Entergy: Gas Utility Sale Eases Balance Sheet Concerns; Remains a Top Utilities Pick

We are reaffirming our $120 fair value estimate for Entergy ETR after it announced an agreement to sell its Louisiana gas distribution business for $484 million in cash to infrastructure fund Bernhard Capital Partners. We are reaffirming our narrow moat rating.

Although the deal is too small to affect our fair value estimate, we think it is important financially and strategically for Entergy. We expect Entergy to use the proceeds to retire debt and fund growth investments, alleviating some of the near-term pressure on the company to raise market financing. The sale price at 1.4 times rate base is a slight premium to Entergy’s current market value.

Entergy’s high leverage and need for capital have been a drag on the stock’s valuation since it began exiting its Northeast nuclear business in 2014. The stock traded at an 18% discount to our fair value estimate and 14 times our 2023 earnings forecast on Oct. 27 before the deal announcement. U.S. utilities trade at a median 15.5 P/E. Entergy’s 5% dividend yield is one of the highest in the sector. The board raised the dividend 6% on Oct. 27.

Strategically, the divesture will make Entergy one of the few pure-play investor-owned electric utilities in the U.S. We think electric utilities deserve premium valuations relative to historical levels because of secular growth investment opportunities in clean energy, reliability, and growing electricity demand. The bulk of Entergy’s three-year $16 billion capital investment plan supports those trends.

We continue to forecast 7% average annual earnings growth during the next five years.

Securing regulatory approval could be unusually long since federal, state, and several local entities must sign off. We think approval is likely in part because Bernhard is based in Baton Rouge, Louisiana.

Separately, Entergy’s Arkansas utility resolved two long-running regulatory uncertainties. The financial impact is too small to affect our valuation or normalized earnings forecast.