Before the bell, Entergy Corporation (ETR) reported its second quarter 2012 results. In the reported quarter, the company posted operational earnings per share (“EPS”) of $2.11, which comfortably beat the Zacks Consensus Estimate of $1.70. Earnings also came in higher than the year-ago quarter’s $1.76.
On a reported basis, including one-time items, earnings per share came in at $2.06 for the reported quarter, compared with earnings of $1.76 per share in the year-ago quarter.
Operational Results
Revenue in the reported quarter fell 10.2% year over year to $2.5 billion, falling short of the Zacks Consensus Estimate of $2.9 billion. Of this Electricity revenue was down 12.5% to $1.9 billion, Natural Gas was down 17.4% to $23.9 million, while Competitive Businesses was down 0.4% to $560.2 million.
Entergy overall reported a net income attributable to the company of $365.0 million versus net income of $315.6 million in the prior-year period.
Segment Results
Utility
In second quarter 2012, Utility earnings were $304.2 million on an as-reported basis and $314.1 million on an operational basis, compared to $248.4 million on both as-reported and operational bases in second quarter 2011. The year-over-year variance reflects a significant decrease in income tax expense which resulted from a June 2012 agreement with the IRS regarding tax treatment for storm cost financings in Louisiana associated with hurricanes Katrina and Rita. This was partially offset by a decrease in net revenue attributable to a regulatory charge.
Retail sales volume in second quarter 2012 was 4% higher year-over-year, reflecting strong weather-adjusted sales growth across all customer classes. In the reported quarter, higher non-fuel operation and maintenance expense served as a partial offset to the increased operational earnings. Non-fuel operation and maintenance expense increased due primarily to higher compensation and benefits costs (largely pension) as well as higher fossil-related outage and distribution expenses.
Residential sales in second quarter 2012, on a weather-adjusted basis, increased 5.8% compared to second quarter 2011. Commercial and governmental sales, on a weather-adjusted basis, increased 4.2% quarter over quarter. Industrial sales in the second quarter increased 2.6% compared to the same quarter of 2011. Retail sales growth on a weather-adjusted basis was 4.0% for the quarter.
Entergy Wholesale Commodities
Entergy Wholesale Commodities’ as-reported and operational earnings were $81.3 million for the second quarter 2012, compared with $64.9 million for second quarter 2011. The primary drivers for the increase were lower decommissioning expense and a lower effective income tax rate. The reported quarter saw a reduction in decommissioning liability as well as in decommissioning expense. The lower effective income tax rate was due largely to the absence of a charge in the prior year which resulted from a change in Michigan tax law. However, these were partially offset by lower net revenue and increased non-fuel operation and maintenance expense.
Parent & Other
Parent & Other reported a loss of $20.5 million on an as-reported basis and loss of $20.9 million on an operational basis for second quarter 2012. This compares to earnings of $2.3 million on both as-reported and operational bases in second quarter 2011. The loss was due primarily to higher income tax expense.
Financial Condition
Entergy in the reported quarter generated $587.4 million from operating activities compared with $654.1 million in the year-ago period. Cash and cash equivalents at the end of the reported period were $283.4 million versus $694.4 million at year-end 2011. Long-term debt increased to approximately $12.0 billion compared with slightly above $10.0 billion at year-end 2011.
Guidance
Entergy expects its 2012 as-reported basis earnings per share to be in the range of $3.49 – $4.29. It also 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 and is 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).
Earlier in December 2011, Entergy 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.
Post-merger, ITC will become one of the largest electricity transmission companies in the U.S. Its area of operations will stretch 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.
We currently have a long-term Neutral recommendation on Entergy. The stock carries a Zacks #2 Rank (Hold rating) in the short run, primarily due to the low-level of current valuation. The stock is now trading at a discount in terms of forward earnings estimates versus its utility peers like The AES Corporation (AES) and American Electric Power Company Inc. (AEP).
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