Executive Summary / Key Takeaways

• Strategic Pivot at a Discount: Entergy New Orleans completed the sale of its natural gas distribution business in July 2025, transforming into a pure-play electric utility while recognizing a $7 million gain, yet the stock trades at just 0.43x book value—a valuation that reflects regulatory risks but ignores the improved strategic focus and reduced commodity exposure.

• Carbon Goals vs. Load Growth Tension: The company faces a fundamental strategic conflict: its commitment to 50% carbon-free capacity by 2030 is being delayed by stronger-than-expected sales growth, particularly from data centers, forcing a pragmatic "customer-led" approach that prioritizes reliable fossil and hydrogen-capable generation over pure renewable ambition.

• Data Center Catalyst with Concentration Risk: Entergy is pursuing massive data center opportunities, including a 2,262 MW generation project for Meta in Louisiana and special contracts for Google , representing potential revenue upside but creating customer concentration risk and stranding concerns if AI demand falters.

• Regulatory Headwinds Dominate Narrative: A $78.5 million regulatory charge in Q1 2024 for income tax benefit sharing, a $131.8 million write-off at Entergy Arkansas, and ongoing MISO capacity cost pressures demonstrate the regulatory execution risk that justifies the valuation discount, even as new legislation like the Generating Arkansas Jobs Act of 2025 aims to streamline cost recovery.

• Capital Intensity Requires Constant Rate Case Success: With $785 million in planned capital investments through 2029 and a 10.98% earned ROE that triggered a $19.2 million rate reduction, the investment thesis hinges entirely on the company's ability to recover escalating costs in an increasingly challenging regulatory environment.

Setting the Scene: A Monopoly Utility's Identity Crisis

Entergy New Orleans, LLC operates as a regulated electric monopoly serving approximately 200,000 customers in Orleans Parish, Louisiana. Unlike most utilities that maintain both gas and electric operations, ENJ completed the strategic divestiture of its natural gas distribution business on July 1, 2025, marking a definitive pivot to single-commodity focus. This eliminates the operational complexity and commodity price volatility of gas distribution, allowing management to concentrate capital and regulatory attention exclusively on electric grid modernization and resilience.

The company makes money through a straightforward regulated utility model: invest in generation, transmission, and distribution assets; earn a state-authorized return on equity (currently 9.35%); and recover costs through customer rates approved by the New Orleans City Council. This model provides predictable cash flows when regulatory relationships are stable, but creates earnings vulnerability when rate cases go against the company—as evidenced by the $78.5 million regulatory charge in Q1 2024 related to sharing income tax benefits with customers.

Entergy New Orleans sits within a broader Entergy Corporation (ETR) structure that traces its operational framework to 1980s-era agreements governing power sharing among Gulf Coast utilities. While the parent company's history shapes capital allocation and system planning, ENJ's strategic direction is increasingly independent, focused on serving New Orleans' unique urban density, tourism-driven load patterns, and acute weather vulnerability. The company is headquartered in New Orleans, Louisiana, placing it at the epicenter of climate risk and resilience investment demand.

The utility industry is experiencing unprecedented structural shifts. Liquefied natural gas export growth is driving domestic gas prices higher, complicating fuel procurement. MISO 's implementation of reliability-based demand curves has caused capacity auction clearing prices to surge, increasing purchased power costs. Most significantly, data center demand is projected to consume 9.1% of U.S. electricity by 2030, creating both a massive growth opportunity and a reliability challenge for utilities unprepared for 24/7 baseload requirements. ENJ's strategy must navigate these forces while maintaining its regulatory compact and justifying massive capital deployment.

Technology, Products, and Strategic Differentiation: The "Customer-Led" Decarbonization

ENJ's core technology is not software or hardware but its integrated grid infrastructure and regulatory franchise. The company's strategic differentiation lies in its resilience-focused investment approach, designed for a flood-prone, hurricane-vulnerable urban environment. This manifests in concrete capital projects like the 2025-2026 Accelerated Resilience Plan, which will upgrade 63 line miles with hardened infrastructure. Why does this matter? Because each dollar spent on resilience reduces future storm restoration costs and strengthens the company's regulatory standing by demonstrating tangible customer benefits, creating a virtuous cycle that supports rate recovery.

The "customer-led" clean energy strategy represents a pragmatic departure from top-down decarbonization mandates. Rather than pursuing renewable targets irrespective of cost, ENJ and its parent are building what customers demand: reliable, dispatchable power that can eventually accommodate carbon capture or hydrogen co-firing . The Ironwood Power Station (446 MW hydrogen-capable natural gas turbine) and Jefferson Power Station (754 MW natural gas combined cycle) exemplify this approach—fossil assets today, but engineered for future decarbonization if technology and economics support it. This approach preserves optionality while meeting immediate load growth, though it also means the company will miss its 2030 carbon-free capacity goal, potentially exposing it to environmental stakeholder pressure.

