Entergy Corporation — Q1 2013 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Entergy operates regulated electric and gas utilities and the merchant generation business Entergy Wholesale Commodities (EWC). The combined filing also contains separate reports for its utility subsidiaries and System Energy Resources.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $2.609 billion | $2.384 billion |
| Operating income (loss) | $394.0 million | $(56.9) million |
| Consolidated net income (loss) | $167.0 million | $(146.7) million |
| Net income attributable to Entergy Corporation | $161.4 million | $(151.7) million |
| Diluted EPS | $0.90 | $(0.86) |
| Operating cash flow | $544.0 million | $600.5 million |
| Cash and cash equivalents at quarter-end | $262.9 million | $685.0 million |
Revenue increased about 9%. Operating income improved substantially, in part because Q1 2012 included a $355.5 million pretax ($223.5 million after-tax) impairment charge for Vermont Yankee and related assets. The filing reports no Q1 2013 asset impairment charge. Q1 2013 operating margin was approximately 15.1%, calculated from reported operating income and revenue; the comparable 2012 margin was negative.
Investing activities used $661.8 million, including $631.9 million of construction/capital expenditures; financing activities used $152.6 million. Cash declined $269.6 million during the quarter. Operating cash flow fell $56.5 million year over year, with higher deferred fuel refunds, storm restoration spending and nuclear refueling costs among the reasons cited.
At March 31, 2013, Entergy reported debt to capital of 58.7%, or 56.9% excluding specified non-recourse securitization bonds; net debt to net capital excluding those bonds was 56.3%. Cash was 0.6% of capital for this ratio calculation. The $3.5 billion parent credit facility had $2.922 billion of available capacity, with $570 million borrowed and $8 million in letters of credit. Entergy also had $883.7 million of commercial paper outstanding and was in compliance with its credit-facility debt covenant.
Changes and operating drivers
- Utility: Segment net income rose to $127.8 million from $67.2 million. Net revenue increased $117 million, principally from approved retail rate and rider changes, Grand Gulf cost recovery, and more favorable weather.
- EWC: Segment net income was $82.1 million versus a $175.9 million loss. Net revenue rose $41 million to $493 million on higher realized energy and capacity prices, partly offset by lower nuclear generation. Nuclear capacity factor fell to 83% from 88%; billed nuclear output declined to 9,246 GWh from 9,838 GWh.
- Q1 2013 EWC average realized nuclear revenue was reported at about $57.82/MWh in the operating metrics. The filing says 84% of planned nuclear generation for the remainder of 2013 was contracted, at an expected average contracted energy price of $45/MWh based on March 31 market prices.
- Utility operating costs increased in areas including maintenance, depreciation, taxes and interest; higher pension and other postretirement costs were also cited. Results are seasonal, with peak periods in Q3, and management cautions against using interim results as a full-year estimate.
Outlook, risks and unusual items
- No clear consolidated earnings guidance is provided in the filing. The Board declared a quarterly common dividend of $0.83 per share, unchanged from the prior quarterly rate.
- Management described near-term EWC plant economics as challenging amid weak power-market conditions. It estimated that a $10/MWh increase in relevant annual average energy prices would increase EWC nuclear pretax net income by $122 million, based on March 31 conditions and planned generation and hedges. A $1/MMBtu gas-price increase would raise EWC assurance-related liquidity exposure by $82 million. A downgrade below investment grade could require about $54 million of additional collateral under specified agreements.
- ANO incident: On March 31, a lifting apparatus collapsed during ANO 1’s refueling outage, causing one contractor fatality, injuries, damage to the turbine building, and an ANO 2 shutdown. ANO 2 restarted April 28; ANO 1 repair costs and return-to-service timing were still being assessed. Entergy disputed the insurer’s position that a $50 million construction sublimit applies and was evaluating its recovery options.
- Transmission transaction and market structure: The proposed transmission-business spin-off and merger with ITC remained subject to regulatory approvals. FERC extended its review deadline to September 18, 2013; state regulator staff and other parties raised concerns. Utility-company plans to join MISO and changes to the System Agreement also remained subject to proceedings.
- Other material matters: Entergy Services agreed to a $975,000 civil penalty and mitigation activities in a FERC reliability-standards settlement, without admitting or denying alleged violations. A revised nuclear decommissioning study reduced one EWC site’s decommissioning liability and related asset by $46.6 million. Preliminary post-Fukushima compliance cost estimates were approximately $240 million for Utility and $260 million for EWC over 2012–2018, excluding potential filtered-vent costs.
- Other risks include nuclear license and environmental proceedings, fuel and power prices, rate recovery, storm costs, litigation and regulatory approvals. Entergy stated there were no material changes to the risk factors in its 2012 Form 10-K.
Investor verification priorities
- Confirm the sustainability of Q1 earnings improvement after adjusting for the prior-year Vermont Yankee impairment and assess the drivers of Utility and EWC results.
- Track ANO 1 outage duration, repair and replacement-power costs, insurance coverage and any customer recovery.
- Check outcomes and timing for the ITC transaction, MISO integration, System Agreement changes and pending rate proceedings.
- Monitor cash generation, capital spending, commercial paper, credit-facility availability and collateral exposure under EWC contracts.
- Review EWC power-market assumptions, forward contract coverage, nuclear license renewals and decommissioning estimates; the filing notes that planned generation assumptions depend on license renewals for certain plants.