STATE OF VERMONT
PUBLIC SERVICE BOARD
Docket No. 7404
Petition of Entergy Nuclear Vermont Yankee,
LLC, and Entergy Nuclear Operations, Inc., for
Approval of an Indirect Transfer of Control of
Each Company, Consent to Pledge Assets,
Guarantees and Assignment of Contracts by
Entergy Nuclear Vermont Yankee, LLC, and
Amendment to the CPG of Entergy Nuclear
Operations, Inc. to Reflect a Name Change,
Replacement of $60 Million Guarantee with $60
Million Letter of Credit and Substitution of $700
Million Support Agreement for Two InterCompany Credit Facilities
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REDACTED VERSION
PREFILED REBUTTAL TESTIMONY OF
SETH G. PARKER
ON BEHALF OF THE
VERMONT DEPARTMENT OF PUBLIC SERVICE
July 10, 2008
Summary: The purpose of Mr. Parker’s testimony is to evaluate the financial issues
of Entergy Corp.’s proposed restructuring of its merchant nuclear generating assets
to determine if the transaction will promote the public good of Vermont residents.
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 1 of 17
PREFILED REBUTTAL TESTIMONY OF
SETH G. PARKER
ON BEHALF OF
THE VERMONT DEPARTMENT OF PUBLIC SERVICE
July 10, 2008
1
Q.
2
A.
Please state your name.
My name is Seth G. Parker.
3
4
Q.
the State of Vermont Department of Public Service (“DPS”).
5
6
Are you the same Seth G. Parker who previously filed direct testimony on behalf of
A.
Yes.
7
8
Q.
9
10
Has any information changed regarding your occupation, business address,
professional background, or experience since your direct testimony was filed?
A.
No.
11
12
Q.
13
A.
What is the purpose of your rebuttal testimony?
My Rebuttal Testimony responds to financial issues of the proposed
14
restructuring transaction contained in the Rebuttal Testimony filed by Wanda C.
15
Curry and Susan Abbott on behalf of Entergy Nuclear Vermont Yankee (“EVY”)
16
and Entergy Nuclear Operations, Inc., (“ENO” and collectively the “Petitioners”).
17
As with my Direct Testimony, LAI was retained by the DPS to determine whether
18
Entergy Corp.’s proposed restructuring of its merchant nuclear generating assets
19
will promote the public good of Vermont residents.
20
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 2 of 17
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Summary of Rebuttal Testimony
2
Q.
3
A.
Please summarize your Rebuttal Testimony in this matter.
My Rebuttal Testimony presents my findings and recommendations
4
concerning the financial strength and credit worthiness of Enexus Energy, the new
5
company that will own EVY and the other merchant nuclear generating plants. The
6
findings in my Rebuttal Testimony are consistent with the findings in my Direct
7
Testimony and can be summarized as follows:
8

Entergy Corp., the current owner of EVY and the other merchant nuclear
9
generating plants, intends to establish Enexus Energy with a speculative grade
10
credit rating in the BB range. The intended credit rating of Enexus Energy is
11
significantly below the BBB/Baa3 investment-grade credit rating of Entergy Corp.
12
In addition, Enexus Energy will have a smaller asset base, fewer revenues, and
13
lower net income compared to Entergy Corp., which is a large, diversified
14
company.
15

The justification for selecting a credit rating in the BB range is based on a cohort
16
group of exempt wholesale generators (“EWGs”) that own and operate merchant
17
generation plants with similar or lower credit ratings. However, those credit ratings
18
reflect the poor financial condition of these EWGs due to poor business decisions
19
and unfavorable market conditions over the past few years. Very few EWGs own
20
nuclear power plants, which have unique risks. On the other hand, almost all of the
21
owners of nuclear power plants have investment-grade ratings.
22

The NRC will have to approve the transaction, and will consider financial
23
information in its approval process. If Enexus Energy were to have an investment-
24
grade credit rating, the NRC would find the company “financially qualified” under
25
its own regulations. If Enexus Energy did not have an investment-grade credit
26
rating, the NRC would require additional financial information.
27
28

The financial health of Enexus Energy is important because Entergy Corp.’s
financial projections indicates that EVY Begin Confidential Information *******
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 3 of 17
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
3
Ms. Curry’s assertion that the $60 million letter of credit, which will replace an
4
existing $60 million guaranty from Entergy Corp., “will be available to fund six
5
months of VY Station costs” relies upon financial adjustments that have not been
6
adequately explained.

