Entergy Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; filed November 5, 2018. Entergy operates regulated electric and gas utilities across portions of Arkansas, Louisiana, Mississippi and Texas, plus the merchant Entergy Wholesale Commodities (EWC) business, principally nuclear generation in the northern United States. Figures below are consolidated Entergy amounts unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $3.104 billion | $3.244 billion | $8.497 billion | $8.451 billion |
| Operating income | $271 million | $759 million | $698 million | $1.123 billion |
| Consolidated net income | $540 million | $402 million | $925 million | $901 million |
| Net income attributable to Entergy Corporation | $536 million | $398 million | $915 million | $891 million |
| Diluted EPS | $2.92 | $2.21 | $5.01 | $4.94 |
| Operating cash flow (nine months) | $1.860 billion | $1.713 billion in 2017 |
- Q3 operating revenue fell about 4%; nine-month revenue increased about 1%. Q3 operating income declined substantially, while reported net income and EPS rose, primarily reflecting unusually favorable income-tax items rather than stronger pretax operating performance.
- Q3 Utility net revenue was $1.557 billion, down $254 million year over year, including $277 million of customer refunds of unprotected excess deferred taxes. These revenue reductions were offset by lower income-tax expense and had no net-income effect. Utility billed retail usage rose 6% in Q3 and 5% for the nine months, helped by weather and customer growth.
- EWC net revenue decreased to $341 million from $392 million in Q3 and to $995 million from $1.136 billion for the nine months. Lower realized energy prices and, in Q3, more non-refueling outage days weighed on results. EWC nuclear capacity factor was 90% in Q3 versus 98% a year earlier; nine-month factor was 86% versus 79%.
- Q3 income-tax expense was a benefit of $283 million; the reported effective tax rate was negative 110.2%. For nine months, the tax benefit was $520 million and the effective rate was negative 128.4%. Major Q3 items included about $107 million of tax benefit from restructuring a decommissioning-trust investment and about $23 million from conclusion of a state tax audit. Nine-month results also included a $52 million Entergy Louisiana benefit from an IRS audit settlement.
- EWC impairment charges were $155 million pretax ($123 million after tax) in Q3 and $297 million pretax ($235 million after tax) for nine months, reflecting shortened expected operating lives under the merchant-fleet exit strategy. Q3 included $117 million related to Pilgrim, principally following an updated decommissioning cost study.
- Nine-month investing cash outflow was $3.000 billion, including $2.883 billion of construction/capital expenditures; financing provided $1.348 billion. Cash rose to $988 million from $781 million at year-end 2017. The filing attributes improved operating cash flow partly to lower nuclear-refueling spending and favorable Utility sales; investment outflow increased mainly with construction spending.
- At September 30, total debt to capital was 68.2%, or 67.7% excluding non-recourse securitization bonds; net debt to net capital excluding those bonds was 66.4%, up from 65.2% at year-end 2017. Long-term debt was $15.781 billion and current maturities $735 million; notes payable and commercial paper were $1.947 billion.
- Entergy’s $3.5 billion revolving facility had $630 million drawn and $2.864 billion available after letters of credit. Its commercial-paper program limit was $2 billion, with about $1.947 billion outstanding. Entergy reported compliance with its credit-facility debt-ratio covenant.
Material changes, outlook and management commentary
- Management is reducing EWC merchant nuclear exposure. Planned commercial shutdowns are Pilgrim by May 31, 2019; Indian Point 2 by April 30, 2020; Indian Point 3 by April 30, 2021; and Palisades by May 31, 2022. Entergy agreed to sell Pilgrim and Palisades to Holtec for nominal equity consideration, subject to conditions and transfer of decommissioning trusts and obligations. Pilgrim sale was expected by end-2019 and Palisades by end-2022; each sale was expected to result in a loss, with final amounts dependent on trust assets, retirement obligations and intervening results. The Vermont Yankee sale to NorthStar also remained subject to approvals; Entergy disclosed $132 million drawn on its facility and adjusted net investment of $266 million at quarter-end.
- Entergy expects approximately $155 million of EWC retention and severance costs in 2018, of which $103 million had been incurred by September 30, plus approximately $215 million from 2019 through mid-2022. It expects further nuclear-fuel and capital-spending charges for impaired plants, generally expensed as incurred except at Palisades.
- The preliminary 2019–2021 capital plan calls for about $11.1 billion of Utility investment and $0.2 billion of EWC investment, excluding nuclear fuel. The estimates remain subject to review, regulatory requirements, project changes, market conditions and access to capital. No consolidated earnings guidance is stated in the provided filing text.
- After quarter-end, the Board raised the quarterly common dividend from $0.89 to $0.91 per share. Entergy also had forward sale agreements covering 15.3 million shares, with settlement expected on or before June 7, 2019.
- Regulatory and legal matters include a FERC challenge to System Energy’s 10.94% return on equity and a separate complaint over Grand Gulf sale-leaseback costs; both proceedings could affect rates or require refunds. The FERC proceeding on the return was set for hearing, then held in abeyance. Entergy Arkansas’s opportunity-sales proceeding established an estimated $132 million payment, including interest, to other utility companies; the liability was previously recognized and management expects to recover the retail portion through rates.
- Entergy New Orleans’ 128 MW power-station project faced legal challenges and a City Council investigation. In October 2018, investigators concluded individuals were paid to support the project and that the company knew or should have known; the Council required the company to show cause why it should not be fined $5 million. Entergy disputed aspects of the report. A New Orleans distribution-system prudence investigation and reliability review were also underway.
- Other notable items: the NRC renewed Indian Point 2 and 3 operating licenses, though planned shutdown dates remain governed by the New York settlement; ANO units moved to NRC oversight Column 1; Grand Gulf may return to Column 2 after an operational issue. A $62 million DOE judgment for Pilgrim spent-fuel costs was paid in October 2018. The filing says there were no material changes to the Form 10-K risk factors.
Key investor verification points
- Separate underlying operating trends from tax-driven earnings benefits, customer tax refunds and decommissioning-trust investment gains; review recurring versus nonrecurring impacts on EPS and cash flow.
- Track EWC plant operating performance, planned shutdown and sale approvals, decommissioning-trust values, asset-retirement estimates, and future impairment and restructuring charges.
- Monitor debt and refinancing needs, especially commercial paper near its program limit, upcoming maturities, capital spending, and the effect of the equity forward settlement.
- Verify outcomes and potential customer or shareholder effects of the System Energy FERC complaints, Arkansas opportunity-sales payments, rate proceedings, and New Orleans power-station and reliability matters.
- Assess whether planned capital investments and new generation projects receive required approvals and cost recovery, and whether construction, environmental, regulatory or storm costs alter the stated preliminary plans.