Entergy Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Entergy Corporation is a utility company primarily engaged in the generation, transmission, distribution, and sale of electric power to retail customers in Louisiana, Arkansas, Mississippi, and Texas, with a small natural gas distribution business.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Entergy operates as a regulated utility, meaning its prices and service standards are under the oversight of state and federal regulatory bodies, allowing it a reasonable rate of return on invested capital, but also limiting how profitable it can be.

Business Overview:

Entergy Corporation operates as a diversified electric utility company across the Southern United States, primarily in the states of Louisiana, Arkansas, Mississippi and Texas. It’s important to note that while the majority of its operations consist of regulated activities, they also have a smaller non-regulated business segment.

Regulated Utilities (Electric): The core of Entergy’s business involves the generation, transmission, distribution and sale of electric power to retail customers within their specified service territories, using rate plans authorized by regulators. Their regulated business benefits from a steady revenue stream, but they must seek approval for price changes and significant investments.
- Generation: They produce electricity through a mix of sources, including nuclear, natural gas, coal, hydro, and solar, in a move toward renewable energy generation.

Entergy is committed to achieving net-zero carbon emissions by 2050. * Transmission: They own and operate a network of transmission lines across their service territory. This is generally viewed as a stable business since they are a regulated monopoly. * Distribution: The company has local distribution lines connecting from substations to customers.

Gas Distribution: In addition, Entergy operates a natural gas distribution business, primarily in Louisiana.

Industry Trends:

Energy Transition: There is a significant push toward renewable energy sources driven by growing awareness of climate change and decreasing cost of renewables. This transition impacts energy production methods and long-term capital investment decisions for utilities.
Regulatory Scrutiny: Utilities are facing ever increasing pressure from regulators due to climate change. More and more regulations are being added or modified, such as those relating to grid resiliency and cybersecurity.
Technological Innovation: The integration of smart grids, advanced metering, and energy storage solutions is transforming the industry. This is forcing utilities to adapt by investing in new technologies.
Economic Uncertainty: Macro-economic conditions such as inflation and economic downturns can affect energy prices and customer demand. As seen by their 2023 earnings, they are also subject to high interest rates.
Increased Energy Demand: Demand for electricity is expected to rise due to electrification, a shift from fossil fuels, and other changing economic trends.

Competitive Landscape:

The utility sector is typically characterized by geographic monopolies or oligopolies, with relatively limited direct competition among utilities in the same regions.

Regulated Monopolies: In their primary service areas, Entergy faces little direct competition due to its regulated status and territorial exclusivity. It competes more for capital and investment dollars within the utility space, rather than from competitors in its area.
Competition in Renewables: They also face some competition from other renewable energy producers.

What Makes Entergy Different:

Geographic Focus: Entergy is geographically focused on the Southern United States, giving it in-depth regional experience but also limiting its expansion. They are also subject to local economic volatility of the south.
Strong Regulatory Expertise: They are experienced in working within a complex and varied regulatory framework. They have consistently and successfully navigated state and federal regulations for rate approvals, infrastructure projects, and environmental compliance, which allows them to earn good returns.
Diverse Generation Portfolio: Entergy has invested in a more diverse generation mix, including nuclear and renewables which it intends to use to reduce its carbon emissions over time. This puts it at an advantage over others who are reliant on less eco-friendly energy generation.
Focus on Operational Efficiency: In their latest earnings calls, Entergy’s management has consistently mentioned increasing their cost efficiencies. This puts them in a better financial standing than competitors in the long run.

Financials:

Revenues:

For the first quarter of 2024, Entergy’s total operating revenues decreased by $1.4 billion year-over-year, driven by lower fuel and purchased power costs, and by lower customer sales volumes and higher revenues from regulated and non-regulated activities.
- The total retail electric revenues were $3,658 million for the first quarter of 2024, down from $4,097 million. The decrease in retail electric revenues reflected a decrease in the fuel rider revenues of $1,556 million and offset by an increase in base rates of $154 million.

ETR’s Q1 2024 earnings report and subsequent calls revealed that they had 138,000 additional customers than this time in 2023 which led to a increase in revenue from customers, however, this revenue has not been enough to offset the fall in fuel related revenue.

For the year ending 2023 total operating revenues for Entergy Corporation was $12.5 billion compared to $12.27 billion in the year before.

