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WIKI ANALYSIS
Entergy is one of the nation’s largest utility operators, with annual revenues around $13 billion and 2008 operating income at $2.28 billion[1] Entergy is also the nation's second largest nuclear generator, after Exelon (EXC). Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity and is a nuclear power generator in the United States. Entergy delivers electricity to 2.7 million utility customers in Arkansas, Louisiana, Mississippi and Texas.[2]
Because Entergy's utility operations are predominantly located in the gulf-state regions, it remains susceptible to increased hurricane activity and larger insurance premiums resulting from heightened perceived risks. For example, Hurricanes Gustav and Ike and a major Arkansas ice storm reduced Entergy's operating cash flow for utilities by $314 million as a result of costs associated with system repairs.[3]
The price of oil has fallen from nearly $150 a barrel in July 2008 to around $70 a barrel in December 2009. This dramatic decline in fossil fuel prices has decreased the cost of operating fossil-fuel based plants. Fossil-fuel plants in Entergy's regulated utility segment represent a substantial portion of Entergy's 30,000 MW of capacity. Falling fossil-fuel prices decrease the marginal cost of operating these plants. This favorable combination lowers Entergy's marginal costs, positively impacting earnings. However, lower fossil fuel prices have a mixed effect on Entergy's earnings. Entergy's substantial non-utility nuclear portfolio is negatively impacted by falling fossil fuel prices.
Though Entergy has significant investments in fossil-fuel generating power plants, its nuclear presence will allow it to benefit from the rising worldwide demand for energy, resulting rising fossil fuel prices, global warming concerns, and a favorable US legislative environment.
Company Overview
Business and Financial Metrics
Third Quarter 2009 Summary
Entergy announced earnings of $455.2 million in the third quarter of 2009, down 3.2% from earnings of $470.3 million in the third quarter of 2008.[4] Its earnings were divided among the following business segments:
- Utility, Parent, & Other
Earnings totaled $259.6 million, down 9.2% from the third quarter of 2008.[4] The decline in earnings was caused by a decrease in electricity demand from industrial customers such as producers of chemicals and primary metals.
- Nuclear
Earnings totaled $200.4 million, down from 4.9% from $210.7 million in the third quarter of 2008.[4] Earnings declined due to higher operational costs. However, the decline was partially offset by higher revenue from increased electricity production due to fewer planned and unplanned outage days.
- Non-Nuclear Wholesale Assets
Entergy’s Non-Nuclear Wholesale Assets business incurred a loss of $4.8 million compared to a loss of $21.0 million in the third quarter of 2008.[4] During the third quarter, Entergy also announced that its non-utility nuclear business will establish a new independent, publicly traded company, Enexus Energy Corporation.[4]
Second Quarter 2009 Summary
In the second quarter of 2009, Entergy reported earnings of $226.8 million, down 16.3% from its earnings of $271.0 million in the second quarter of 2008.[5] Entergy's lower earnings were partially caused by lower production in its nuclear division due to unplanned outage days, partially offset by lower income tax expenses. Lower revenue within Entergy's utility division reflected a regulatory charge associated with a May 2009 Federal Energy Regulatory Commission (FERC) order.[5] Finally, the weak economy has had an adverse effect on the industrial sector, with weakness in industrial sales led by weak demand in chemicals, primary metals, and refining.[5]
Business Segments
Entergy is divided into two broad business segments: utility and non-utility. The Utility segment generates and distributes energy to over 2 million retail customers in the southern regions of the United States. The Non-Utility segment focuses on generating energy through nuclear and non-nuclear plants for wholesale delivery to retail energy suppliers. Together, these segments have the capacity to generate over 30,000 megawatts of electricity.[6]
Utility
Entergy's Utility segment generates, distributes and sells electric power and operates a small Natural gas utility. Entergy's retail utility operations are divided by region into six segments: Entergy Louisiana, Entergy Gulf State Louisiana, Entergy Texas, Entergy Arkansas, Entergy New Orleans and Entergy Mississippi. In all, these six utilities generate 22,000 megawatts of energy and deliver energy to over 2.6 million retail customers. In addition to electric utilities, Entergy operates two natural gas utilities that serve approximately 150,000 retail customers. Entergy Utility also includes several nuclear utilities that serve Entergy's regulated energy businesses.
Non-Utility
Non-Utility Nuclear
Entergy's Non-Utility Nuclear segment operates five nuclear plants in northeast region of the United States and one nuclear plant in the Midwest. These nuclear plants generate energy for wholesale delivery to retail suppliers. In all, these nuclear plants have a generation capacity of almost 5000 megawatts. Entergy Non-Utility Nuclear segment also has access to another 800 MW through a long term management contract for a nuclear power plant in Nebraska.
