Entergy to invest more than $4 billion annually for at least the next five years to upgrade its expansive grid

Business Strategy and Outlook

Entergy’s growing, energy-hungry Southeast U.S. service territory and constructive state regulatory frameworks give it a long runway of earnings and dividend growth potential. Entergy will invest more than $4 billion annually for at least the next five years to upgrade its expansive grid and build out its renewable energy portfolio. Much of this investment has strong support from industrial customers trying to electrify and decarbonize their businesses. Entergy’s investment opportunities and customer growth will lead to annual earnings growth in line with management’s 6%-8% target. Entergy has made a substantial strategic transformation during the last few years. It was the second-largest U.S. nuclear owner for nearly two decades with six plants in the Northeast and four rate-regulated plants in the Southeast. The plants in the Northeast at their peak earned more than Entergy’s rate-regulated utilities. But they became a drag on earnings, dividends, and shareholder returns as power prices fell and never rebounded.

Management began exiting the business in 2014 by selling and retiring the plants, most notably the Indian Point units that supplied as much as 25% of New York City’s electricity but succumbed to antinuclear policymakers. Entergy closed its last nonutility nuclear plant, Palisades (Michigan), this year. Entergy has turned over decommissioning responsibilities to other companies, eliminating the risk of unexpected decommissioning costs.

As a predominantly rate-regulated utility, Entergy no longer has direct energy market exposure. Entergy’s unique risk is severe storms that hit its service territory regularly. From Hurricane Katrina to Ida and many in between, Entergy regularly faces billion-dollar storm repair costs. Regulators have a long history of allowing Entergy to recover those costs from customers, limiting the financial risk for shareholders. Given the exit from Northeast nuclear generation and the growth potential of Entergy’s utilities, the dividend might increase to track earnings growth.

Financial Strength

The strong industrial growth in the Mississippi Delta region will be one of the main drivers for more than $4 billion of investment annually at Entergy’s utilities during the next five years. Entergy’s balance sheet rightsizing and constructive regulation that enhances cash flow should limit the amount of new debt and equity that the company has to issue to fund its growth program. Entergy enters its large investment program with a strong balance sheet. The approximately $5 billion of impairments or other costs associated with the exit of the merchant nuclear business had weakened its balance sheet, but Entergy has put that behind it. The current leverage is manageable, considering the diversity and consistency of the company’s utility earnings. In October 2021, Entergy’s board raised the dividend $0.24 per share annualized, or 6%, to $4.04, the largest increase since 2010 and are in line with the expectations. Entergy had been raising the dividend $0.08 per share annually, or about 2%, since 2015 and didn’t raise the dividend between 2010 and 2015, constrained by weak performance at the competitive generation business and capital investment needs at the utilities. With the exit from the competitive generation business, the dividend might increase to track earnings growth.

Bulls Say’s

Industrial electricity rates that are well below the U. S. average are driving strong industrial development in the Mississippi Delta region and electricity sales growth.

The board raised the dividend 6% for 2022, the largest increase in a decade. The dividend growth is to continue at a similar rate for the foreseeable future.

The decision to exit the merchant nuclear business demonstrates good capital allocation as merchant nuclear earnings had high variability.

Company Profile

Entergy is a holding company with five regulated integrated utilities that generate and distribute electricity to about 3 million customers in Arkansas, Louisiana, Mississippi, and Texas. It is one of the largest power producers in the country with approximately 23 gigawatts of regulated utility-owned power generation capacity. Entergy was the second-largest nuclear owner in the U.S. before it began retiring and selling its merchant plants in 2014.

(Source: MorningStar)

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