Profitability:

Net Income Attributable to Entergy Corporation was $310 million or $1.44 per share compared to $522.7 million or $2.67 per share in the first quarter of 2023. These were primarily affected by lower net gains from interest and other investment income ($193.7 million), and a higher loss from nonrecurring items ($380.6 million).
Their annual report shows earnings available to common shareholders of $1.34 billion in 2023 compared to $1.12 billion in 2022.

Return on Invested Capital (ROIC):

ROIC is a common metric used to understand a company’s efficiency in its use of capital. As seen in the “Analyzing Performance” section, the company has shown volatility in this metric. Historically, the companies with a high return have been better investments. Management continues to try to increase this metric.

The main value driver, which their economic profit is based on, has been decreasing over time. This means the company has made less efficient use of its capital and management needs to be more proactive in their strategy to improve performance.

Balance Sheet:

ETR’s debt to capital ratio was 51.5% as of the last report. This has increased slightly YoY. This is a metric used to see how levered a company is, and the increase is not ideal, however it is still within managements own constraints. * Their long-term debt stands at $22 billion, down from around $24 billion last year.
They reported that their Cash and Cash Equivalents stood at $520 million, which has fallen dramatically compared to the $1.1 billion they had in 2023. This can be attributed to the increased capital expenditures and acquisitions.
Their liquidity and capital resources remain adequate to support their operational needs and continue with investments.

ETR has relatively high levels of debt compared to its cash flow and overall revenues. It’s something for investors to keep an eye on, but overall management has said that they are committed to paying down their debt and improving their credit ratings.

Recent Concerns & Issues:

Regulatory Uncertainty: Entergy operates in a complex and rapidly changing regulatory environment, leading to uncertainty in its long-term profitability, which has made many investors wary.
Hurricane and Storm Costs: ETR is susceptible to extreme weather events, especially hurricanes, as they operate in the South. This can lead to high costs for repairs and power restoration, and could lead to increased regulatory scrutiny if they are unable to serve customers efficiently. They often seek approval from regulatory bodies to recover costs from past weather-related incidents from their customers through surcharges and rate increases.
- This was evidenced by an extra 47 cents per share in expenses in Q1 2024 that were related to the recovery from storms from previous years.
Rising Interest Rates: ETR is heavily leveraged, meaning rising interest rates increase the cost of funding and may decrease their profitability in the long-run. Management plans on reducing debt, however that may not be as fast as ideal, and thus they are more likely to be affected by macro-economic headwinds.
Supply Chain Disruptions: They are vulnerable to supply chain disruptions, particularly regarding its nuclear fuel and raw material inputs for generation plants, and have also had multiple instances of supply chain disruptions. They have however taken steps to secure supply and are not currently as vulnerable as before.

Moat Rating: 3 / 5

Entergy has a narrow moat based on its regulated operations, which enjoy some geographic protection but are subject to regulatory constraints.

Intangible Assets: ETR does have some protection via regulatory requirements and licenses. Also they have created a brand in the south that allows them to have loyal customers, however these are not as valuable as some that are found in other industries.
Switching Costs: There are limited options for consumers to change electricity providers in Entergy’s operating areas, leading to some level of customer lock-in and pricing power.
Cost Advantages: ETR is making efforts to improve operational efficiency and improve economies of scale through its acquisitions. This will increase its ability to offer prices comparable to its competitors.
Network Effects: The network effects are primarily constrained by the geographic limitations of the markets they serve.

Understandability: 3 / 5

ETR’s operations are reasonably complex.

The basic operations of generation, transmission, and distribution are relatively easy to grasp. However, many investors may not be aware of all the complex regulatory requirements and nuances associated with the company’s operations.
The company also has multiple segments and joint ventures which may increase the complexity for most investors to comprehend.
The calculations used to come up with the various financial statements are relatively complex due to the regulated environment the company operates in.

Balance Sheet Health: 3 / 5

While not in critical danger, ETR’s balance sheet does indicate some vulnerabilities.

The increased levels of debt mean the company is more susceptible to changes in interest rates.
Their cash and short-term assets have decreased significantly, though not enough to cause any concern in their solvency. However it means they have less capital flexibility.
The increasing number of nuclear and renewable energy projects they plan to pursue, they will have to continue to leverage and have high levels of capital expenditures, requiring strong cash flow.

Summary:

While ETR is a solid company that serves the South of the US, its economic moat has been eroding and is now reliant on management to adapt and use new methods to increase revenue and profitability. It is also subject to many macro-economic headwinds that may impact its growth trajectory.