We’ll give it to you straight: the brightest trends and our best recommendations, and anything else you might want to know about how to profit in 2010 and beyond.
Space and time limit us to 100 participants, so mark the date on your calendar: April 23-24, 2010, in San Diego, where they say it’s 72 and sunny every day of the year. You may find all details at www.InvestingSummit.com. Better yet, call 1-800-832-2330 (between 9:00 a.m. and 5:00 p.m. EST Monday through Friday) or go online now to reserve your seat at the table.
Roger Conrad is Editor of Canadian Edge, Utility Forecaster, Chief Strategist of Portfolio2020, and Co-Editor of MLP Profits.
Disclosure: "No Positions"