ENTERGY CORP annual report, FY2013

Business context and reporting period

Entergy Corporation’s combined Form 10-K covers the fiscal year ended December 31, 2013, and includes Entergy and seven registrant subsidiaries. It is an annual report, not a standalone fourth-quarter filing. Entergy operates regulated electric and gas utilities across Arkansas, Louisiana, Mississippi, and Texas, plus Entergy Wholesale Commodities (EWC), principally a merchant nuclear-generation business.

Financial performance and liquidity

Annual operating margin was approximately 11.9% (operating income divided by revenue); net margin attributable to Entergy was approximately 6.3%. Cash used in investing activities was $2.602 billion, including $2.288 billion of construction and capital expenditures. Cash used in financing was $381 million. Common dividends paid were $593 million; the Board declared a quarterly dividend of $0.83 per share in January 2014.

At year-end, total assets were $43.406 billion and long-term debt was $12.139 billion; notes payable and commercial paper were $1.047 billion. Debt-to-capital was 57.9%, or 56.3% excluding non-recourse securitization bonds; net debt-to-net capital excluding those bonds was 54.8%. Entergy had $739 million in cash and $3.237 billion of available capacity under its $3.5 billion credit facility, and reported compliance with its debt covenant.

Material changes versus comparable periods

• Revenue increased 10.6%, but net income attributable to Entergy fell 15.9% and diluted EPS declined from $4.76 to $3.99. The 2013 effective tax rate was 23.6%, compared with 3.4% in 2012; both periods included material tax-settlement effects.
• Utility net revenue rose $555 million to $5.524 billion, primarily reflecting retail rate changes, customer-sharing of Louisiana Act 55 financing savings, Grand Gulf recovery, and volume/weather. EWC net revenue fell $52 million to $1.802 billion, principally due to mark-to-market effects, lower nuclear volume, and higher nuclear fuel expense.
• 2013 included $321.5 million of Vermont Yankee impairment and related charges ($202.2 million after tax), versus $355.5 million ($223.5 million after tax) in 2012. The 2013 impairment reflected the planned plant shutdown.
• Operating cash flow rose $249 million year over year. Investing cash outflow decreased by $1.038 billion, partly because 2012 included the Hot Spring and Hinds plant acquisitions. Financing shifted from providing $538 million in 2012 to using $381 million in 2013.
• Fourth-quarter reported revenue was $2.692 billion versus $2.436 billion in 2012; net income attributable to Entergy was $146.9 million versus $296.3 million.

Outlook, management commentary, risks, and unusual items

• Management planned $2.315 billion of construction and capital investments in 2014, followed by $2.380 billion in 2015 and $2.105 billion in 2016. Planned 2014 investment included $1.895 billion for Utility and $420 million for EWC.
• Entergy expected 2014 pension contributions of approximately $400 million and other postretirement contributions of $74.1 million; pension funding estimates remained subject to actuarial valuations. The 2013 qualified pension cost was $352 million.
• Entergy announced Vermont Yankee’s planned closure after its current fuel cycle, expected in the fourth quarter of 2014, citing low wholesale power and gas prices, the plant’s cost structure, and market design. EWC had contracted 74% of planned nuclear generation for both 2014 and 2015 at expected average energy prices of approximately $50/MWh and $49/MWh, respectively. Management described continued low prices as challenging for merchant nuclear economics.
• A workforce redesign eliminated approximately 800 positions and generated about $110 million of 2013 costs ($70 million after tax). Regulators approved deferral of approximately $45 million for future recovery in Arkansas and Louisiana. Further Vermont Yankee severance and retention costs of approximately $50–55 million were expected through 2014.
• Utility operations completed integration into the MISO regional transmission organization in December 2013. Entergy Arkansas exited the System Agreement; other subsidiaries had filed or were directed to file termination notices. Regulatory proceedings concerning cost allocation and withdrawal terms remained ongoing.
• The planned transmission spin-off and merger with ITC was terminated in December 2013 after a state regulator denied the relevant joint application. Entergy reported $36 million of 2013 costs related to the terminated transaction.
• The ANO stator incident caused a fatality, injuries, damage, and extended outages at both units. Restoration and property costs were estimated at $94 million by year-end; Entergy Arkansas recorded a $50 million insurance receivable, while disputing the insurer’s asserted coverage sublimit and pursuing litigation. Separately, Baxter Wilson Unit 1’s return-to-service cost was estimated at $45–60 million, subject to insurance and regulatory recovery.
• Key ongoing risks include rate and cost-recovery outcomes, MISO and System Agreement transition, EWC power prices and nuclear license renewals, spent-fuel storage and decommissioning costs, environmental requirements, severe weather, pension funding, and litigation. The filing identifies a Texas customer class-action case, a Mississippi Attorney General complaint, and Indian Point license and environmental proceedings, among other matters.

Deloitte issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded that internal controls were effective as of December 31, 2013.

Investor verification priorities

• Reconcile the annual earnings decline and fourth-quarter comparison against the detailed tax, impairment, and segment disclosures; distinguish reported results from operational measures used for incentive awards.
• Track Vermont Yankee’s shutdown, decommissioning funding, and remaining charges, as well as economic performance and license-renewal outcomes for the other merchant nuclear plants.
• Verify recovery, insurance proceeds, and final costs for the ANO incident and Baxter Wilson outage; monitor the related regulatory and legal proceedings.
• Review MISO transition costs, System Agreement exit notices, and the outcome of pending production-cost allocation proceedings.
• Assess whether planned capital spending, pension contributions, and debt maturities remain financeable while preserving liquidity and dividend capacity.
• Follow rate-case decisions and storm-cost recovery, including Entergy Texas’s pending case and Louisiana’s Hurricane Isaac filings.