Entergy Spinning Off Nuclear Operations (ETR)

Entergy Corp. (NYSE:ETR) is trading up over 2% right after the open.  The power utility reported earnings, but perhaps even bigger than earnings is the news that the $24 Billion market cap power company is spinning off its nuclear operations.

On Nov. 3, 2007, Entergy’s Board of Directors approved a plan to pursue a separation of the non-utility nuclear business from Entergy’s regulated utility business through a tax-free spin-off of the non-utility nuclear business. SpinCo, the term used to identify the new company yet to be named, will be a new independent publicly-traded company. In addition, SpinCo and Entergy Corporation intend to enter into a nuclear services joint venture, with equal ownership.

Entergy Nuclear earned $160.9 million, or 80 cents per share, onas-reported and operational bases in third quarter 2007, compared to$106.9 million, or 50 cents per share, in third quarter 2006 foras-reported and operational earnings. The improved results in thirdquarter 2007 came from increased revenues from pricing and theproduction available from Palisades, acquired in the second quarter ofthis year, and the positive effect of a lower tax rate in the currentperiod. Partially offsetting this increase was reduced production as aresult of additional unplanned outage time at Vermont Yankee. Inaddition, Palisades entered a planned refueling outage on Sept. 9,2007. There were no refueling outages in third quarter 2006.

Entergy Corporation’s shareholders will own 100% of the common equityin both SpinCo and Entergy. SpinCo’s business is expected to consist ofthe non-utility nuclear assets, including the Pilgrim Nuclear Stationin Plymouth, Mass., the James A. FitzPatrick and Indian Point EnergyCenter plants in Oswego and Buchanan, N.Y., respectively, the Palisadesplant in Covert, Mich., and the Vermont Yankee plant in Vernon, Vt.,and a power marketing operation. Entergy Corporation’s business willconsist of the current five regulated utility operating subsidiaries,System Energy Resources, Inc., the related services subsidiaries SystemFuels, Inc., Entergy Operations, Inc. and Entergy Services, Inc., andthe remaining Entergy subsidiaries. The newly-created joint venture isexpected to operate the nuclear assets owned by SpinCo. The jointventure is also expected to offer nuclear services to third parties,including decommissioning, plant relicensing and plant operations forthe Cooper Nuclear Station and others.

The joint venture operating structure for SpinCo ensures that the corenuclear operations expertise currently in place at each of thenon-utility nuclear plants will remain after the spin-off. EntergyNuclear Operations, Inc. will supplement its application filed July 30,2007 with the Nuclear Regulatory Commission, seeking indirect transferof control of the operating licenses for the non-utility nuclear fleet,to incorporate the planned business separation. Entergy NuclearOperations, Inc., the current NRC-licensed operator of the non-utilitynuclear plants, would remain the operator of the plants after theseparation. Entergy Operations, Inc., the current NRC-licensed operatorof Entergy’s utility nuclear plants, will also remain in place as awholly-owned subsidiary of Entergy and will continue to be the operatorof the utility nuclear plants. The decision to retain the existingoperators for the nuclear stations reflects Entergy’s commitment tomaintaining safety, security and operational excellence.

M&A and private equity’s appetite to chase anything and everythingunder the sun may have diminished drastically, but ‘other’ special situation investing in spin-offs, break-ups, reorganizations is heating back up.  You can sign up for a trial to the 24/7 Wall St. Special Situation Investing Newsletter.

Jon C. Ogg
November 5, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.