7
The “strategic, operational, and financial benefits” of the proposed restructuring
8
transaction claimed by Ms. Curry in her Prefiled Testimony and her Rebuttal
9
Testimony will accrue primarily to Enexus Energy and its shareholders, and not to
10
Vermont residents. Some of these claimed benefits may actually pose additional
11
risks to Vermont residents.
12
13
Q.
14
A.
What are your conclusions and recommendations in this matter?
My conclusions and recommendations in this Rebuttal Testimony are
15
consistent with those contained in my Direct Testimony and can be summarized as
16
follows:
17

I am concerned that Enexus Energy will have less financial ability than Entergy
18
Corp. to withstand adverse market changes, weather poor plant performance, or
19
fund unexpected capital expenditures under the intended capitalization strategy.
20

The EWG credit ratings that Entergy Corp. has relied upon to determine the
21
capitalization strategy for Enexus Energy are inappropriate, and an investment-
22
grade corporate credit rating would be preferable.
23

The NRC regulations regarding its approval of the proposed transaction, as well as
24
provisions in the Master Decommissioning Trust Agreement, support my
25
conviction that a nuclear plant owner should be financially strong as evidenced, for
26
example, by an investment-grade credit rating.
27

There are ways that Entergy Corp. could improve the financial strength of Enexus
28
Energy within the planned transaction structure, perhaps sufficient to merit an
29
investment-grade credit rating or at the very least bring it closer to such a rating.
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 4 of 17

1
Notwithstanding any increased risk caused by the lower credit rating of Enexus
2
Energy, the benefits that Vermonters will receive from the Power Purchase
3
Agreement (“PPA”) between EVY and the Vermont Yankee Nuclear Power
4
Corporation, which expires at the end of the existing NRC operating license on
5
March 21, 2012, should not be affected by the proposed transaction.

6
Petitioners still have to support their claim that the proposed $60 million Letter of
7
Credit would be sufficient to fund six months of Vermont Yankee costs after
8
permanent shutdown.

9
Petitioners have to adequately explain if their claim that “as a result of the new
10
structure Enexus will bring another highly-trained and highly-motivated set of eyes
11
to scrutinize EquaGen’s performance and drive that performance towards
12
excellence” implies that Enexus Energy will charge EVY with higher
13
administrative costs compared to Entergy Corp.