Non-Nuclear Wholesale Assets
Entergy's Non-Nuclear Wholesale Assets sells wholesale energy produced by non-nuclear plants. Non-Nuclear Wholesale has a generation capacity of 1600 MW.
Trends and Forces
Falling Fossil Fuel Prices
The price of oil has fallen from nearly $150 a barrel in July 2008 to about $70 in December 2009.[8] This dramatic decline in fossil fuel prices has decreased the cost of operating fossil-fuel based plants. Fossil-fuel plants in Entergy's regulated utility segment represent a substantial portion of Entergy's 30,000 MW of capacity. Falling fossil-fuel prices decrease the marginal cost of operating these plants. This favorable combination lowers Entergy's marginal costs, positively impacting earnings.
However, lower fossil fuel prices stand to have a mixed effect on Entergy's earnings. Entergy's substantial non-utility nuclear portfolio is negatively impacted by falling fossil fuel prices. The dramatic fluctuations in the price of fossil fuels have underscored the differences between nuclear and fossil fuel energy sources:
Nuclear vs. Fossil. The key difference between nuclear and fossil plants is the cost structure. Nuclear plants require very large capital investments (to construct the plant) but little expenditure for fuel because it takes relatively little uranium to power a plant. On the other hand, fossil fuel plants require relatively little capital investment but have high fuel costs because they require large amounts of coal, oil or gas. In the past, low fossil fuel prices gave given fossil fuel plants a cost advantage over nuclear plants. The cost advantage, compounded by the stigmas of nuclear energy has prevented new nuclear construction for almost 30 years. Record fossil fuel prices have begun to reverse this trend. The possibility and implications of peak oil may reinforce this reversal. Because market prices for wholesale energy are determined by fossil-fuel plants, increasing operation costs at fossil fuel plants will widen profit margins at Entergy's non-utility nuclear plants, boosting earnings. Already, nuclear utilities such as Entergy have begun filing for permits for construction of new nuclear plants to capitalize on this fact.
Weather
Bad weather can knock out power to Entergy customers, forcing the company to do costly repairs. For example, Hurricane Gustav in 2008 cut power to 1.8 million homes, 690,000 of which were Entergy's customers - the second largest outage for the company.[9]
Global Warming and Environmentalism
Over the past few years, global warming has moved from the fringes to become a main stream issue across the globe. A growing body of scientific evidence ties carbon dioxide emissions to rising temperatures. As a result of growing popular awareness of the risks of global warming, many large corporations have stepped up their efforts to project greener images. Additionally, many expect the US government to enact more stringent legislation limiting carbon emissions. Environmental awareness is another key trend driving the renaissance of nuclear energy. Compared to their fossil fuel peers, nuclear energy plants have negligible emissions. Although Entergy also operates fossil fuel plants, its substantial nuclear portfolio should allow it to offset its emissions if carbon trading markets are used to lower emissions.
Entergy appears to be a posterboy for sustainability; on September 11th, 2007, the company was named a member of the Dow Jones Sustainability Index for North America and the world, an award only granted to 16 other utilities worldwide. 2007 is the sixth year the company has been named a member of the DJSI, an unprecedented honor. The company ranked highest in its sector for climate strategy, environmental policy and management, shareholder engagement, occupational safety, and talent attraction/retention. Furthermore, the company was named "Best in Class" four times by the Carbon Disclosure Project for its disclosure of greenhouse gas emissions and its plans to prevent and deal with climate change. It should be noted, however, that the environmental benefits of nuclear power are still hotly debated; among hardcore environmentalists, the true friendliness of Entergy is still up in the air.
Nuclear Power Is Still Highly Controversial
Nuclear power plants are run to precise, extremely high standards in order to ensure that the power-generating processes do not go awry. This is because nuclear energy is generated by dealing with the most basic and yet most powerful forces in the universe: the quantity of energy released by fission reactions in a single power plant, though enough to power 800,000 people, is enormous enough to melt a hole deep into the planet. Furthermore, an uncontrolled reaction could release enough radiation to make the state of Pennsylvania unlivable. Entergy has taken an industry-leading position on plant safety and regional safety, and is currently in the process of installing the most advanced meltdown-warning system in the world at its Indian Point Energy Center to give locals advance warning if there is any danger.
