Enexus plans mired in gobbledygook

Bob Audette

Oct. 22, 2009 (McClatchy-Tribune Regional News delivered by Newstex) -- BRATTLEBORO -- It's next to impossible for someone without an MBA to understand the financial maze behind Entergy's (NYSE:ETR) plans to spin off Vermont Yankee nuclear power plant into a new company.

The paperwork submitted to Vermont's Public Service Board, which must issue a certificate of public good for the spinoff to be effective in the state, is filled with terms such as letters of credit, senior secured credit facilities, pari passu, collateral agents, indenture of debt securities, commodity hedging transaction, lien-based credit support structures, revolving lines of credit and support agreements.

Entergy has proposed to spin off five of its merchant nuclear power plants into Enexus, "a completely independent company on the day of the spin," according to an e-mail from Michael Burns, Entergy's senior communications specialist for corporate and national media relations.

Those power plants include Yankee in Vernon, Pilgrim in Massachusetts, Indian Point and Fitzpatrick in New York and Palisades in Michigan, which are considered merchant plants because they sell power directly to the market without state price regulation.

In the Burns e-mail, Entergy's financial experts attempted to explain the spinoff in ways that one not versed in convoluted financial transactions can understand.

"Entergy is relinquishing all ownership rights in six very valuable nuclear units that have the capacity to produce significant earnings and cash for many years to come,

assuming license renewal," stated Paul LaRosa, Entergy's director investor relations, in the e-mail.

Entergy is not issuing stock to pay off its debt, stated Alex Schott, senior communications specialist for Entergy. It is issuing $3.5 billion in debt prior to the spinoff which will be swapped for $3.5 billion in debt issued by Enexus.

The debt issued by Enexus is in the form of debt securities, which are also known as a fixed-income security -- any financial instrument "that can be bought or sold between two parties and has basic terms defined, such as (the amount borrowed), interest rate and maturity/renewal date," according to investopedia.com.

Holders of debt securities receive interest, which is largely determined by the perceived repayment ability of the borrower, according to investopedia.com.

Enexus' $3.5 billion in debt will come in the form of $2 billion in debt securities issued to Entergy shareholders and $1.5 billion issued to third-party investors.

Entergy keeps the $3.5 billion of cash raised through Enexus' debt issuance "essentially as payment for the spin of the plants to Enexus," stated Schott.

That cash will be used "to reduce outstanding Entergy debt, repurchase Entergy shares or for other corporate purposes," wrote Burns.

In its memorandum of understanding with the Vermont Department of Public Service, Enexus agreed to a number of conditions to receive a positive referral from DPS to the Public Service Board.

Enexus has secured a $1.175 billion credit agreement with investment firms such as Goldman Sachs (NYSE:GS) , Citigroup (NYSE:C) Global Markets, BNP Paribas, the Bank of Novia Scotia and Mizuho Corporate Bank. In 2011, Enexus has the option of increasing that credit agreement by up to $500 million if needed.

That credit agreement will be used to back many of those conditions agreed to in the memorandum of understanding.

They include a $100 million line of credit to be used to make upgrades and repairs that guarantee the reliability of the plant. Enexus also agreed to a $50 million letter of credit if it falls below investment grade, where it is now rated. That letter of credit has to be maintained as long as Enexus is below investment grade.

Enexus also agreed to provide a $700 million support agreement, which can be used by any of its plants for operating expenses to maintain the plant, to protect the public's health and safety and to meet Nuclear Regulatory Commission requirements.

Enexus will also supply a $60 million letter of credit to fund operations at Yankee following the cessation of operations there.

All of the debt will be guaranteed by the assets of the plant, which include the physical facilities themselves and the revenues from electric generation.

"Enexus will be more than debt," stated Burns. "The units are significant assets and have provided and are expected to continue providing substantial cash flow and net income."

The promises will be backed up by the cash the business generates and the access to funds from the money Enexus will have the day after the transaction is completed, he said.

"Enexus will have sole access to the earnings and cash produced by these assets going forward and the financial strength inherent in the ownership of valuable assets such as these plants is what provides Enexus the ability to honor its commitments in all the states in which it operates," stated LaRosa.

Bob Audette can be reached at raudette@reformer.com, or at 802-254-2311, ext. 273.

Newstex ID: KRTB-0475-39069915