Entergy Corp. CEO J. Wayne Leonard said that he had expected to announce the sale of Entergy-Koch LP, its joint trading venture with Koch Industries, on Monday, but negotiations are “considerably more complex than selling a power plant.” However, several companies have expressed an interest in the unit, and negotiations remain ongoing with a “highly credible, very sophisticated buyer.”

Entergy announced its intentions to sell the profitable trading unit, as well as the Gulf South Pipeline, in June, with the trading unit sold first (see Daily GPI, June 9). Even though both businesses are “quite profitable and valuable,” trading does not fit within the company’s current plans, Leonard told financial analysts during a conference call.

“When we formed the Entergy-Koch venture, we believed in it, and believed that trading was going to stand in the middle [of the company’s operations] in an integrated way,” he said. Among other things, Entergy planned to build more generation and expand its market through the Gulf South Pipeline. “But as you know, neither of these events came to pass. All five of our jurisdictions remain regulated…the region has overbuilt.” Now, the utility is “extremely capable” of procuring its power, and it is contracted “months and years in advance, and it’s not a daily, tradable commodity.”

Still, Leonard said Entergy-Koch has a “large balance sheet, relationships to wrap around it, and it will be value-creating for both the buyer and the seller. We will execute on this point of view, and [the buyer will] back it up with a fair price. We have no intentions of choking down a marginal deal to get it off our ‘to do’ list,” but he added, “we are working as quickly as practicable, as is the counterparty.”

Prudential Equity Group David Trone has put Entergy-Koch’s worth at about $2 billion, including $1 billion for the energy trading segment and about $960 million for the pipeline segment.

Likely buyers were considered to be among several large financial institutions, that would have the balance sheets and the wherewithal to continue an ongoing trading operation, including J.P. Morgan Chase & Co., Merrill Lynch & Co., Lehman Brothers and Deutsche Bank AG.

If the sales go through as anticipated, a new common stock repurchase program of up to $1.5 billion will take effect and extend through the end of 2006. The repurchase program will be decreased to $1 billion should a sale of Entergy-Koch not materialize.

“It is still our expectation that a combination of all three options — share repurchase, dividend increase and investments — will result over the next few years,” Leonard said. “And while value-creating investments could materialize at any time, the dividend level is scheduled for review at the early November meeting.”

The buyback, “and a significant one at that — is exactly what many investors have been looking for from Entergy over the past few months,” said Merrill Lynch analysts Steven J. Fleishman and Jonathan P. Arnold. They also were encouraged by the quarterly earnings news, which was unveiled on Monday.

The New Orleans-based utility reported a profit of $265.2 million ($1.14/share), compared with as-reported earnings of $205.6 million (89 cents) and operational earnings of $270.1 million (28 cents) for the same period of 2003. The quarterly earnings this year were affected by a July 2003 “unfavorable” Texas court decision regarding the inactive portion of the River Bend nuclear power plant, Entergy said.

Quarterly earnings within Entergy’s Energy Commodity Services unit, which includes Entergy-Koch and Entergy’s non-nuclear wholesale assets, were well off the numbers from the comparable period of 2003. The unit recorded as-reported earnings and operational earnings of $9.5 million (4 cents/share), compared with as reported earnings in 2Q2003 of $48.6 million (21 cents) and operational earnings of $47.9 million (21 cents).

“Lower results in second quarter 2004 were primarily due to the loss of disproportionate sharing of income from the Entergy-Koch venture,” the company said in a statement. Beginning in 2004, Entergy’s share of the partnership’s profits dropped to 50%, consistent with its ownership interest. However, in 2Q2003, the income-sharing mechanisms allocated substantially all of the partnership’s income to Entergy.

In addition, trading profits declined “consistent with low volatility typical of this time of year compared to 2Q2003 “when unusually favorable market conditions served to increase trading results.” Also, earnings contributed by Gulf South Pipeline were nearly flat quarter-to-quarter after adjusting for the loss of disproportionate sharing of income.

Entergy noted that quarterly results were driven by approved rate changes implemented at Entergy New Orleans in June 2003; “more normal” weather in 2004 compared with “milder-than-normal” weather a year earlier; lower interest expense because of refinancing efforts in 2003; and higher operation and maintenance expenses because of increased customer support and employee benefits expenses.

For the quarter, Utility, Parent & Other recorded as-reported and operational earnings of $192.7 million (83 cents/share), compared with as-reported earnings of $112.2 million (49 cents) and operational earnings of $177.8 million (77 cents) in 2Q2003. The as-reported earnings last year resulted from a loss provision related to River Bend construction costs.

Megawatt-hour sales in the residential sector, on a weather-adjusted basis, were down nearly 2% compared with 2Q2003, which Entergy blamed on customer growth offset by lower usage. Commercial and governmental sales, after adjusting for weather, were up 1%. Industrial sales experienced an increase of nearly 4% “with usage by the chemical and petroleum refining sectors continuing to show strength.”

Entergy Nuclear earned $63.0 million (27 cents/share), compared with $44.9 million (19 cents) in 2Q2003. The company credited improvement from increased MWhs generated because of fewer scheduled and unscheduled outages and uprates completed in 2003 at Indian Point units 2 and 3 and Pilgrim nuclear plants; 2) increased revenue on higher contract pricing; and 3) the addition of a support services contract for the Cooper Nuclear Station signed in 3Q2003.

Going forward, Entergy estimated 2004 as-reported and operational earnings guidance in the range of $4.10-4.30/share “until we are able to make an official announcement on the sale of Entergy-Koch Trading,” said CFO Leo Denault. “We are initiating 2005 guidance in the range of $4.60-4.85 on both as-reported and operational bases including the assumption that we are able to effect the sale of Entergy-Koch Trading and Gulf South Pipeline by year-end 2004. This range reflects a 10-15% growth rate versus the midpoint of our 2004 guidance, significantly above our previously disclosed near-term earnings aspiration of 8-10%”

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