The data center strategy is the most significant technological and commercial shift. Entergy Louisiana's Meta project, Entergy Arkansas's Google contract, and similar opportunities represent a potential doubling of industrial load. Entergy Louisiana's 2,262 MW generation project for Meta includes three combined-cycle turbines enabled for future carbon capture, a new 500 kV transmission line, and substation upgrades, with the customer contributing to costs and providing termination payment protections. While this de-risks the investment through customer commitments, it also creates concentration risk—if AI demand proves cyclical or Meta scales back, those assets could become stranded. For ENJ specifically, the Google/Altitude special rate contract for a West Memphis data center, supported by the 600 MW Arkansas Cypress Solar facility, shows how the company is linking renewable development directly to large customer demand, creating a new revenue model that bypasses traditional rate-base recovery.

Financial Performance & Segment Dynamics: Regulatory Decisions Drive Earnings Volatility

ENJ's financial performance demonstrates the direct impact of regulatory outcomes on profitability. For the nine months ended September 30, 2025, net income increased $39.5 million compared to 2024, but this was entirely due to a $78.5 million regulatory charge in the prior year period. Without this one-time benefit, underlying earnings would have declined, reflecting the operational challenges of flat load growth and rising costs. This highlights that regulatory decisions, rather than operational efficiency, are the primary driver of earnings volatility—a key risk for investors seeking predictable utility returns.

Third quarter 2025 electric operating revenues were $220.3 million, up from $213.7 million in 2024, driven by higher industrial and residential usage. However, nine-month revenues declined to $543.0 million from $549.3 million in 2024, as commercial usage weakness offset residential gains. The volume/weather variance in Q3 2025 was negative due to decreased weather-adjusted residential and commercial usage, partially offset by favorable weather impacts. This demonstrates that ENJ is not immune to broader economic softness in commercial sectors, even as it benefits from population growth and tourism recovery in residential demand.

The natural gas sale's financial mechanics are complex and revealing. The $7 million pre-tax gain ($5 million net-of-tax) was partially offset by a $12.8 million write-off of retained gas plant assets that were not included in the sale and will not be recovered. Additionally, $4 million of the gain was deferred as a regulatory liability to be amortized over three years beginning September 2026, providing credits to customers. This illustrates the regulatory compact in action—gains from asset sales must be shared with customers, limiting shareholder upside, while stranded asset costs are borne by shareholders, creating asymmetric risk.

The formula rate plan filing illustrates the regulatory tightrope. ENJ's 2024 evaluation report showed a 10.98% earned ROE versus the 9.35% authorized return, which would have triggered a $13.8 million rate decrease. After adjustments, the company proposed an $8.6 million reduction, but the City Council approved a $19.2 million decrease effective September 2025. This demonstrates that regulators can and will extract value when returns exceed authorized levels, and they also have discretion to demand larger reductions than proposed, creating uncertainty around future earnings power.

Outlook, Management Guidance, and Execution Risk: Massive Capex Meets Regulatory Uncertainty

Management's guidance reveals a capital-intensive future with uncertain recovery mechanisms. ENJ anticipates $785 million in capital investments from 2026-2029, including $225 million in 2026, $160 million in 2027, $185 million in 2028, and $215 million in 2029. This represents a significant acceleration from historical levels and will require continuous rate case filings. Every dollar of investment must be defended in regulatory proceedings where the company has recently demonstrated limited pricing power.

The carbon goal delays are perhaps the most important strategic admission. Due to stronger-than-expected sales growth and changes to tax credits, Entergy now believes its 2030 carbon intensity goal may be delayed and its 2030 carbon-free capacity goal will not be achieved. This signals a pragmatic shift toward serving load growth over environmental targets, which could reduce regulatory risk from environmental groups but potentially increase long-term carbon liability and customer rates as the company builds more fossil generation.

The data center pipeline provides the growth narrative. Entergy Louisiana's Meta project, Entergy Arkansas's Google contract, and similar opportunities represent a potential doubling of industrial load. However, management acknowledges that "reductions in demand for electricity to power hyperscale data centers" is a key risk, and the concentration of business with a small number of customers in an emerging technology industry creates vulnerability. While data centers offer premium load growth, they also represent a potential bubble—if AI investment proves overbuilt, ENJ's capital investments could become stranded.

Regulatory developments offer both opportunity and risk. The Generating Arkansas Jobs Act of 2025 authorizes recovery of financing costs during construction, streamlining rate recovery. Texas legislation established a capacity cost recovery rider for MISO procurement costs. However, the MISO transmission interconnection queue is experiencing severe delays, and the volume of requests may be exacerbated by load growth. This indicates that while some jurisdictions are facilitating cost recovery, underlying infrastructure constraints could delay critical generation projects, threatening reliability and load growth capture.

Risks and Asymmetries: Where the Thesis Breaks

The most material risk is regulatory cost recovery failure. The $131.8 million write-off at Entergy Arkansas following an adverse opportunity sales proceeding decision, upheld by the Supreme Court in June 2025, demonstrates that even long-standing regulatory assets can be wiped out. For ENJ, the $12.8 million gas asset write-off and the $19.2 million formula rate plan reduction show that regulators will not guarantee full cost recovery. If this pattern continues with the $785 million capital plan, returns could compress materially below authorized levels.

