Entergy Starts Low in 2012
Before the bell, Entergy Corporation (ETR) reported its first quarter 2012 results. In the reported quarter, the company reported operational EPS of 44 cents, which fell short of the Zacks Consensus Estimate of 54 cents. Earnings also came lower than the year-ago quarter’s $1.38.
The wide variance of $1.30 per share between operational and reported numbers was due to a non-cash item arising from an asset impairment charge of $1.26 per share in Entergy Wholesale Commodities business.
Earnings in the reported quarter were lower than the year-ago period by 94 cents. Of this, Utility segment earnings were 53 cents lower due to higher income tax expense, lower revenue and higher non-fuel operations & maintenance expense.
Earnings also fell at Entergy Wholesale Commodities segment by 37 cents primarily due to lower revenue from the nuclear portfolio on lower energy pricing.
Parent & Other recorded a higher segmental loss of 4 cents year-over-year due primarily to several individually insignificant items.
On a reported basis including one-time items, loss per share came in at 86 cents for the reported quarter, compared with earnings of $1.38 in the year-ago quarter.
Operational Results
Revenue in the reported quarter fell 6.2% year over year to $2.38 billion, falling short of the Zacks Consensus Estimate of $2.54 billion. Of this Electricity revenue was down 4.3% to $1.78 billion, Natural Gas was down 35.3% to $46.01 million, while Competitive Businesses were down 8.5% to $552.81 million.
Entergy overall reported a net loss attributable to the company of $151.7 million versus net income of $248.7 million in the prior-year period.
Segment Results
Utility
In first quarter 2012, Utility's earnings were $62.9 million on an as-reported basis and $68.7 million on an operational basis, compared to $164.3 million on both as-reported and operational bases in first quarter 2011. The year-over-year variance reflects higher income tax expense, lower net revenue and higher non-fuel operations and maintenance expense.
Entergy Wholesale Commodities
Entergy Wholesale Commodities reported a loss of $168.5 million on an as-reported basis for first quarter 2012, compared to earnings of $122.6 million for first quarter 2011. On an operational basis, Entergy Wholesale Commodities earnings were $55.0 million, in first quarter 2012, compared to $122.6 million in first quarter 2011.
Parent & Other
Parent & Other reported a loss of $46.1 million on an as-reported basis and $44.6 million on an operational basis for first quarter 2012. This compares to a loss of $38.2 million on both as-reported and operational bases in first quarter 2011. The wider loss was due primarily to several individually insignificant items.
Financial Condition
Entergy in the reported quarter generated $600.5 million from operating activities compared with $323.1 million in the year-ago period. Cash and cash equivalents at the end of the reported period were $685.0 million versus $694.4 million at fiscal-end 2011. Long-term debt increased to $12.1 billion compared with slightly above $10.0 billion at fiscal-end 2011.
Guidance
Entergy updated its 2012 earnings guidance range to be $3.55 to $4.35 per share on an as-reported basis and reaffirmed operational guidance range of $4.85 to $5.65 per share.
Outlook
New Orleans, Louisiana-based Entergy is an integrated energy company engaged primarily in electric power production and retail distribution operations. Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity as the second-largest nuclear generator in the United States.
Entergy delivers electricity to 2.8 million utility customers in Arkansas, Louisiana, Mississippi and Texas. The company is the second largest U.S. nuclear power generator after Exelon Corporation (EXC).
Entergy earlier in December 2011 has entered into a definitive agreement with ITC Holdings Corporation (ITC) under which the former will divest its electric transmission business to the latter for gross cash of $1.775 billion. The divested business would be merged with the operations of ITC Holdings.
The transaction will require consent from Entergy's retail regulators, the Federal Energy Regulatory Commission and ITC shareholders. The company expects the transaction to complete by 2013.
Currently, Entergy’s electric transmission business consists of approximately 15,700 miles of interconnected transmission lines at voltages of 69kV and above and associated substations across its utility service territory in the Mid-South.
Post-merger, ITC will become one of the largest electricity transmission companies in the U.S. Its area of operations will stretch across from the Great Lakes to the Gulf Coast, with more than 30,000 miles of transmission lines.
Per the agreement, Entergy will divest its electric transmission business to a newly formed entity known as Mid South TransCo LLC ("Transco") which will be distributed to Entergy’s shareholders in the form of a tax-free spin-off. Then, under an all-stock Reverse Morris Trust transaction, Transco will merge with and into a newly created merger subsidiary of ITC.
Post-merger, Entergy will have an approximately 50.1% stake in ITC in exchange for their shares in TransCo. The balance 49.9% stake of the combined company will be with the existing shareholders of ITC.
Entergy plans to utilize most of the cash proceeds from the transaction to redeem the debt at its utility operating companies and at the parent, Entergy. It expects the transaction to meet the criteria for tax-free treatment for U.S. federal income tax purposes.
The divestiture will provide more investment alternatives and enhance the credit quality of Entergy and its operating subsidiaries. It will allow the company to invest more in its generation operations. Moreover, the transaction will not affect its retail customers and they will continue to receive the same high quality service as before.
In the past, the company spent much effort to create its own independent grid. Currently, it is seeking to integrate its transmission operations into the Midwest Independent System Operator.
Entergy retains a short-term Zacks #3 Rank (Hold) rating. We also have a long-term Neutral recommendation on the stock.
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