14
At this point I still believe that the drawbacks of the transaction outweigh the
15
benefits to Vermont residents. I cannot state that the proposed transaction
16
promotes the public good without a clear demonstration of tangible benefits for
17
Vermont residents.
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19
Impacts of Proposed Restructuring on Vermont
Q.
Do you agree with Ms. Curry’s statement that “…a fair reading of Mr. Parker’s
20
testimony is that little will change for the state as a result of the Enexus transaction,
21
and, in fact, the transaction will result in tangible benefits to Vermonters”?
22
A.
No, I believe Ms. Curry has mischaracterized my position.. In my Direct
23
Testimony, I carefully evaluated each of the benefits identified in Ms. Curry’s
24
Prefiled Testimony. I found that the “strategic, operational, and financial benefits
25
of the proposed restructuring transaction…will accrue primarily to Enexus Energy
26
and its shareholders, and not to Vermont residents.” Furthermore, I concluded that
27
“At this point I believe that the drawbacks of the transaction outweigh the benefits
28
to Vermont residents, and recommend that the Petitioners demonstrate tangible
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 5 of 17
1
benefits for Vermont residents.” Ms. Curry’s Rebuttal Testimony does not contain
2
any new information about her claimed strategic, operational, and financial benefits
3
that would lead me to a different conclusion.
4
The one positive factor in the proposed transaction, substituting a $60
5
million letter of credit for an existing $60 million guaranty from Entergy Corp., is
6
relatively minor and is outweighed by additional risks to which Vermont residents
7
would be exposed. The biggest risk would be the weaker financial condition of
8
Enexus Energy compared to Entergy Corp., as evidenced by the credit ratings that
9
Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”) indicated
10
they would apply on a preliminary basis.
11
12
Q.
13
14
How would a lower credit rating for Enexus Energy, as compared to the current
EVY owner, Entergy Corp., increase the risk for Vermont residents?
A.
A lower credit rating is a good indication that Enexus Energy will not be as
15
financially able to withstand adverse market changes, weather poor plant
16
performance, or fund unexpected capital expenditures, as detailed in my Direct
17
Testimony. This is a risk for Vermont residents, since Enexus Energy would be the
18
new owner of EVY, which provides a significant portion of the state’s electricity at
19
favorable rates.
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21
Q.
22
23
Is the $60 million amount of the letter of credit sufficient to pay EVY operating
expenses for a period of six months in case of a permanent shutdown?
A.
I do not know at this point. Ms. Curry estimated these expenses in her
24
Rebuttal Testimony by making adjustments to EVY’s projected operating expenses
25
in 2012, but did not provide details for those adjustments. The DPS requested
26
those details in the 3rd Set of Information Requests, but the Petitioners’ Response is
27
inadequate. For example, Ms. Curry states that “…the precise level of reductions
28
has not been estimated”, yet she has assumed a Begin Confidential information
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*** End Confidential Information reduction in the EVY workforce. Cost
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adjustments for other line items have even less explanation.
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 6 of 17
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2
Q.
Do you agree with Ms. Curry’s statement on page 5 that “…EVY’s financial
3
condition during the remainder of its current license is not likely to change
4
materially under the proposed restructuring’?
5
A.
We should not confuse the financial condition of EVY with the financial
6
condition of its owner, Enexus Energy. While the revenues and operating expenses
7
for EVY will not change materially, I am concerned that Enexus Energy will not be
8
as financially strong as the current owner, Entergy Corp.
9
10
Q.
11
A.
Why would that be important?
First, Begin Confidential Information *************************
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********* End Confidential Information under normal, expected conditions.
13
According to Entergy Corp.’s financial projections, EVY Begin Confidential
14
Information *****************************************************
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16
Information Second, as the Petitioners’ themselves have stated, nuclear plants
17
have unique risks. If EVY were to have a serious problem that required it to cease
18
operations, even temporarily, it will not be able to generate revenues and Enexus
19
Energy would have to pay for fixing the problem as well as cover ongoing
20
operating expenses. Whereas Entergy Corp. is a very large and diversified
21
corporation with an investment-grade credit rating, Enexus Energy will be much
22
smaller and will have more limited financial resources.
23
24
Q.
proposed transaction will have “two clear layers of benefits to Vermonters”?
25
26
Do you agree with Ms. Abbott’s first claim in her Rebuttal Testimony that the
A.
No, I do not. Her first claim is that “Vermonters will continue to receive
27
power from the VY Station under the existing Power Purchase Agreement at very
28
favorable prices from a sound, well-performing, low-cost nuclear company.”
29
Vermonters will continue to receive this power at favorable prices regardless of the
30
proposed restructuring transaction. Ms. Abbott should realize that the benefits
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 7 of 17
1
from the existing PPA are independent of the transaction. In fact, the proposed
2