MISO market dynamics create a second major risk. The significant increase in seasonal auction clearing prices due to reliability-based demand curves increased Entergy Texas's purchased power costs by $29 million in nine months 2025. While Texas now has a recovery rider, ENJ's exposure to MISO capacity costs without similar protection could pressure margins. The transmission interconnection queue delays could prevent timely generation additions, forcing expensive spot market purchases during peak demand.

Weather and climate risk remains acute. New Orleans' location makes it uniquely vulnerable to hurricanes, requiring massive resilience spending with uncertain regulatory treatment. While the Accelerated Resilience Plan is approved, future storm costs could exceed authorized recovery, as seen post-Hurricane Ida. This creates binary earnings risk, as one major storm could trigger hundreds of millions in unrecoverable costs.

Data center concentration risk is growing. The Meta (META) project represents 2,262 MW of generation, and the Google (GOOGL) contract supports 600 MW of solar. If AI demand proves cyclical or these customers default, the termination payment provisions may not fully protect against asset stranding. This indicates ENJ is betting its capital plan on a narrow set of customers in a volatile industry.

Interest rate and capital cost risk is intensifying. With $785 million in planned capex and the parent company's debt-to-capital ratio at 64.3%, ENJ's cost of capital is rising. The forward sale agreements for $1.9 billion of equity through 2029 suggest the parent is already managing balance sheet pressure. If rates remain elevated, the authorized ROE of 9.35% may become insufficient to attract capital, requiring rate increases that regulators may resist.

Valuation Context: Deep Value or Value Trap?

At $21.63 per share, ENJ trades at 3.6x trailing earnings and 0.43x book value—multiples that scream deep value in a sector where peers trade at 16-24x earnings and 2.0-2.7x book value. The market cap of $182.5 million stands at a fraction of the $785 million in planned capital investments through 2029, suggesting either severe undervaluation or fundamental skepticism about earning power.

The valuation discount reflects regulatory risk more than operational weakness. CenterPoint Energy (CNP) trades at 23.6x earnings with a 2.21x price-to-book ratio, Southern Company (SO) at 20.9x and 2.67x, and American Electric Power (AEP) at 16.7x and 2.01x. ENJ's 0.43x book value implies the market believes its assets are impaired or that future returns will be far below authorized levels. This creates potential upside if the company can demonstrate consistent regulatory recovery, but it also signals that investors view the regulatory environment as hostile.

Cash flow metrics provide a more nuanced picture. ENJ generated $823.6 million in operating cash flow over the trailing twelve months, but free cash flow was only $130.6 million after $693.0 million in capital expenditures. The free cash flow yield of 71.6% appears extraordinary but is misleading—it's inflated by the low stock price and unsustainable given the $785 million capital plan. The operating cash flow yield of 4.5x suggests the market is pricing in a significant deterioration in cash generation.

The balance sheet strength is moderate. With $11.88 billion in annual revenue and $1.06 billion in net income, the company generates sufficient cash to service debt, but the capital intensity is extreme. The parent company's 64.3% debt-to-capital ratio and $1.4 billion in commercial paper outstanding indicate leverage is rising. For ENJ, the key metric is the ability to issue debt at reasonable rates to fund the capital plan—if the regulatory environment remains uncertain, credit spreads could widen, increasing the cost of capital and compressing returns.

Peer comparisons highlight ENJ's unique risk profile. While CNP, SO, and AEP all face similar data center opportunities and MISO cost pressures, they benefit from geographic diversification and larger rate bases that absorb regulatory volatility. ENJ's single-territory focus creates higher regulatory leverage—both positive and negative. The valuation discount reflects this concentration risk, but it also ignores the potential for premium returns if New Orleans load growth outpaces the national average.

Conclusion: A Binary Bet on Regulatory Execution

Entergy New Orleans represents a classic deep-value utility investment with a binary outcome. The 0.43x book value valuation implies the market has priced in regulatory failure, yet the company's monopoly franchise, strategic pivot to pure-play electric, and exposure to data center-driven load growth provide clear catalysts for re-rating.

The central thesis hinges on whether ENJ can successfully execute its $785 million capital plan while earning its authorized 9.35% ROE. The recent $19.2 million rate reduction and $12.8 million asset write-off demonstrate regulatory risk is real, but the Generating Arkansas Jobs Act and similar legislation show jurisdictions are willing to facilitate cost recovery for critical infrastructure. The data center opportunities offer premium load growth that could justify the capital spend, but concentration risk means the bet is not diversified.

For investors, the critical variables to monitor are: (1) the outcome of future formula rate plan filings—if earned ROE continues to exceed authorized levels and regulators extract larger concessions, the valuation discount is justified; (2) the pace of data center project completions and whether actual load materializes as projected; and (3) the company's ability to manage MISO cost recovery and transmission queue delays without margin compression.

The stock's deep discount creates asymmetric upside if regulatory execution improves, but the recent pattern of adverse decisions suggests this is far from certain. ENJ is not a passive utility hold—it's an active bet on management's ability to navigate an increasingly complex regulatory environment while capitalizing on one of the most compelling load growth opportunities in the sector.