Entergy Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Entergy operates regulated electric utilities in the Gulf South and the non-utility Entergy Wholesale Commodities business, principally merchant nuclear generation. This combined filing also contains separate reports for subsidiary registrants.
Financial performance
- Q2 revenue: $2.463 billion, down 9.2% from $2.713 billion. Operating income was $442.3 million versus $377.4 million; calculated operating margin was approximately 18.0% versus 13.9%.
- Q2 earnings: Consolidated net income was $572.6 million, compared with $153.7 million; net income attributable to Entergy Corporation was $567.3 million, or $3.17 per diluted share, versus $148.8 million, or $0.83.
- Six-month results: Revenue was $5.072 billion, down 10.0%; operating income was $940.5 million versus $920.2 million, with calculated operating margin of approximately 18.5% versus 16.3%. Consolidated net income was $807.8 million versus $456.7 million; diluted EPS was $4.45 versus $2.48.
- Cash flow, six months: Operating cash flow was $1.252 billion, down from $1.338 billion. Investing used $2.266 billion, including the Union Power Station acquisition; financing provided $659 million. Cash declined by $355 million to $996 million.
- Debt and liquidity: Debt to capital was 59.6% (59.1% at year-end 2015); excluding non-recourse securitization bonds, it was 58.4%. Net debt to net capital, excluding those bonds, was 56.6%, up from 55.0%. Entergy had $3.254 billion available under its $3.5 billion credit facility and $853 million of commercial paper outstanding.
- Dividends: The Board declared a quarterly dividend of $0.85 per share in July, unchanged from the prior quarter.
Changes and drivers
- Utility net revenue was nearly flat for the first half ($2.899 billion versus $2.898 billion): rate increases, including recovery of Union Power Station costs, were largely offset by weaker weather-related usage and other items. Industrial usage grew, while residential and commercial usage generally weakened.
- Wholesale Commodities net revenue fell to $293 million in Q2 from $350 million and to $759 million for six months from $877 million. Lower realized energy and capacity prices, reduced nuclear output/refueling outages, and the Rhode Island State Energy Center sale contributed. Q2 nuclear fleet capacity factor fell to 76% from 89%; Indian Point 2 was offline for 77 refueling/outage days.
- Reported earnings benefited materially from unusual items: a $238 million reduction in income tax expense from a tax election involving a nuclear subsidiary; tax benefits from settlement of the 2010–2011 IRS audit, including Entergy Louisiana benefits; and a $59 million expense reduction ($38 million after tax) from final DOE spent-fuel litigation decisions. These items substantially boosted Q2 and first-half net income.
- Entergy purchased the 1,980 MW Union Power Station for approximately $949 million in March 2016. It also planned 2016–2018 construction and capital investments of $3.770 billion, $3.345 billion, and $3.330 billion, respectively.
Outlook, risks and contingencies
- No specific consolidated earnings guidance was stated in the supplied filing text. Management cautioned that interim results are seasonal and should not be used alone to estimate full-year results.
- Management cited challenging merchant-generation economics amid low power prices and market designs that it believes do not adequately compensate nuclear plants. Pilgrim was expected to close May 31, 2019; FitzPatrick was planned to shut down in late January 2017 unless a possible sale discussed in July 2016 was completed. Palisades and Indian Point also face market, operating, or licensing risks.
- Indian Point 2 returned to service June 16 after inspection and repair work; the outage reduced Q2 pre-tax earnings by an estimated $51 million. A future Indian Point 3 outage may be extended. Indian Point license and environmental proceedings remain pending.
- ANO remained in NRC oversight Column 4. Entergy Arkansas expected approximately $50 million of incremental 2016 costs, with $30.6 million incurred through June 30, excluding potential remediation costs. The NRC reported the site was being operated safely and will conduct follow-up inspections.
- Entergy is developing a nuclear sustainability plan expected to increase operating and capital costs; the filing says an estimate cannot yet be made. Other material exposures include regulatory and rate proceedings, fuel-cost recovery, environmental compliance, weather and storm restoration, and spent-fuel litigation. The FERC opportunity-sales proceeding resulted in an $87 million estimated liability at Entergy Arkansas, partly offset by an estimated $75 million regulatory asset; the final amount remains uncertain.
- Proposed generation projects remained subject to approvals: the $869 million St. Charles Power Station received an ALJ recommendation in favor of certification, while the $216 million New Orleans Power Station application was pending. Entergy New Orleans also faced a City Council show-cause filing deadline in September 2016 concerning several regulatory matters.
Investor verification priorities
- Separate recurring earnings from the tax-election, IRS settlement, and DOE litigation benefits; confirm their cash and future-period effects.
- Track merchant power prices, hedges, outage performance, nuclear license proceedings, and the status and economics of the planned Pilgrim and FitzPatrick exits or sale.
- Review capital spending, financing needs, debt maturities, commercial paper, and covenant headroom as major generation projects proceed.
- Monitor the ANO and Pilgrim NRC actions, the FERC opportunity-sales liability, and pending state and federal rate, fuel-recovery, and environmental proceedings.