transaction may increase the risk that Vermont Yankee will be able to continue
3
functioning reliably due to the reduced financial strength of EVY’s owner. Thus
4
the ability of Vermonters to receive power from the existing PPA could be
5
adversely affected by the proposed transaction.
6
7
Q.
to Vermonters”?
8
9
What is Ms. Abbott’s second claim in her Rebuttal Testimony regarding “benefits
A.
Her second claim of benefits consists of two parts: (i) “the amount of
10
financial support EVY will receive through the $700-million Support Agreement
11
will represent an increase from the support in place today” and (ii) “the
12
replacement of Entergy Corporation’s existing guaranty by a $60 million letter of
13
credit…”
14
15
Q.
“Support Agreement will represent an increase from the support in place today”?
16
17
Do you agree with Ms. Abbott’s claim that Vermonters will benefit because the
A.
I cannot tell if I agree. First of all, nowhere in Ms. Abbott’s Rebuttal
18
Testimony does she discuss the Support Agreement, so I cannot understand the
19
basis for her claim. Second, the dollar amount of the Support Agreement appears
20
impressive, but it covers five operating nuclear plants in addition to EVY. As
21
others have pointed out, these dollars “…could be exhausted by the needs of other
22
plants.” Third, I am unsure if the $700 million amount, as well as the total amount
23
under existing support agreements, represents an absolute cap on financial support.
24
For example, if $701 million of cost-effective investments were required for the
25
safe and reliable operation of the Enexus Energy plants, I do not know if Enexus
26
Energy would be precluded from investing that extra $1 million. Fourth, the
27
Support Agreement will be between Enexus Energy and each of the merchant
28
nuclear plants it owns. The Support Agreement will only be as good as the
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financial strength of Enexus Energy.
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Seth G. Parker
Docket No. 7404
July 10, 2008
Page 8 of 17
1
Q.
Do you agree with Ms. Abbott’s remaining claim that Vermonters will benefit by
2
“the replacement of Entergy Corporation’s existing guaranty by a $60 million letter
3
of credit”?
4
A.
As I’ve stated in my Direct Testimony, I view positively the fact that the
5
letter of credit will be with a third party rated A/A or better. However, this is a
6
relatively minor factor in my overall assessment of the proposed transaction.
7
Credit Rating and Financial Strength of Enexus Energy
8
Q.
9
10
Is Ms. Curry correct in her claim that you “over-emphasize the importance of an
investment-grade credit rating”?
A.
No. The simple facts are that Entergy Corp. currently enjoys investment-
11
grade issuer ratings of BBB from S&P and Baa3 from Moody’s, and the capital
12
structure of Enexus Energy is intended to result in a BB rating, which is a
13
speculative grade. S&P and Moody’s indicated that Enexus Energy would receive
14
Begin Confidential Information ********End Confidential Information
15
ratings, respectively, on a preliminary basis.
16
In my Direct Testimony I pointed out that (i) many financial institutions are
17
restricted to investment-grade securities, (ii) the Master Decommissioning Trust
18
Agreement between EVY and Mellon Bank contains investment-grade provisions,
19
and (iii) the NRC gives preferential treatment to license transfer applicants with
20
investment-grade credit ratings. While Ms. Curry may claim that I have over-
21
emphasized the importance of an investment-grade credit rating, neither she nor
22
Ms. Abbott contradicts the differences I have highlighted between investment-
23
grade and speculative-grade credit ratings.
24
25
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 9 of 17
1
Q.
Is Ms. Abbott correct in her Rebuttal Testimony that you implied that “…NRC
2
guidance in NUREG-1577…effectively mandates that Enexus have an investment-
3
grade rating”?
4
A.
No. I explained in my Direct Testimony that having an investment-grade
5
credit rating is an advantage, and that if an applicant does not have an investment-
6
grade credit rating then “…the NRC must rely on ‘other relevant financial
7
information’…” In my Summary of Testimony I pointed out that “There are ways
8
that Entergy Corp. could improve the financial strength of Enexus Energy within
9
the planned transaction structure, perhaps sufficient to merit an investment-grade
10
credit rating.” [Emphasis added.] I never stated that an investment-grade credit
11
rating is mandated, effectively or otherwise.
12
13
Q.
In the same paragraph of her Rebuttal Testimony, Ms. Curry states that “…Enexus
14
and its nuclear units will be financially strong.” Do you agree with Ms. Curry’s
15
claim?
16
A.
The term “financially strong” is vague. Regardless of how one defines
17
“financially strong”, Enexus Energy will not be as financially strong as Entergy
18
Corp. This is a significant factor in my determination of whether the proposed
19
transaction will promote the public good and result in tangible benefits for Vermont
20
residents.
21
22
Q.
Will the credit rating of Entergy Corp. be affected by the proposed transaction?
23
A.
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Seth G. Parker
Docket No. 7404
July 10, 2008
Page 10 of 17
1
Q.
In considering your three suggested alternative capital structures, Ms. Curry claims
2
that Enexus Energy “does not therefore have a “superior” alternative and submits
3
that the proposed capital structure is the best alternative and provides for a
4
financially sound company.” What is your response?
5
A.
I believe that the proposed capital structure may be good, or even best, for
6
Entergy Corp. and its shareholders, but it is not best for Vermonters. Ms. Curry has
7
not argued with my basic contention that Enexus Energy will not be as financially