The threats to the environment and human life that nuclear power could pose have many people who would otherwise support nuclear energy in the fight against climate change turning to other energy sources like wind and solar, though the fact that Entergy's competitor, Exelon, can generate a kilowatt-hour of energy for only 1.8 cents versus an average of 4 cents for wind energy could have average consumers leaning toward nuclear as an easy climate change solution. Ultimately, the question of the success of nuclear energy will come down to what people fear more: the threat of climate change with its unknown effects or the risk of a cataclysm whose effects are known ([www.wikipedia.com/chernobyl see: Chernobyl]).
Entergy's nuclear power plants have had several incidents that have tarnished the company's credibility. In 2007, a cooling tower at the Vermont Yankee nuclear power plant collapsed.[10] The Nuclear Regulatory Commission said the tower was not needed to assure safety, but the incident shook public confidence. In January 2010, levels of radioactive tritium rose in the groundwater surrounding Entergy's nuclear plant in Vermont.[10] Entergy is also seeking to create a separate subsidiary, which some opponents view as an attempt to limit Entergy's legal liability.
Government Regulation and Legislation
The US government plays a critical role in the financials of the highly regulated energy sector. Each of Entergy's utilities and non-utilities face a variety of challenges and potential benefits that may arise from changes in legislation and regulatory schemes:
Utility
Most of Entergy's retail utilities are in highly regulated markets. Regulation impairs Entergy's ability to pass increasing costs along to consumers. However, local and state governments have been trending toward deregulation and open markets. Increasingly deregulated markets and market based pricing should provide a boost to earnings in Entergy's utility segment.
Non-Utility Nuclear
In all, the legislative environment is favorable for Entergy's Non-Utility Nuclear segment. Increasing concern over global warming makes US carbon emission legislation likely in the short to midterm. Entergy should benefit from any legislation based on carbon trading markets because its substantial nuclear portfolio should allow it to offset emissions at its carbon based plants with carbon credits from nuclear plants. Additionally, the 2005 federal energy bill provided many government incentives for the continued expansion of the US nuclear fleet. Non-Utility Nuclear should benefit from this favorable legislative environment moving forward.
Hurricane Seasons
Entergy's utility operations are predominantly located in the gulf-state regions, making it very susceptible to hurricanes. The 2005 Hurricanes Katrina and Rita and the 2007 Hurricane Humberto caused immense damage to Entergy's utility infrastructure throughout the gulf states resulting in significant losses. Specifically, Entergy reported over $1B in losses due to hurricane damage. After Hurricane Katrina, Entergy's subsidiary Entergy New Orleans was forced to file for bankruptcy due to a near complete loss of revenue from its electric and natural gas customers. Entergy is poised to recover much of these losses from federal and state assistance along with insurance claims. However, the storms may have a more permanent negative impact on earnings as many expect New Orleans' population to remain at half of pre-storm levels. If hurricane seasons continue to increase in intensity, whether due to global warming or natural cycles, storm systems will continue to pose a very serious threat to Entergy's operations.
Competitors
Entergy's position as the nation's second largest nuclear operator puts in a favorable position compared to its non-nuclear utility peers. Increased fossil fuel prices have continued to raise wholesale electricity rates throughout the nation. As a nuclear supplier, Entergy's Non-Utility Nuclear segment will benefit because it is largely immune to increases in fuel prices. It is important to note that, while these metrics are useful in highlighting various advantages of each utility, none of these company's utility operations are in direct competition. Each utility operates in a geographical monopoly.
| Revenue (FY 2008, USD millions) | Net Income | Generation Capacity (MW) | Net Profit Margin | |
|---|---|---|---|---|
| Entergy | $13,093.76 | $1,240.54 | 4,998 | 9.47% |
| American Electric Power Company (AEP)[11] | $14,440.00 | $1,380.00 | 37,000 | 9.48% |
| OGE Energy (OGE) | $4,070.70 | $231.40 | N/A | 5.68% |
Notes
- ↑
- ↑ Reuters: ETR
- ↑
- ↑ 4.0 4.1 4.2 4.3 4.4 Entergy News Release: Entergy Reports Third Quarter Earnings
- ↑ 5.0 5.1 5.2 Trading Markets: "Entergy Reports Second Quarter Earnings"
- ↑ http://www.entergy.com/News_Room/newsrelease.aspx?NR_ID=1108
- ↑ ETR 10-k 2009 "Selected Financial Data" p. 57
- ↑ Bloomberg Energy Prices
- ↑ Reuters: "Some 690,000 Entergy customers still without power"
- ↑ 10.0 10.1 New York Times: "Radiation Levels Cloud Vermont Reactor’s Fate" Mathew Wald, Jan. 27, 2010
- ↑ AEP 10-k 2009
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