Milder weather, higher costs weigh on Entergy earnings, but 'tailwinds' seen in IRA

Milder weather and higher operating and interest expenses caused Entergy to report adjusted first-quarter income down 13.7% from Q1 2022, but the New Orleans-based company is capitalizing on federal legislation to expand its renewables offering and clean energy industrial demand across Louisiana, Mississippi and Texas.

Population-weighted average combined heating and cooling degree days in Louisiana, which lies at the heart of Entergy utility footprints that also include parts of Arkansas, Mississippi and Texas, were down by 21.7% in the first quarter, compared with Q1 2022.

"Weather has been a headwind to start the year," reducing Entergy earnings by 22 cents/share, said Kimberly Fontan, executive vice president and CFO.

Entergy is a member of the Midcontinent Independent System Operator. MISO's Louisiana Hub day-ahead on-peak locational marginal prices averaged less than $30/MWh in the first quarter, down 31.6% from Q1 2022's $43.65/MWh.

For purposes of Entergy earnings, plunging natural gas prices likely mitigated bearish weather and power price fundamentals. At the Henry Hub, spot gas averaged $2.676/MMBtu in the first quarter, down almost 42% from Q1 2022's $4.599/MMBtu.

As reported to the Securities and Exchange Commission, Entergy earned $311 million, or $1.47/share, in the first quarter, up from Q1 2022's $276 million, or $1.36/share.

Among the adjustments was $76 million resulting from storm securitization at Entergy Louisiana.

Conservative assumptions

After adjustments, Entergy earned $242 million, $1.14/share, in the first quarter, down from Q1 2022's $269 million, or $1.32/share.

"We incorporate conservative assumptions into our planning process and have a portfolio of flex levers to mitigate the impacts," Fontan said. "The fundamentals of our utility growth remains strong, and despite the first quarter weather, we remain squarely on track to achieve our financial objectives for 2023."

Entergy projects compound annual growth rate for adjusted earnings of 6% to 8% through 2025, which would put 2023's adjusted earnings in a range of $6.55-$6.85/share.

"Excluding weather, retail sales were higher, driven by industrial sales growth of 2%," Fontan said. "That growth came largely from new and expansion customers, particularly in the primary metals and petrochemicals industries. This was partially offset by lower sales to cogeneration customers, as cogen sales were particularly strong in 2022."

Industrial grown seen

Andrew Marsh, Entergy chairman and CEO, said the company expects industrial sales to grow about 6% in 2023, the earnings presentation states that 44% of Entergy's utility sales are to industrial consumers.

"As we've said for a number of years now, there's a lot of advantages to the Gulf Coast, and that's access to global and national markets and the available energy infrastructure, low energy prices, supportive communities, available workforce," Marsh said. "Now you've got broken global supply chains and geopolitical uncertainty. You've got the tailwinds, the [Inflation Reduction Act], but before you even get to the IRA, we've seen a lot of onshoring and that's basically what our 6% is based on."

The IRA includes several incentives for clean energy, on which Entergy made significant strides in the first quarter, including:

• An agreement for a 500-MW green hydrogen electrolyzer in East Texas
• A request for Louisiana regulators to approve 225 MW of new solar capacity
• A separate proposal to Louisiana regulators for 3 GW of renewable resources, in addition to 2.5 GW already sought

"Tailwinds of the IRA" could cause Entergy's industrial demand growth rate to "get bigger," Marsh said.

"The rules are still a bit uncertain associated with that -- green hydrogen in particular -- but we are seeing an awful lot of interest in in the Gulf Coast area to try and take advantage of, frankly, the existing infrastructure that's already there," Marsh said. "For example, we have production, we have consumption, we have transportation, we have storage. We have everything that you need to move hydrogen. ... I mean it is effectively a hydrogen hub already."