Entergy Corp. (NYSE: ETR). We also note that the company’s pipeline of planned renewable projects is growing, with 1,170 MW in the construction/RFP phase, up from 875 MW at the end 3Q19.
The company reported 3Q non-GAAP earnings of $491 million or $2.44 per share. Adjusted EPS beat the consensus estimate of $2.42. On the top line, operating revenues declined 8% to $2.9 billion as regulated utility operating revenue declined 5% and Entergy Wholesale Commodities (EWC) operating revenue declined 29%.
During the quarter, a category 4 hurricane, Hurricane Laura, impacted the Gulf Coast. Southeastern Louisiana and Southeastern Texas were particularly hard hit, with damage from the storm expected to exceed $14 billion. Hurricane Laura (along with a subsequent storm in October 2020) led to widespread outages and negatively impacted electric utility sales.
Entergy currently has two major generation projects under construction: the Washington Parish Energy Center in Louisiana – a 361-megawatt natural gas-fired power plant expected to enter service this year – and the Montgomery County Power Station in Texas – a 990-megawatt combined cycle power plant slated to enter service in 2021.
The forecast excludes the EWC segment as the company winds down this unit. Management previously projected a GAAP loss of $0.55 per share attributable to EWC, but now forecasts a more modest loss of $0.30 per share. Additionally, management projects higher interest expense than previously forecast. It also expects revenue to be hurt by hurricane outages and COVID-19.
EARNINGS & GROWTH ANALYSIS
In the Utility segment, 3Q non-GAAP and GAAP earnings came to $552 million or $2.74 per share. The 5% decline reflected higher depreciation expense, higher interest expense, lower sales volume due to COVID-19, unfavorable weather, and the negative effects of Hurricane Laura.
In the Parent & Other segment, the 3Q non-GAAP and GAAP loss narrowed to $61 million or $0.30 per share from $72 million or $0.36 per share in 3Q19. The improvement was attributable to reduced business travel as a result of COVID-19.
In the Entergy Wholesale Commodities segment (EWC), the company reported a GAAP gain of $30 million. Positive drivers included lower asset write-offs and impairments, gains on nuclear decommissioning trust funds, lower other O&M expense, and lower depreciation expense.
As noted above, Entergy has been reducing its wholesale competitive market exposure in order to stabilize earnings. In 2017, it sold the FitzPatrick nuclear plant to Exelon Generation. It has sold its Pilgrim nuclear plant to a subsidiary of Holtec International, a manufacturer of parts for nuclear reactors. The sale followed approval by the U.S. Nuclear Regulatory Commission of ETR’s request to transfer its license as part of the plant shutdown process. The company is also selling its Palisades plant to Holtec.
The company plans $11.9 billion in capital expenditures at its regulated utilities in 2021-2023, and will focus on adding new generation capacity, improving reliability, and making environmental upgrades. We note that the company’s service territories benefit from favorable domestic energy prices (relative to prices in other countries); competitive power rates (which are 20% below the national average); and solid infrastructure spending.
We are maintaining our 2020 and 2021 EPS estimates of $5.66 and $5.97, respectively. We expect Entergy to benefit from a growing renewable projects pipeline, as the company recently laid out plans to achieve net-zero carbon emissions by 2050. This geographic diversity partly insulates the company from regulatory pressures and weak demand in any one region.
MANAGEMENT & RISKS
Management is committed to maintaining both regulated and nonregulated operations and believes that they offer complementary benefits to shareholders.
We would probably lower our earnings estimates for the company if the U.S. economy slows, as it has in the face of the coronavirus pandemic. Entergy also faces financial, operational and legal risks related to its nuclear power plants.
ETR trades at 19.4-times our adjusted 2020 EPS estimate, slightly below the peer median of 19.9. We believe that the shares should trade at a premium given the company’s plans to spin off its competitive business, which should help it to achieve more stable earnings growth.
On November 24 at midday, BUY-rated ETR traded at $110.65, up $0.93.