Morningstar | Entergy Overcomes Mild Weather and Reports Solid Earnings; Dividend Increases Should Accelerate
We are reaffirming our fair value estimate of $98 per share after Entergy reported flat adjusted EPS for the 2019 first quarter versus last year and reaffirmed earnings guidance. Adjusted EPS for the recently ended quarter was $0.82 versus $0.83 in the same period last year.The mostly flat results were especially positive in light of the mild winter weather that was a $0.21 EPS headwind versus favorable weather last year, a $0.07 drag from 6% higher diluted average share count, and $0.02 from higher parent/other expenses. These negative variances were almost completely offset by rate increases and regulatory charges that occurred in the first quarter of 2018, returning the benefits of lower federal income taxes to customers.
Although adjusted EBITDA guidance for the merchant nuclear segment over the next four years was modestly lower than the February guidance, management reaffirmed during the conference call that they expected the exit from their merchant nuclear business to be cash-flow-positive. The merchant segment is excluded from adjusted earnings beginning in 2019 due to the pending shut down and sale of the remaining operating merchant nuclear plants.
Entergy plans to shut down Pilgrim this month, Indian Point Unit 2 in April 2020, Indian Point Unit 3 in April 2021, and Palisades in May 2022. All four reactors have agreements in place with companies specializing in decommissioning that will assume the risk of decontaminating the sites and the future performance of the nuclear decommissioning trust funds. Thus, we have a high level of confidence the exit will be cash-flow-positive.
Although the dividend increase in the 2018 fourth quarter was only 2.2%, we expect annual increases to accelerate to 3%-4% over the next five years with the exit from the merchant nuclear business and more stable earnings from Entergy’s regulated utilities.
For more detail, see our report "Entergy on Path to Remove Nuclear Plant Albatross."
Entergy is a holding company. Through its subsidiaries, the company is an integrated energy company engaged mainly in electric power production and retail distribution operations. The company owns and operates power plants. The company has two segments: Utility, which generates, transmits, distributes and sells electric power to retail and wholesale customers in Arkansas, Louisiana, Mississippi, and Texas; and Entergy Wholesale Commodities, which includes the ownership, operation, and decommissioning of nuclear power plants, located in the northern United States, the sale of the electric power produced by its operating plants to wholesale customers, and also provides services to other nuclear power plant owners.
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