Entergy Corporation — 2019 Q3 Form 10-Q
Business context and reporting period
Combined quarterly report for Entergy Corporation and six subsidiaries, covering the quarter and nine months ended September 30, 2019. Entergy operates regulated electric and gas utilities across Arkansas, Louisiana, Mississippi and Texas, plus a wholesale generation business centered on merchant nuclear plants. Figures below are for Entergy Corporation on a consolidated basis unless noted.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $3.141 billion | $3.104 billion | $8.416 billion | $8.497 billion |
| Operating income | $520 million | $271 million | $1.142 billion | $698 million |
| Consolidated net income | $369 million | $540 million | $869 million | $925 million |
| Net income attributable to Entergy Corporation | $365 million | $536 million | $856 million | $915 million |
| Diluted EPS | $1.82 | $2.92 | $4.38 | $5.01 |
Operating margin was approximately 16.6% in Q3 2019 versus 8.7% in Q3 2018, and 13.6% for the first nine months versus 8.2% a year earlier. Net income attributable to Entergy as a share of revenue was approximately 11.6% in Q3 2019 versus 17.3% in Q3 2018; nine-month figures were approximately 10.2% versus 10.8%.
- For the first nine months, cash from operating activities was $2.118 billion, investing activities used $3.025 billion, and financing activities provided $1.382 billion. Cash and cash equivalents ended the period at $956 million, up from $481 million at year-end 2018.
- Construction and capital expenditures were $3.080 billion for the nine months. Long-term debt including current maturities was approximately $17.458 billion at September 30, 2019. Commercial paper outstanding was $1.918 billion.
- Debt to capital was 65.4%; excluding non-recourse securitization bonds, debt to capital was 65.0% and net debt to net capital was 63.8%. The $3.5 billion parent credit facility had $3.339 billion of capacity available; Entergy reported compliance with its debt covenant.
- Entergy’s Board declared a quarterly common dividend of $0.93 per share in October 2019, up from $0.91.
Material changes versus the prior comparable period
- Q3 revenue rose modestly, while nine-month revenue declined slightly. Utility retail pricing and Q3 usage supported results, but the wholesale segment’s revenue fell, primarily following Pilgrim’s May shutdown and lower capacity prices.
- Operating income increased in both comparison periods, while net income and EPS declined. Q3 2019 included a $191 million pretax ($156 million after-tax) loss on the Pilgrim sale. The prior-year periods included significant nuclear-asset impairment charges and tax benefits, making reported net income comparisons less indicative of underlying trends.
- Utility net income increased $74 million in Q3 and $47 million for the nine months. Entergy Wholesale Commodities reported a Q3 net loss of $141 million, versus income of $106 million in Q3 2018; nine-month results were a $69 million loss versus $31 million of income.
- Utility billed retail electricity use fell 2% for the nine months, partly reflecting less favorable weather. The wholesale nuclear fleet’s capacity factor improved to 91% from 86% for the nine-month period, but owned capacity fell from 3,962 MW to 3,274 MW following Pilgrim’s shutdown.
Outlook, commentary, risks and unusual items
- Management is exiting merchant nuclear generation by shutting down and selling the remaining plants. The Indian Point sale to Holtec is targeted for May 2021 after Indian Point 3 is shut down and defueled; the planned shutdown dates assumed in the filing are April 2020 for Indian Point 2, April 2021 for Indian Point 3 and May 2022 for Palisades.
- Entergy expects approximately $100 million of merchant-business employee retention and severance costs in 2019, of which $70 million had been incurred by September 30, and approximately $135 million from 2020 through 2022. It also expects additional nuclear-fuel and capital-related charges at certain plants as incurred.
- The preliminary 2020–2022 capital plan is approximately $11.4 billion for the Utility and $65 million for Wholesale Commodities, excluding nuclear fuel. The estimates are subject to revision, regulatory requirements, project changes and access to capital.
- Key regulatory and legal uncertainties include FERC proceedings over System Energy’s return on equity and capital structure, and a Grand Gulf sale-leaseback complaint. The LPSC and FERC trial staff were seeking approximately $512 million and $511 million, respectively, plus interest, in claims related principally to uncertain tax positions; Entergy disputes the claims and recorded a provision for the return-on-equity proceeding.
- Challenges to the NRC’s Pilgrim license-transfer approval remained pending after the August 2019 sale to Holtec. In New Orleans, appeals concerning the power station approval and open-meetings ruling remained pending; a separate City Council committee recommended a $1 million reliability penalty for consideration. A previously approved settlement allowed construction to proceed.
- Other material exposures include rate-setting and fuel-cost recovery proceedings, storm restoration and cost recovery, nuclear safety and decommissioning obligations, environmental regulation, weather, commodity prices, and credit and capital-market conditions. Management states interim results are seasonal and should not be used as a full-year estimate; the filing gives no clear full-year earnings or EPS guidance.
Most important facts for investors to verify
- How much of operating-income improvement reflects recurring utility operations versus tax, regulatory and other period-specific effects, and whether the Pilgrim sale loss and remaining exit costs are fully captured.
- Final outcomes and potential customer refunds in System Energy’s FERC return-on-equity/capital-structure and Grand Gulf sale-leaseback proceedings.
- Progress and final economics of the Indian Point and Palisades shutdown and sale plans, including decommissioning trust funding and liabilities.
- Regulatory approval and recovery terms for planned capital projects, including the 2020–2022 investment program and major generation projects.
- Debt, commercial paper, covenant headroom and funding needs as capital spending continues; also confirm whether the October dividend increase is sustainable against future earnings and cash flows.