Entergy Corporation — Q3 2016 Form 10-Q
Business context and reporting period
Entergy operates regulated electric utilities across parts of Arkansas, Louisiana, Mississippi and Texas, plus Entergy Wholesale Commodities, a merchant power business centered on nuclear generation. This combined filing reports the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Financial figures below are consolidated and in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $3.125 billion | $3.371 billion | $8.197 billion | $9.005 billion |
| Operating income (loss) | $772 million | ($965 million) | $1.713 billion | ($45 million) |
| Consolidated net income (loss) | $393 million | ($718 million) | $1.201 billion | ($262 million) |
| Net income attributable to Entergy | $388 million | ($723 million) | $1.185 billion | ($276 million) |
| Diluted earnings (loss) per share | $2.16 | ($4.04) | $6.60 | ($1.54) |
| Operating cash flow | Not separately presented here | Not separately presented here | $2.252 billion | $2.350 billion |
Q3 operating margin was approximately 24.7%, versus a loss-making margin in 2015; the comparison is heavily affected by the prior-year impairment charges. Utility net revenue increased to $1.859 billion in Q3 from $1.750 billion and to $4.758 billion for nine months from $4.648 billion. Wholesale Commodities net revenue declined to $396 million in Q3 from $409 million and to $1.155 billion for nine months from $1.286 billion.
- Nine-month investing cash outflow was $2.982 billion, versus $2.186 billion; financing provided $687 million, versus a $545 million outflow. Cash and cash equivalents were $1.307 billion at September 30, 2016, down from $1.351 billion at year-end 2015.
- At September 30, debt to capital was 59.4%; excluding non-recourse securitization bonds, debt to capital was 58.3% and net debt to net capital was 55.9%, compared with 57.7% and 55.0%, respectively, at December 31, 2015. Long-term debt was $13.862 billion, with $750 million currently maturing; notes payable and commercial paper totaled $433 million.
- Entergy had a $3.5 billion revolving credit facility, with $3.314 billion available after borrowings and letters of credit. Commercial paper outstanding was $264 million. Entergy reported compliance with its credit-facility debt covenant.
Material changes versus prior comparable periods
- Reported earnings rebounded from 2015 losses, principally because Q3 2015 included $1.642 billion of pretax impairment and related charges for FitzPatrick and Pilgrim. The nine-month 2016 comparison also benefited from a $238 million income-tax reduction from a tax election, IRS audit settlement benefits, and DOE spent-fuel litigation recoveries and expense reductions.
- Consolidated revenue declined 7% in Q3 and 9% for nine months. Utility rate increases and recovery riders lifted utility net revenue, but lower wholesale realized and capacity prices, the sale of the Rhode Island State Energy Center, and reduced wholesale nuclear output weighed on results.
- Utility billed retail electricity usage fell 1% for the first nine months; lower residential and commercial usage was partly offset by industrial growth. Wholesale nuclear capacity factor was 85% for the nine months, versus 90% in 2015, and billed wholesale energy declined 11%.
Outlook, management commentary, risks and unusual items
- Management described persistently weak wholesale power-market economics as a challenge for merchant nuclear plants and stated its strategy is to reduce risk and the size of the merchant fleet. Entergy planned to close Pilgrim by May 31, 2019; it agreed to sell the 838 MW FitzPatrick plant to Exelon for $100 million plus a $10 million signing fee, subject to approvals and other conditions. If the sale does not proceed, shutdown and decommissioning remain alternatives.
- Grand Gulf entered a maintenance outage in September and was not expected back in service before mid-January 2017; the NRC began a special inspection in October. Indian Point 2 returned to service in June after an extended outage; Entergy estimated a $51 million pretax earnings impact in Q2. Indian Point license proceedings remain subject to delay and challenge. ANO remained under enhanced NRC oversight; approximately $37 million of an estimated $50 million in 2016 incremental costs had been incurred by September 30.
- Entergy estimated 2017–2019 capital investment of approximately $10.3 billion for Utility and $0.6 billion for Wholesale Commodities. A nuclear operational-excellence initiative was expected to add Utility capital costs of $870 million over those years, plus incremental operating costs; management also forecast higher nuclear outage expenses. These are investment estimates, not earnings guidance. The filing provides no clear consolidated EPS guidance.
- Other key exposures include the Arkansas regional-haze FIP, which requires specified White Bluff and Independence emission controls; an estimated $87 million Entergy Arkansas liability in the FERC opportunity-sales proceeding, subject to further review; and a proposed Waterford 3 settlement involving customer refunds and credits, pending LPSC approval. The FitzPatrick sale and several major generation projects also require regulatory approvals.
- The Board declared a quarterly common dividend of $0.87 per share in October, up from $0.85. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of nine-month 2016 earnings reflects recurring operating performance versus the $238 million tax election benefit, IRS settlement effects, and DOE litigation recoveries?
- Whether FitzPatrick sale conditions and regulatory approvals are satisfied, and the resulting operating, decommissioning, and cash-flow effects.
- Grand Gulf’s return-to-service timing, NRC follow-up findings, and the extent of additional nuclear fleet operating and capital costs.
- Outcomes of the White Bluff/Independence emissions requirements, the opportunity-sales proceeding, Waterford 3 settlement, and other rate-recovery matters.
- Whether planned capital spending, refinancing needs and dividends remain supportable by operating cash flow and available liquidity as merchant power economics and utility demand evolve.