8
sound as Entergy Corp., and that the lower financial strength exposes Vermonters
9
to additional risks. In fact, Ms. Abbott agreed that “Should Enexus…improve its
financial metrics, theoretically it could qualify for a better rating.”
10
11
12
Q.
In her Rebuttal Testimony, Ms. Curry has claimed that you have not “provide[d]
13
any specific information in his testimony regarding potential negative impacts or
14
greater risks to Vermonters that would flow from this transaction…” Can you
15
provide such specific information?
16
A.
In my Direct Testimony I quoted the entire rationale upon which S&P based
17
its preliminary credit rating. The risks that S&P specifically identified take up one
18
and one-half pages of single-spaced type, and include risks of Begin Confidential
19
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20
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Confidential Information Moody’s rationale for its preliminary credit rating were
24
similar, if not identical. These are specific risks that Enexus Energy will face
25
leading to my concern that the company will not be as financially able as Entergy
26
Corp. to withstand adverse market changes, weather poor plant performance, or
27
fund unexpected capital expenditures. The increased risk to Vermonters is a direct
28
result of the proposed restructuring transaction.
29
30
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 11 of 17
1
Q.
2
A.
Are there any specific risks that you wish to elaborate on?
Yes. The “heightened operating risk” of nuclear power was addressed by
3
Ms. Abbott in her Rebuttal Testimony. Ms. Abbott explained that “lengthy, forced
4
outages stress the operator’s liquidity position and financial flexibility.” In the
5
Petitioners’ Response to the 3rd Set of Information Requests, Ms. Abbott further
6
explained that “The major operating risk associated with nuclear power is the risk
7
of an event that will cause the plant to be out of service for an extended period of
8
time. The length of time assumed for a nuclear outage is much greater than for any
9
other type of plant…” This is exactly one of the specific risks about which I am
10
concerned, and why the financial strength of Enexus Energy is so important.
11
12
Q.
Returning to Ms. Curry’s Rebuttal Testimony, she also claimed that your Direct
13
Testimony “…fails to offer any guidance distinguishing financial and other risks
14
that exist today for Vermont from any perceived risks that would result from…the
15
proposed transaction.” Can you offer such guidance?
16
A.
Yes. The risks to which EVY is exposed at the plant level will not
17
materially change after the proposed transaction. What will change is the reduced
18
financial ability of Enexus Energy, EVY’s owner, to address any problems that
19
arise from these plant risks, as compared to Entergy Corp.’s financial ability.
20
21
22
Strategic, Operational and Financial Benefits of the Proposed Transaction
Q.
In her Rebuttal Testimony, how did Ms. Curry respond to the portion of your
23
Direct Testimony regarding how the claimed strategic, operational, and financial
24
benefits will accrue to the state?
25
A.
I was surprised to read in Ms. Curry’s Rebuttal Testimony that, aside from
26
the $60 million letter of credit and the Support Agreement, she admitted that it is
27
“…more difficult to show that the other benefits for Enexus that I discuss in my
28
prefiled [Direct] testimony…accrue directly to Vermont…” She made this same
29
admission in the Petitioners’ Response to the 3rd Set of Information Requests. Ms.
30
Curry appears to have agreed with my contention that the various “strategic,
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 12 of 17
1
operational and financial benefits of the proposed transaction…will accrue
2
primarily to Enexus Energy and its shareholders, and not to Vermont residents.”
3
I note that Ms. Curry stated that she “believe[s] that the long-run benefits
4
offered by Enexus will ultimately accrue to Vermont through a well-operated,
5
reliable VY Station.” However, I believe that Entergy Corp., if it continued to be
6
the owner, would ensure that Vermont Yankee would be as well-operated and
7
reliable as Enexus Energy.
8
I also would agree with Ms. Curry that long-term issues beyond the current
9
NRC license term that ends in March, 2012, are not the focus of this proceeding.
10
At the same time, the Petitioners have asked the NRC and the Vermont Public
11
Service Board to allow Vermont Yankee to continue operating beyond its current
12
license term. If these requests are granted, Vermonters will have to live with the
13
proposed organizational structure from this case for an additional twenty years. We
14
need to stay cognizant of that possibility
15
16
Q.
17
18
Do you have any comments on Ms. Curry’s discussion of her claimed strategic,
operational and financial benefits of the proposed transaction?
A.
No. Ms. Curry fully presented her claims about those benefits in her Direct
19
Testimony, and nothing in her Rebuttal Testimony has altered my belief that those
20
benefits will accrue primarily to Enexus Energy and its shareholders. In addition, I
21
note that Ms. Curry claimed that “as a result of the new structure Enexus will bring
22
another highly-trained and highly-motivated set of eyes to scrutinize EquaGen’s
23
performance and drive that performance towards excellence.” This claimed benefit
24
raises the question of whether Enexus will have higher administrative costs that are
25
charged to EVY compared to Entergy Corp.
26
27
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 13 of 17
1
2
Ability to Maintain Financial Strength
Q.
Turning now to the Rebuttal Testimony of Susan D. Abbott, what is your response
3
to her contention that “Enexus’ financial strength is robust in both normal times
4
and times of stress”?
5
A.
