Entergy Corporation — Q2 2017 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers the quarter and six months ended June 30, 2017, with comparisons to 2016. Entergy operates regulated electric and gas utilities across parts of Arkansas, Louisiana, Mississippi and Texas, and the Entergy Wholesale Commodities (EWC) merchant-generation business. The filing also includes separate reports for utility subsidiaries.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $2.619 billion | $2.463 billion | $5.207 billion | $5.072 billion |
| Operating income | $143.5 million | $442.3 million | $318.3 million | $940.5 million |
| Consolidated net income | $413.4 million | $572.6 million | $499.4 million | $807.8 million |
| Net income attributable to Entergy Corporation | $409.9 million | $567.3 million | $492.5 million | $797.3 million |
| Diluted EPS | $2.27 | $3.16 | $2.74 | $4.45 |
- Operating revenue rose about 6% in Q2 and 3% year to date. Utility retail electric revenue increased, supported by rate changes and higher billed retail usage; EWC revenue was lower year to date after outages and the FitzPatrick sale.
- Operating income fell sharply: operating margin was approximately 5.5% in Q2 versus 18.0% in Q2 2016, and 6.1% for the first half versus 18.5%. The comparison reflects, among other items, EWC impairment charges, higher purchased-power expense, and unusually favorable tax and litigation items in 2016.
- Q2 and first-half 2017 included EWC impairment charges of $194 million and $405 million, respectively. The first-half 2017 results also included a $373 million income-tax expense reduction from tax elections; the FitzPatrick sale generated a $16 million pretax gain and a $44 million tax benefit in Q1. These items materially affect period comparisons.
- Utility net revenue was $1.549 billion in Q2, up from $1.524 billion, and $2.954 billion for the first half, up from $2.899 billion. EWC net revenue was $250 million in Q2 versus $293 million and $744 million for the first half versus $759 million.
Cash flow, debt and liquidity
- First-half operating cash flow was $819.7 million, down from $1.252 billion. Investing cash outflow was $1.770 billion, compared with $2.266 billion; financing cash inflow was $697.2 million, compared with $659.3 million. Cash declined $253.3 million to $934.5 million.
- Capital expenditures were substantial: construction/capital expenditures were $1.720 billion for the first half, up from $1.294 billion. Management cited increased utility construction spending and nuclear outage costs among cash-flow drivers.
- At June 30, Entergy reported debt-to-capital of 65.5%, or 64.7% excluding non-recourse securitization bonds; net debt-to-net capital excluding those bonds was 63.2%, up from 61.8% at year-end 2016.
- Entergy had a $3.5 billion revolving credit facility, with $225 million borrowed and $3.269 billion of capacity available after letters of credit. It also had $1.1 billion of commercial paper outstanding. The company reported compliance with its credit-facility debt-ratio covenant.
- Total cash and current assets were $934.5 million and $3.599 billion, respectively; current liabilities were $4.241 billion. Long-term debt was $14.308 billion, with $702.9 million of current maturities and $1.249 billion of notes payable and commercial paper also reported.
Material changes and management outlook
- Utility billed retail electricity use increased 4% in Q2 and 1% for the first half; industrial usage was a key contributor. Total utility billed electricity sales, including resale, decreased 2% in both comparisons.
- EWC’s nuclear fleet capacity factor declined to 59% in Q2 from 76%, and to 71% for the first half from 83%. More outage days and the sale of the 838 MW FitzPatrick plant reduced output and capacity; higher realized energy and capacity prices partly offset the decline.
- Management is reducing EWC’s merchant fleet, with planned shutdowns of Palisades in October 2018, Pilgrim by June 1, 2019, Indian Point 2 in April 2020 and Indian Point 3 in April 2021, subject to stated licensing assumptions. Entergy expected about $110 million of 2017 employee retention and severance costs, of which $66 million had been incurred by June 30, and approximately $250 million from 2018 through 2021. Further impairment-related fuel and capital costs are expected to be expensed as incurred. The filing provides no consolidated earnings guidance.
- Major utility investment plans include Lake Charles Power Station, estimated at $872 million and approved by the LPSC in July 2017 for expected mid-2020 operation; Montgomery County Power Station, estimated at $937 million, with generation construction cost recovery capped at $831 million subject to exclusions and PUCT approval in July 2017; and the proposed Washington Parish Energy Center, estimated at $261 million, with regulatory approval pending. New Orleans was seeking approval for either a $232 million, 226 MW unit or a $210 million, 128 MW alternative; a City Council decision was expected in February 2018.
- The Board declared a quarterly common dividend of $0.87 per share in July 2017, unchanged from the prior quarterly rate. Entergy cautions that interim results are seasonal and should not be used as a full-year forecast.
Risks, contingencies and unusual items
- A FERC administrative law judge’s July 2017 initial decision concluded Entergy Arkansas should pay $86 million plus interest to other utility companies in the opportunity-sales proceeding. FERC review remains pending; Entergy had previously recorded an $87 million liability, and final amounts and recipients remain uncertain.
- Arkansas and Mississippi regulators challenged System Energy’s 10.94% return on equity under the Grand Gulf Unit Power Sales Agreement, seeking a lower return; the complaint cited a proposed range of 8.37%–8.67%. System Energy recorded a provision against revenue, but the filing does not provide a clear amount. FERC action was pending.
- Regulatory rate recovery, MISO participation and cost allocation, fuel and purchased-power recovery, nuclear operations and licensing, decommissioning obligations, environmental compliance, commodity prices, weather and storms, and access to capital are among the identified risks.
- Entergy stated that no material changes had occurred to the risk factors in its 2016 Form 10-K. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of 2017 earnings reflects recurring utility performance versus the $373 million tax benefit, EWC impairments, FitzPatrick-related items and prior-year tax/litigation benefits.
- FERC outcomes and potential financial effects for the Entergy Arkansas opportunity-sales case and the System Energy return-on-equity complaint.
- Actual and forecast costs, outage performance, licensing status and shutdown timing for the remaining EWC nuclear fleet.
- Regulatory approvals, final cost recovery and execution risks for the planned generation and grid investments, including the stated construction-cost caps and schedules.
- Whether operating cash flow, capital spending, short-term borrowing and debt ratios remain consistent with liquidity needs and the credit-facility covenant.