#11 New position: ETR

We took an 8% position (4/27) in Entergy, a utility in the South (Louisiana, Texas, Arkansas) with a large Northeast nuclear plant presence. Our entry point was $64.27. ETR trades at an in-line valuation with the utility group but our purchase is based on belief that over time, the company's nuke portfolio will be worth more as the Obama administration and Congress become more focused on a carbon tax (nukes produce no CO2 emissions). Some sellside analysts peg the value of ETR's no-carbon nuke portfolio to be as high as $15/sh. We do not think this value will be immediately realized, but we have a long term view that over time this value will be recognized as policy is formed and timetables set. The second core reason for our purchase of ETR is that it is a long play on natural gas. Here is my attempt to explain why:

Power (electricity) comes from many sources, including coal, renewables, nukes and gas plants. The cheapest plants to run are nuclear and renewables (though they are mosre costly to build in the first place). The next cheapest are coal plants (US has lots of coal, but unfortunately it emits lots of CO2). Finally there are gas plants which are the most expensive to run, and their costs to run are driven by the price of the fuel they use, natural gas.

The curve below represents the electricity production curve. A few things to note: (1)the first power used is from renewables/nukes. That makes sense because you obviously want to use your cheapest sources first. As your demand for power increases, the utility company is forced to bring into operation the higher cost plants (coal and then nat gas). In most markets, the demand for electricity is high enough to require the operation of nat gas plants. In the case of the nat gas plant, the price of the marginal (or last) GW produced is the price charged for each GW produced regardless of source. If one follows the chart below along nat gas Curve 2, one can see that the profit at a nuke plant is the area represented by A. Additionally, when prices of nat gas are high (Curve 1)one can observe that the profit of the nuke plant is even larger (rectangles A+B).



The nat gas portion of our thesis is predicated on the gas curve (which looks like Curve 2) eventually looking like Curve 1. Presently the price of nat gas is roughly $3.50/Mcfe vs historical levels of closer to $6-8. If the gas prices do move higher, it will make all of ETR's nukes more profitable and worth more.

By the way, the reason for the low nat gas prices are: (1)low industrial demand in the US for electricity bc of the recession, (2) higher liquefied nat gas imports from abroad bc nat gas exporting nations are sending less to Japan and Korea (who are experiencing their own recessions), and (3)too much domestic production of nat gas. Eventually prices should climb again as US production is cut (we are already seeing drilling rigs down to 750 from 1200 a year ago) and industrial demand picks up.