Ms. Abbott provided some financial ratios for Enexus Energy during
6
normal times that purport to support her contention. While she does not provide
7
those same ratios for Entergy Corp. in her Rebuttal Testimony, she did provide two
8
ratios in the Petitioners’ Response to the 3rd Set of Information Requests. Begin
9
Confidential Information *****************************************
10
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11
**************End Confidential Information However, the ratios Ms. Abbott
12
presents are somewhat compromised because she used a different base year for
13
Entergy Corp. (2007) than for Enexus Energy (2010). Based on the limited
14
information, it is impossible to tell if Enexus Energy’s financial strength will be as
15
strong as Entergy Corp.’s during normal times.
16
17
Q.
of stress”?
18
19
Do you agree with Ms. Abbott that “Enexus’ financial strength is robust in…times
A.
Absolutely not. Ms. Abbott provided financial ratios under two stress
20
scenarios: market prices reduced by $25/MWh and Indian Point #3, Enexus
21
Energy’s largest plant, out of service for one year. In these scenarios, the resulting
22
financial ratios for Enexus Energy Begin Confidential Information ***
23
***********************************************. End Confidential
24
Information I further note that Ms Abbott points out “Moody’s assesses forced
25
outages based on First Energy’s forced-outage experience at Davis-Besse [another
26
nuclear plant], which lasted for 26 months…”, yet she did not provide financial
27
ratios for that particular stress scenario. It would be instructive to compare the
28
impact of a 26 month outage on Enexus Energy’s financial ratios to Entergy
29
Corp.’s financial ratios.
30
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 14 of 17
1
Q.
predictable cash flows…”?
2
3
Do you agree with Ms. Abbott regarding “Enexus' ability to produce stable and
A.
While selling power on a forward basis, through a PPA for example, can
4
minimize cash flow volatility, we have to consider the entire Enexus Energy
5
portfolio. EVY’s entire output has been sold for the remainder of the current NRC
6
operating license, through March, 2012, but this is not true for Enexus Energy as a
7
whole. According to Ms. Abbott’s Response to the 3rd Set of Information
8
Requests, Begin Confidential Information ******************************
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****************************End Confidential Information Thus I am not
11
confident that Enexus Energy will have “stable and predictable cash flows” for very
12
long.
13
14
Q.
15
16
Are power revenues particularly unstable or unpredictable when sold at market
prices?
A.
Yes. Ms. Abbott correctly highlighted the close linkage between natural
17
gas prices used by many power plants on the margin and electric energy prices in
18
New England and New York, where five of the six merchant nuclear plants are
19
located. One consequence is that if gas prices fall from their current high levels,
20
then energy prices will fall, too. Another consequence is that the volatility of gas
21
prices affects the volatility of electric energy prices in the Northeast. .
22
23
Q.
What is your response to Ms. Abbott’s claim that “Enexus’ ability to produce stable
24
and predictable cash flows will allow it to weather adverse circumstances as an
25
independent company and, in fact, to be better off than if it continued as a
26
subsidiary of Entergy Corporation.”
27
A.
Both Enexus Energy and Entergy Corp. have the ability to execute PPAs to
28
produce stable and predictable cash flows for their power plants. The proposed
29
transaction does not facilitate Enexus Energy’s ability to execute PPAs, so I cannot
30
agree that Enexus Energy is better off as an “independent company”.
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 15 of 17
1
2
3
Nuclear Owner Peer Group
Q.
What is your response to Ms. Abbott’s claim in her Rebuttal Testimony that the
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peer group you selected to compare credit ratings “is not terribly appropriate since
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most of the companies he cited are regulated utilities…”
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A.
The peer group for Enexus Energy, the intended owner of EVY and five
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other operating nuclear plants, is, quite simply, all other owners of nuclear plants. I
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did not differentiate between owners that are regulated utilities and owners that are
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not.
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Q.
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A.
Why did you not differentiate?
As Ms. Abbott pointed out in her Response to the 3rd Set of Information
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Requests, “There has never been a stand-alone, purely nuclear, merchant
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company.” Therefore I had two choices: nuclear plant owners whether or not they
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are or own regulated utilities, or merchant power plant owners whether or not they
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own nuclear plants. I thought it was much more important to consider nuclear plant
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owners in light of my focus on credit ratings and the importance credit rating
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agencies place on the unique and significant risks of nuclear power.
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Q.
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A.
Did Ms. Abbott have any observations about that peer group?
