Entergy (ETR) Veers Away From Merchant To Focus On Utility

We have updated the research report on Entergy Corporation (NYSE:ETR) , a New Orleans, LA-based utility company.

Entergy is gradually transforming itself from a hybrid to a pure-play utility. Foremost on its agenda is to lower its exposure to the risk-prone and volatile wholesale commodities market by scaling down its Entergy Wholesale Commodities (“EWC”) business. This strategy is likely to be prudent as regulated spending offers a secured rate of return.

Entergy is looking to explore the potential of its core utility business, which operates in parts of Arkansas, Louisiana, Mississippi and Texas. Entergy believes adjusted earnings per share from its utility, parent and other segment could rise at roughly 5% to 7% a year.

The company has already closed the Vermont Yankee and RISEC units and will be shutting down Pilgrim and FitzPatrick by the end of 2019. The company will be left with Indian Point, which is currently profitable, and Palisades, which has a power purchase agreement through 2022. The company has outlined plans for growth at its utility segment and a smaller footprint at EWC, the home of merchant nuclear plants.

Overall, Entergy plans to invest $15.6 billion in the 2016–2020 time frame, with a major share going to its generation and transmission businesses. The company expects grid upgrades, asset replacement, and industrial load growth to drive earnings.

In addition to pursuing growth opportunities in the generation business, the company has a strong project pipeline and has secured the Louisiana Public Service Commission approval to replace 100 miles of pipe over the next 10 years. A combination of different types of projects will enable the company to diversify its revenue stream.

However, the performance of Entergy's regulated utilities depends upon rate relief at regular intervals in the company's different service areas. Any adverse decision in pending regulatory cases can materially impact Entergy's earnings.

Again, Entergy's financial performance is guided by price fluctuations in wholesale power markets. Wholesale power prices are a function of supply and demand, which in turn are driven by factors such as the price of fuels (particularly natural gas and coal), the rate of expansion of subsidized low carbon generation in the markets in which Generation's output is sold and the impacts on energy demand of factors such as weather, economic conditions and implementation of energy efficiency and demand response programs.

Zacks Rank

Entergy Corporation currently carries a Zacks Rank #3 (Hold). Some better-ranked peers include Avangrid, Inc. (NYSE:AGR) , Spark Energy, Inc. (NASDAQ:SPKE) and CenterPoint Energy, Inc. (NYSE:CNP) . While Avangrid and Spark Energy sport a Zacks Rank #1 (Strong Buy), CenterPoint carries a Zacks Rank #2 (Buy).

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