The staff of the Arkansas Public Service Commission has recommended that Entergy Arkansas Inc., or EAI, be allowed a rate increase of $122.4 million, down from the utility's initial request of $122.9 million.
Analysts reacted positively to the news, and Entergy Corp. shares were up 4% on Oct. 4, compared with the S&P utilities index, which was up roughly 1% on the same day.
After reviewing EAI's capital component balances and cost rates, PSC staff on Oct. 4 recommended the $122.4 million rate hike, along with reducing the utility's benchmark rate of return on rate base from 4.67% to 4.64%. For long-term debt, staff is recommending a decrease from 5% to 4.32% for the cost rate of EAI's projected June 2018 issuance of a new 30-year bond worth $175 million. A decrease in the overall long-term debt cost rate from 4.36% to 4.31% was also recommended.
For short-term debt, staff recommended an increase in EAI's short-term debt cost rate from 0.65% to 0.79% due to supplemental information received by the PSC regarding the daily, weighted, average cost rate for EAI's money pool.
As for the rate increase amount of $122.4 million, Guggenheim Securities analyst Shahriar Pourreza wrote in an Oct. 4 note that "this is materially better than we as well as investors expected."
"Staff was very supportive/constructive with Entergy's capital and [operations and maintenance] requests for their regulated nuclear plant," Pourreza said in reference to the Arkansas Nuclear One plant. "Constructive recommendation from the staff (still pending commissioner order), the first test case in [Arkansas], could likely set precedent on a go forward basis — Regulated nuclear spend recovery will eventually work itself through, in our view, which has been our call."
"This constructive step forward with the 2018 [formula rate plan] proceeding, especially with the Arkansas prudency review, could go a long way to provide the much needed comfort that investors seek around [Entergy's] nuclear spending program, which includes both [operations and maintenance] and capital — a key driver of management's forward growth trajectory," he added.
Pourreza reiterated Guggenheim's "buy" rating for Entergy stock they "continue to like the story and see sizeable upside potential for [Entergy] shares — Investors should catch up as they continue to gain comfort; this is a good start."
Wells Fargo Securities analyst Neil Kalton shared sentiments with Pourreza, writing in an Oct. 5 note that staff's recommendation is "a positive data point and highly supportive of our thesis that the regulators and policy makers in [Entergy's] jurisdiction will view the company's nuclear cost improvement program as being legitimate expenses incurred in the ordinary course of business."
"Investors have been concerned that [Entergy] could incur nuclear cost disallowances," he added, "particularly after the [PSC] set aside the 2016 [formula rate plan] nuclear-related revenues for further scrutiny."
Kalton said a final decision by the PSC is expected by the end of 2017.