Yes. First, she recognized that “All but three of the companies Mr. Parker
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cited have investment-grade ratings.” Second, she compares financial ratios for
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Enexus Energy to some of those nuclear plant owners and found that “Enexus’
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credit metrics as projected for 2010 compare favorably to those of the nuclear
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entities cited by Mr. Parker.” However, Ms. Abbott’s finding begs an important
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question: If Enexus Energy compares so favorably, why did both credit rating
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agencies assign Begin Confidential Information ***************** End
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Confidential Information preliminary ratings to it, while sixteen of the seventeen
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nuclear plant owners Ms. Abbott includes have investment-grade ratings?
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Seth G. Parker
Docket No. 7404
July 10, 2008
Page 16 of 17
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Q.
generators are more appropriate financial comparables…” for Enexus Energy?
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Do you agree with Ms. Abbott’s suggestion that “Independent wholesale power
A.
No, I do not. The disadvantages of this peer group, also referred to as
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exempt wholesale generators (“EWGs”) by Entergy Corp. and in my Direct
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Testimony, outweigh any advantage.
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Q.
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Is there an advantage of an EWG peer group for establishing a capitalization
strategy for Enexus Energy?
A.
As Ms. Abbott pointed out in her Rebuttal Testimony, the principal assets
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of EWGs are merchant power plants and related business operations, and not
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regulated businesses. Thus the advantage of an EWG peer group is that their
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business operations, ignoring technology choice, are similar to Enexus Energy.
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Q.
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What is the first disadvantage of an EWG peer group for establishing a
capitalization strategy for Enexus Energy?
A.
The first disadvantage of an EWG peer group is that virtually none of those
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EWGs own nuclear power plants, while Enexus Energy’s entire asset base will be
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entirely nuclear power plants. As Ms. Abbott herself states in her Rebuttal
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Testimony, nuclear power has “unique risks and benefits”, and “Rating agencies
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put nuclear power in a unique category.” It is wrong to consider Enexus Energy as
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just another EWG and ignore this key difference.
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Q.
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What is the second disadvantage of an EWG peer group for establishing a
capitalization strategy for Enexus Energy?
A.
The second disadvantage, as I more fully explained in my Direct
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Testimony, is that these EWGs are in poor financial condition and thus have
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speculative grade credit ratings. Three of the five EWGs that Entergy Corp. relied
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upon in establishing a capitalization strategy for Enexus Energy emerged from
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bankruptcy in the past few years and are still recovering. I do not believe it is
Seth G. Parker
Docket No. 7404
July 10, 2008
Page 17 of 17
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appropriate for Enexus Energy to start off with a credit rating that is indicative of
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poor financial health.
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Q.
Does Ms. Abbott disagree with the preliminary credit ratings of Begin
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Confidential Information ******* End Confidential Information provided by
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S&P and or Moody’s, respectively?
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A.
No, she does not.
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Q.
existing investment-grade credit rating and Enexus Energy’s expected credit rating?
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Does Ms. Abbott recognize the different levels of risk between Entergy Corp.’s
A.
Yes, she states that that Enexus Energy’s lower credit ratings “…describe a
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slightly more risky investment.” I do not know if other experienced credit analysts
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would characterize a reduction of Begin Confidential Information ************
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*******Confidential Information by S&P and Moody’s, respectively, as
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“slightly” more risky.
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Q.
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A.
Does that complete your Rebuttal Testimony?
Yes, it does at this time.