Morningstar | Entergy's 2018 Results in Line; Remains on Track to Exit Merchant Nuclear Business
We are reaffirming our fair value estimate of $96 per share and narrow moat rating after Entergy reported in line 2018 adjusted Utility, Parent & Other earnings, modestly raised guidance, and updated the status of its plan to exit the merchant nuclear business.Entergy reported 2018 operational earnings of $7.31 per share versus our estimate of $7.00 and the consensus estimate of $7.10 per share. However, since Entergy will transition to an almost fully regulated company as it retires merchant nuclear plants over the next three years, we are focused on the results of the UP&O segment. Adjusted 2018 EPS for the UP&O segment were $4.71, in line with our estimate of $4.70.
Entergy’s earnings guidance will now only include UP&O and it bumped 2019 adjusted EPS guidance by $0.20, to a range of $5.10-$5.50. However, the change was due to Entergy lowering its effective tax rate assumption. The change also increased the 2020 and 2021 guidance ranges by $0.10 per share. Our 2021 EPS estimate of $6.09 for UP&O is unchanged and slightly higher than the $5.60-$6.00 guidance range.
We remain confident that the exit of the merchant nuclear business will be cash flow neutral. Management reaffirmed this during the earnings call. The three reactors at Indian Point are the remaining units without agreements with a decommissioning specialist. Due to the weak performance of the capital markets in the fourth quarter, the year-end balance of Indian Point’s three nuclear decommissioning trusts declined about $150 million, to approximately $1.85 billion. However, the three NDTs remain comfortably above the estimated asset retirement obligation of approximately $1.75 billion.
Entergy indicated it has begun the process of negotiating a sale of Indian Point’s three reactors with a company specializing in decommissioning. We expect this to result in a transaction like the ones for Vermont Yankee, Pilgrim, and Palisades.
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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