Entergy Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. This combined filing covers Entergy Corporation and six separately reporting utility and generation subsidiaries. Entergy operates regulated electric utilities and a merchant nuclear generation business, Entergy Wholesale Commodities (EWC).
Financial performance
- Revenue: $2.610 billion, down 10.6% from $2.920 billion in Q1 2015. Utility net revenue declined $35 million to $1.375 billion, primarily from lower weather-related usage. EWC net revenue declined $61 million to $466 million, mainly due to lower wholesale energy and capacity prices and the sale of Rhode Island State Energy Center.
- Profit: Consolidated net income was $235.2 million, down 22.3% from $302.9 million. Net income attributable to Entergy Corporation was $230.0 million, or $1.29 basic and $1.28 diluted per share, versus $298.1 million, or $1.66 basic and $1.65 diluted, a year earlier.
- Operating income and margins: Operating income was $498.2 million versus $542.8 million. Calculated operating margin was approximately 19.1%, compared with 18.6%; net margin based on consolidated net income was approximately 9.0%, versus 10.4%.
- Cash flow: Operating cash flow was $532.8 million, down from $611.0 million. Investing used $1.878 billion, including approximately $948 million for the Union Power Station acquisition and $636 million of construction expenditures. Financing provided $1.086 billion, principally reflecting debt issuance. Cash declined $259.3 million to $1.092 billion.
- Debt and liquidity: Debt to capital was 60.9% (59.7% excluding non-recourse securitization bonds); net debt to net capital excluding those bonds was 57.8%, up from 55.0% at year-end 2015. Long-term debt book value, including current maturities, was approximately $14.3 billion; notes payable and commercial paper were $766 million. Entergy had a $3.5 billion revolving facility, with $2.877 billion available after borrowings and letters of credit. The company reported compliance with its credit-facility debt covenant.
- Dividend: The board declared a quarterly dividend of $0.85 per share in April, compared with $0.83 per share declared in Q1 2015.
Changes and significant developments
- Utility and EWC segment net income fell to $199.7 million and $79.6 million, respectively, from $227.8 million and $123.4 million. Parent and Other reported a $44.0 million loss, compared with a $48.3 million loss.
- Retail electricity usage across the Utility declined 3% (849 GWh); industrial usage increased, partly offsetting weather-related weakness in residential and commercial sales. EWC average revenue per MWh fell to $56.47 from $67.00.
- Entergy subsidiaries acquired the 1,980-MW Union Power Station for approximately $948 million. Entergy Arkansas, Louisiana, and New Orleans acquired different power blocks; recovery of related costs is subject to regulatory arrangements.
- Entergy’s debt-to-capital ratio rose from 59.1% at December 31, 2015, primarily reflecting net long-term debt issuance.
Outlook, risks and contingencies
- Merchant nuclear economics: Management described continued low power prices and market-design challenges. EWC had contracted 88% of planned 2016 nuclear generation at an expected average contracted energy price of $40/MWh, and 63% of planned 2017 generation at $46/MWh. A $10/MWh market-price increase was estimated to raise pre-tax income by $79 million for the remainder of 2016; a $10/MWh decrease was estimated to reduce it by $69 million.
- Planned closures and outage: Entergy intends to shut FitzPatrick at the end of its current fuel cycle, planned for January 27, 2017, and Pilgrim on May 31, 2019. A bolt inspection issue extended the Indian Point 2 refueling outage, then expected to continue into June 2016; management estimated an approximately $60 million pre-tax 2016 earnings impact.
- Nuclear oversight and costs: ANO and Pilgrim faced enhanced NRC oversight. Entergy Arkansas expected approximately $50 million of incremental 2016 ANO inspection and improvement expenses, excluding potential remediation costs. Pilgrim’s estimated direct response costs were $45–$60 million, including approximately $30 million in 2016. A broader nuclear performance plan remained under development, with costs not yet estimable.
- Regulatory and legal matters: Following FERC decisions in the opportunity-sales proceeding, Entergy Arkansas recorded an estimated $87 million liability, partly offset by a $75 million regulatory asset; final amounts remain uncertain. Entergy Texas sought approval to refund approximately $56.2 million to customers. Other rate cases, fuel-cost audits, and nuclear licensing proceedings remain pending.
- Capital projects: Entergy Louisiana’s proposed 980-MW St. Charles Power Station remained subject to regulatory approvals and permits; commercial operation was estimated for summer 2019 if approved.
- Guidance: The provided filing text does not state a consolidated full-year earnings or revenue guidance figure. Management cautioned that interim results are seasonal and should not be used as a basis for estimating full-year results.
- Other risks: Disclosed exposures include commodity and power-price volatility, nuclear plant performance and licensing, weather and storm restoration, environmental requirements, rate recovery, financing conditions, and litigation. Management reported no material changes to the risk factors in the 2015 Form 10-K.
Investor verification priorities
- Confirm the drivers and sustainability of the earnings decline, particularly lower EWC realized prices and utility weather-related sales weakness.
- Review funding, rate recovery, and debt effects of the Union Power Station purchase and related construction plans.
- Track Indian Point 2’s restart and final outage costs, as well as the timing and execution of the Pilgrim and FitzPatrick shutdown plans.
- Monitor FERC opportunity-sales proceedings and the eventual amount and allocation of Entergy Arkansas’s recorded liability.
- Assess liquidity and leverage after significant investment spending, debt issuance, and the rise in net debt to net capital.