(ETR) Entergy Provides Third Quarter and FY12 Outlook

Integrated energy company, Entergy Corporation (ETR) provided third-quarter 2012 preliminary operational earnings expectation of approximately $1.94 per share and as-reported earnings expectation of approximately $1.88 per share. Results for third-quarter 2011 were $3.53 per share on both as an as-reported basis and operational basis.

The decrease in third-quarter 2012 earnings reflect decline in all the three segments, Utility, Entergy Wholesale Commodities and Parent & Other segment.

The special item in the third quarter of 2012 was due to expenses associated with the proposed spin-off and merger of Entergy’s electric transmission business with ITC Holdings Corporation (ITC).

Entergy had earlier, in December 2011, entered into a definitive agreement with ITC Holdings, 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.  Recently, Entergy Arkansas Inc. along with ITC Holdings Corp. and ITC Midsouth LLC, filed a request at the Arkansas Public Service Commission to spin off the Arkansas electric transmission business and merge it into a subsidiary of ITC. The company expects the transaction to complete by 2013.

Entergy also reaffirmed its previously issued operational earnings guidance for 2012.

Segment Details

Utility

The quarter-over-quarter decrease in Utility’s operational earnings reflects higher income tax expense, higher non-fuel operation and maintenance expense and higher depreciation expense. Retail billed sales volume declined due to the net effect of weather and Hurricane Isaac. Overall, weather was warmer-than-normal. However, it was less favorable in comparison to the significantly warmer-than-normal temperatures experienced in the year-ago quarter.

However, these expenses were partially offset by an increase in Utility net revenue. Improvement in Utility net revenue was driven by the absence of the 2011 regulatory charge for customer sharing of the IRS settlement benefits and other pricing adjustments.

Entergy Wholesale Commodities (EWC)

The segment’s quarter-over-quarter decrease in earnings reflects lower net revenue that declined due to lower pricing of the nuclear fleet. The downside also reflects higher non-fuel operation and maintenance expense and lower nuclear production due to more unplanned and refueling outages.

However, these negatives were partially offset by a lower effective income tax rate at EWC and lower depreciation expense.

Parent & Other

At Parent & Other, sequential decline reflects an increase in income tax expense on Parent & Other activities and higher interest expense.

Earnings Guidance

Entergy reaffirmed its previously issued 2012 operational earnings guidance in the range of $4.85 to $5.65 per share. The company expects earnings to be at the higher end of the guidance. However, Entergy updated its as-reported earnings guidance for 2012 to a range of $3.44 to $4.24 per share. This includes approximately $1.41 per share of special items for the asset impairment of the Vermont Yankee nuclear power plant and the transmission business spin-off and merger expenses that were incurred in the first three quarters of 2012.

Entergy is expected to release its third-quarter 2012 earnings on October 30, 2012. The Zacks Consensus Estimates for third-quarter 2012 and fiscal 2012 are currently pegged at $2.20 per share and $5.47 per share, respectively.

New Orleans, Louisiana based Entergy is primarily engaged in electric power production and retail distribution of power. With 30,000MW of generating capacity, the company distributes electricity to 2.8 million customers in Arkansas, Louisiana, Mississippi, and Texas. Of this, 14,631MW are gas/oil based, 2,259 are coal based, 70MW are hydro based and the rest are nuclear based. The company also distributes natural gas to 240,000 customers in Louisiana. Entergy is the second largest U.S. nuclear power generator after Exelon Corporation (EXC).

Entergy is well positioned with its geographically-diverse mix of regulated and merchant operations. The company is focused on maximizing its shareholder value through steady investment for rate base growth, as well as through its ongoing stock buyback program and incremental dividend.

However, we are concerned regarding the tepid growth of its competitive business due to lukewarm power demand in the Northeast, pending regulatory approvals and the fate of its Indian Point plant. Entergy retains a short-term Zacks #3 Rank (Hold) rating. We also have a long-term Neutral recommendation on the stock.

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