Entergy's large stake in unregulated wholesale markets for nuclear energy give it a big edge over traditional utilities
From Standard & Poor's Equity ResearchSince the subprime mortgage crisis hit the stock market with a hurricane-like impact last month, share prices for a wide range of companies have come down significantly, providing enhanced buying opportunities in many cases. One company that has just recovered from a real-life hurricane and has locked in a large portion of its profits for many years to come is Entergy (ETR).
The New Orleans company is the only electric utility holding Standard & Poor's highest 5-STARS (strong buy) ranking, with earnings per share expected to grow at the impressive (especially for a utility) rate of 18% in 2007 and 24% in 2008. Entergy's power utility in New Orleans, a relatively small part of the company, which has operations extending from Nebraska to Vermont, emerged in May from two years of bankruptcy brought on by Hurricane Katrina. Though it has lost about half of its customers, Entergy's New Orleans unit paid off all creditors in full and kept its workforce largely intact.
Unregulated Wholesale Markets
In addition, Entergy operates a large and growing fleet of nuclear power plants that sells power in competitive wholesale markets. More than half of their output for 2008-09 has already been sold at what S&P views as attractive prices. Furthermore, the company's financial position is strong enough to support plans to buy back $1.5 billion worth of its own stock during 2007 and 2008, likely increasing its earnings per share and adding to demand for its shares. Entergy also plans to buy back an additional $1.5 billion worth of shares in 2009 and 2010.
"Don't think of it as a utility," says Justin McCann, S&P's equity analyst for the electric utility industry, "because Entergy's ownership of power plants that sell their power in competitive wholesale markets gives it growth prospects that the traditional regulated utility lacks."
"The unregulated, wholesale operations are where its growth is coming from," he says, adding that the company's announced plans to spend $3 billion on stock buybacks over the next few years "should lend support for the shares and help drive earnings-per-share growth even faster."
While several traditional electric utilities offer higher dividend yields than Entergy's 3%, "In our view, they are not attractive the way this company is attractive," McCann says.
Nuclear Power on the Rise
Entergy's chief attraction for investors, McCann says, is its large and expanding exposure to nuclear power, where profits are rising rapidly. Already the second-largest nuclear power generator in the U.S., Entergy just bought its 11th nuclear power plant in May, paying $380 million for the 798-megawatt Palisades plant in Michigan. The company is also taking initial steps that would let it build one of the first new nuclear power stations in the U.S. in three decades.
In July, the company signed a project development agreement with GE-Hitachi Nuclear Energy, an alliance between General Electric (GE) and Hitachi (HIT), to place an advance order for new reactor components that may be hard to find if orders for new reactors start piling up in the years ahead. The company said that while it has not yet made a final decision to build a new nuclear plant, the agreement gives it the option to build one that would enter service in 2017. The new plant most likely would be built at one of two existing nuclear plants near Baton Rouge, La., or Vicksburg, Miss.
The market-based nuclear power plants are much more profitable than the regulated utility businesses and should supply most of the profit growth in the future. Enticingly, those profits are fairly well secured, with the company having already sold 95% of its output for 2007 at $49/MWh, 83% of its 2008 production at $54/MWh, and 64% of 2009 production at $59/MWh.
With profits for its nuclear operations growing much more quickly than for its regulated utilities, Entergy has floated the idea of spinning off its six unregulated nuclear plants into a different company. If this were to come to pass, the shares of the new company would presumably trade at a higher multiple to earnings than the current shares, which reflect the company's mix of regulated and nonregulated businesses.
While no specific move has been proposed, and the company says it is considering all of its options, McCann believes that investors should welcome the move.