By Dan Testa

Entergy Corp. executives acknowledged Nov. 2 that with three Northeast nuclear power plants retired or slated for retirement, economies of scale among its reactors will begin to diminish.

Entergy announced earlier in the day plans to retire its 838-MW James A. FitzPatrick nuclear plant in New York by early 2017. Citing wholesale market design flaws and low natural gas prices, Entergy has been deliberating over the future of the FitzPatrick plant, particularly after announcing plans to retire the 683-MW Pilgrim Nuclear Power Station in Massachusetts by mid-2019 for similar reasons. Entergy permanently closed its Vermont Yankee nuclear plant, which had a capacity of 563 MW, at the end of 2014.

Addressing analysts on the company's third-quarter earnings call, Entergy Chairman and CEO Leo Denault described strategic decisions to close Pilgrim and FitzPatrick, as well as divesting its 583-MW gas-fired Rhode Island Energy Center as "positive, [net present value] decisions over the long term" for the Entergy Wholesale Commodities fleet. "They improve cash flow in the near term and help to derisk the company," Denault said. "That said, I can tell you they are some of the most difficult decisions we, as a management team as well as our board of directors, have ever made."

With the closure of FitzPatrick and Pilgrim, Entergy Wholesale will have two nuclear facilities in its portfolio: the 810-MW Palisades plant in Michigan, the output for which is contracted through April 2022, and the Indian Point reactors in New York, for which Entergy continues to push for relicensing. "We will also continue to advocate for reforms to wholesale market designs," Denault said. "Wholesale electricity markets are failing to produce accurate price signals, reflect true marginal cost and providing energy and capacity, challenging the long-term sustainability of these markets."

Asked about how a shrinking nuclear fleet affects the company's economies of scale operating the facilities, Entergy Executive Vice President and CFO Drew Marsh conceded there would be an impact.

"There definitely is some lost economies of scale," Marsh said. "We have a lot of economies of scale, but it will be shrinking over the retirement schedule over the next few years. Depending on how far you go with the retirement schedule, it depends on how much of an impact that economies of scale has. For the Northeast, we do have about $35 million of plant overhead at each plant and about half of that is direct cost. And so beyond that, we'll be targeting a level of costs that are prudent for the business size and the size of the fleet going forward to make sure the plants stay safe and reliable."

Analysts on the call noted Entergy now has two nuclear plants, Pilgrim and Arkansas Nuclear One, categorized by the U.S. Nuclear Regulatory Commission as reflecting "multiple/repetitive degraded" performance, and designated one step below the category of "unacceptable performance." Entergy estimates an impact of roughly $85 million in costs due to additional federal inspection activities at Arkansas Nuclear One in 2015 and 2016 due to its placement in "Column 4" of the NRC's "Reactor Oversight Process Action Matrix." Also in Column 4, Pilgrim too will undergo increased inspections, with the company estimating the cost at $45 million to $60 million in pretax operation and maintenance expenses.

"We realize these items, while temporary, are disappointing," Denault said. "We will do our best to mitigate their impact. However, our longer-term objectives remain intact. Therefore, as we work our way through the near-term operational issues at ANO and Pilgrim, we maintain our focus on our long-term opportunities."

Denault also asserted any safety issues at ANO and Pilgrim were specific to those facilities and not indicative of any broader change to Entergy's nuclear fleet. "We did have a couple of issues that kind of compounded on each other at both facilities to get us into Column 4," Denault said. "We'd anticipate that this is not going to happen anywhere else. And that we'll work our way out of this judiciously and expeditiously with the NRC over the coming couple of years."

While noting some positive trends at its utility segment, Entergy executives did not refer to the "industrial renaissance" driving demand in the Gulf region around which the company has long focused its utility growth strategy. However, third-quarter industrial sales for Entergy climbed 4% over the prior-year period. Weather-normalized residential sales were down 0.1%, quarter-over-quarter, and Entergy expects a negative EPS impact of 7 cents in 2015 due to lower than expected sales growth, primarily in the residential sector.

"We'll continue to watch and monitor the residential sales volumes. I'll note also, we saw 1.2% growth in commercial in the quarter as well. But it is something we pay a lot of attention to and continue to look at," Entergy Group President, Utility Operations Theo Bunting Jr. said. "From our perspective, we don't see a kind of flat-to-negative as a trend, but it is something for us to continue to monitor as it relates to our view of our organic residential growth."