Morningstar | Entergy Reports Solid Utility Earnings; Sale of Two Additional Merchant Nukes a Positive
We are reaffirming our $82 per share fair value estimate and no-moat rating after Entergy reported weak 2018 second-quarter consolidated operational earnings; reaffirmed 2018 utility, parent, and other segment, or UP&O, earnings guidance; and announced an agreement with Nuclear Asset Management Company to sell the Palisades and Pilgrim nuclear plants. The agreement accelerates the decommissioning and site restoration at these plants and, in our opinion, provides clarity on the exit from three of four remaining merchant nuclear sites.Consolidated operational earnings include Entergy Wholesale Commodities segment earnings from four nuclear units with planned closing dates between 2019 and 2022. Therefore, the performance of ongoing earnings from the UP&O segment drives our fair value estimate. UP&O operational earnings were $1.23 per share in the second quarter, $0.11 per share higher than the same period last year. Entergy reaffirmed its 2018 UP&O earnings guidance range of $4.50-$4.90 per share and our $4.68 per share estimate is unchanged.
Consolidated operational EPS in the recently ended quarter were only $1.79 versus $3.11 in the same period last year. The lower year-over-year results are not a concern and were due to a $2.07 per share prior period tax item that helped the EWC segment in the 2017 second quarter. As stated above, our fair value estimate is driven by the UP&O segment as Entergy continues its transition to a pure-play regulated utility.
In our opinion, the sale of Palisades and Pilgrim is a positive development. However, the decommissioning of the 2 GW Indian Point plant remains after the planned retirement of its two units in 2020 and 2021. The good news is that the decommissioning trust appears to have sufficient funds for the decommissioning and site restoration of Entergy's largest merchant nuclear facility. We expect Entergy to reach a similar agreement to sell Indian Point as the retirement dates get closer.
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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