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Before the bell, Entergy Corporation (ETR - Analyst Report) reported its third quarter 2012 results. In the reported quarter, the company posted operational earnings per share (“EPS”) of $1.95, which missed the Zacks Consensus Estimate of $1.96. Earnings also came in much lower than the year-ago quarter’s $3.53.

On a reported basis, including one-time items, earnings per share came in at $1.89 for the reported quarter, compared with earnings of $3.53 per share in the year-ago quarter.

Operational Results

Revenue in the reported quarter fell 12.7% year over year to approximately $3.0 billion, falling short of the Zacks Consensus Estimate of $3.5 billion. Of this Electricity revenue was down 15.1% to $2.3 billion, Natural Gas was down 10.9% to $23.6 million, and Competitive Businesses was down 2.5% to $619.6 million.

Entergy overall reported a net income attributable to the company of $337.1 million versus net income of $628.1 million in the prior-year period.

Segment Results

Utility


In third quarter 2012, Utility earnings were $296.2 million on an as-reported basis and $306.8 million on an operational basis, compared with $524.1 million on both as-reported and operational bases in third quarter 2011. 

The year-over-year variance was due largely to the absence of the net earnings benefit from a 2011 IRS settlement that resulted in a significant reduction in income tax expense, and a decrease in net revenue attributable to a regulatory charge.

Overall, weather was warmer than normal during the reported quarter, but fell short of the significantly above-normal temperatures experienced in the third quarter of 2011. The decreases were largely offset by the net effect of regulatory actions in several jurisdictions and increased net revenue attributable to weather-adjusted volume. Although total weather-adjusted retail sales growth was essentially flat, net revenue increased from sales growth due to growth in the higher-margin residential and commercial segments.

Higher non-fuel operation and maintenance expense and higher depreciation expense also resulted in the quarter-over-quarter earnings decline. Those were partially offset by deferral or capitalization of Isaac storm restoration costs.

Residential sales in third quarter 2012, on a weather-adjusted basis, increased 1.4% year over year. Commercial and governmental sales, on a weather-adjusted basis, increased 0.9% quarter over quarter. Industrial sales in the third quarter decreased 2.5% over the prior year. Billed retail sales growth on a weather-adjusted basis was essentially flat quarter over quarter.

Growth in residential and commercial and governmental sales was offset by a decline in industrial sales. The industrial sales decrease was due partly to an outage at a large industrial customer.

Entergy Wholesale Commodities

Entergy Wholesale Commodities’ as-reported and operational earnings were $118.8 million for third quarter 2012, compared with $130.2 million for third quarter 2011. The decline was due largely to lower net revenue from the nuclear portfolio primarily on lower energy pricing.

The average realized revenue per megawatt hour for the nuclear fleet was approximately $52, down from approximately $56 in the same period last year. While nuclear generation declined due to an increase in refueling and unplanned outage days, the effect of outage days was partially offset by the exercise of re-supply options provided for in power purchase agreements.

Lower net revenue from Entergy Wholesale Commodities' nuclear fleet was partially offset by net revenue from the 583-megawatt Rhode Island State Energy Center, which was acquired in December 2011. Higher non-fuel operation and maintenance expense also led to the operational adjusted earnings decline, driven by higher compensation and benefits costs and the Rhode Island State Energy Center acquisition. These items were partially offset by lower depreciation expense and a lower effective income tax rate.

Parent & Other

Parent & Other reported a loss of $77.9 million on both as-reported and operational bases for third quarter 2012. This compares to a loss of $26.3 million on both as-reported and operational bases in third quarter 2011. Higher income tax expense was the primary factor driving the variance. Higher interest expense also contributed to the variance.

Financial Condition

Entergy in the reported quarter generated approximately $1.0 billion from operating activities compared with $1.2 billion in the year-ago period. Cash and cash equivalents at the end of the reported period were $749.7 million versus $694.4 million at year-end 2011. Long-term debt increased to approximately $11.7 billion from slightly above $10.0 billion at year-end 2011.

Guidance

Entergy updated its 2012 earnings guidance range to $3.44–$4.24 per share on an as-reported basis and reaffirmed operational guidance range of $4.85–$5.65 per share. The revised as-reported guidance range reflects special items recorded in the reported quarter for expenses in connection with the proposed spin-off and merger of Entergy's transmission business with ITC Holdings Corporation (ITC - Snapshot Report).  

Earlier, in December 2011, Entergy 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.

Entergy also provided 2013 earnings guidance in the range of $4.60–$5.40 per share on both an as-reported basis and an operational basis.

Outlook

New Orleans, Louisiana-based Entergy is an integrated energy company engaged primarily in electric power production and retail distribution operations. Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity and is the second-largest nuclear generator in the United States.

Entergy delivers electricity to 2.8 million utility customers in Arkansas, Louisiana, Mississippi and Texas. The company is the second largest U.S. nuclear power generator after Exelon Corporation (EXC - Analyst Report).

Entergy is also on track with its plan of divesting its electric transmission business to ITC Holdings. The transaction will require the consent from Entergy's retail regulators, the Federal Energy Regulatory Commission and ITC shareholders. The company expects the transaction to complete by 2013.

Post-merger, ITC will become one of the largest electricity transmission companies in the U.S. Its area of operations will stretch from the Great Lakes to the Gulf Coast, with more than 30,000 miles of transmission lines.

Per the agreement, Entergy will divest its electric transmission business to a newly formed entity known as Mid South TransCo LLC ("Transco") which will be distributed to Entergy’s shareholders in the form of a tax-free spin-off. Then, under an all-stock Reverse Morris Trust transaction, Transco will merge with and into a newly created merger subsidiary of ITC.

Post-merger, Entergy will have an approximately 50.1% stake in ITC in exchange for their shares in TransCo. The balance 49.9% stake of the combined company will be with the existing shareholders of ITC.

Entergy plans to utilize most of the cash proceeds from the transaction to redeem the debt at its utility operating companies and at the parent, Entergy. It expects the transaction to meet the criteria for tax-free treatment for U.S. federal income tax purposes.

The divestiture will provide more investment alternatives and enhance the credit quality of Entergy and its operating subsidiaries. It will allow the company to invest more in its generation operations. Moreover, the transaction will not affect its retail customers and they will continue to receive the same standard of service as before.

In the past, the company spent much effort to create its own independent grid. Currently, it is seeking to integrate its transmission operations into the Midwest Independent System Operator.

Entergy presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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