ENTERGY CORP quarterly report, Q3 FY2010

Entergy Corporation — Q3 2010 Form 10-Q Summary

Business context and reporting period

Combined, unaudited quarterly report for the three and nine months ended September 30, 2010. Entergy operates regulated electric utilities and a six-plant Non-Utility Nuclear business, alongside non-nuclear wholesale assets. The report is filed separately by Entergy Corporation and its listed utility and generation subsidiaries; figures below are consolidated Entergy Corporation figures unless noted.

Financial performance and liquidity

Metric	Q3 2010	Q3 2009	Nine months 2010	Nine months 2009
Operating revenue	$3.332 billion	$2.937 billion	$8.954 billion	$8.247 billion
Operating income	$770.6 million	$800.3 million	$1.874 billion	$1.781 billion
Consolidated net income	$497.9 million	$460.2 million	$1.037 billion	$932.3 million
Net income attributable to Entergy Corporation	$492.9 million	$455.2 million	$1.022 billion	$917.3 million
Diluted EPS	$2.62	$2.32	$5.38	$4.66

Q3 operating income declined despite higher revenue, while net income rose; the lower effective tax rate (27.1%, versus 37.9% in Q3 2009) materially benefited earnings. Nine-month effective tax rates were 34.1% and 36.4%, respectively. No consolidated gross or operating margin guidance is stated.

Utility net revenue rose $146 million in Q3 to $1.522 billion, principally from higher usage and rates. Retail billed usage increased 8% year over year, reflecting weather and stronger industrial sales.
Non-Utility Nuclear net revenue fell $64 million, or 10%, in Q3 to $558 million. Capacity factor declined to 91% from 100%; billed generation fell 9%, and realized price was $61.41/MWh versus $61.70/MWh.
Nine-month operating cash flow was $3.165 billion, up from $2.009 billion; investing cash outflow was $1.995 billion and financing cash outflow $949 million. Ending cash was $1.931 billion, versus $1.131 billion a year earlier.
The operating cash-flow increase included $703 million received from Louisiana storm-cost financings; it also reflected lower storm restoration spending and higher Utility net revenue. The increase should not be read as wholly recurring.
At September 30, debt-to-capital was 57.5%; excluding specified Arkansas and Texas securitization bonds, debt-to-capital was 55.6% and net debt-to-net capital was 50.9%. Long-term debt was $11.445 billion, including $940 million of securitization bonds; current maturities were $589 million and notes payable $168 million.
Entergy’s $3.472 billion revolving credit facility had $1.672 billion available after $1.775 billion drawn and $25 million in letters of credit. Entergy was in compliance with its 65% debt-ratio covenant.
Common dividends declared were $0.83/share in Q3, up from $0.75. Nine-month repurchases totaled $665.6 million. The board authorized an additional $500 million repurchase program in October 2010.

Material changes versus prior comparable period

Consolidated revenue increased 13% in Q3 and 9% for the first nine months; Entergy-attributable net income rose 8% and 11%, respectively. Nine-month diluted EPS increased from $4.66 to $5.38.
Utility demand, rate actions and economic recovery supported results, but Non-Utility Nuclear revenue weakened because of lower output, refueling and unplanned outages, and lower contracted prices.
Q3 other operating and maintenance expense increased $127 million year over year. Non-Utility Nuclear recorded spin-off-related and other capital-cost write-offs; benefit costs also increased across the businesses.
Entergy’s share count declined with repurchases; average diluted shares for nine months were 189.9 million versus 197.4 million.

Outlook, management commentary, risks and unusual items

No consolidated full-year earnings guidance is provided in the supplied filing text. Management cautions that utility results are seasonal, with peak periods in Q3, and interim results should not be used to estimate full-year performance.
Entergy plans $7.4 billion of capital investment for 2011–2013: $6.3 billion for Utility and $1.1 billion for Entergy Wholesale Commodities, including Non-Utility Nuclear. Plans include maintenance, environmental compliance, transmission, plant upgrades and nuclear projects.
The proposed Non-Utility Nuclear spin-off was rejected by New York regulators and denied in Vermont; Entergy began unwinding the transaction infrastructure. It expected approximately $15 million after tax of additional unwind costs, primarily through the remainder of 2010. Q3 and nine-month results already included significant related write-offs.
Non-Utility Nuclear had forward-sold 90% of planned remaining-2010 output at an average $57/MWh and 95% of 2011 output at $53/MWh. Management expected realized prices to decline in 2010 and 2011. A downgrade below investment grade could require about $65 million of additional collateral under certain contracts.
Key regulatory matters include System Agreement cost-allocation and refund proceedings, Entergy Arkansas’s post-System Agreement options, the pending Entergy Texas rate-case settlement and customer fuel refund, and a Department of Justice civil investigation into utility generation procurement, dispatch and transmission practices. The FERC audit identified compliance issues; its report did not recommend civil penalties.
Entergy Louisiana reclassified $199.8 million of Little Gypsy project costs to a regulatory asset after concluding abandonment was probable; customer recovery and treatment remain subject to regulatory proceedings. The proposed Acadia Unit 2 acquisition, expected to close in early 2011, remained contingent on regulatory approvals and full cost recovery.
Vermont Yankee’s license expires in March 2012; state approval and license renewal remain uncertain. Its carrying value, including nuclear fuel, was $424 million, and failure to operate significantly beyond the current license date could trigger impairment. Tritium remediation at the site was ongoing; Entergy estimated total related operating costs of $17.5 million.
Environmental compliance exposure includes potential White Bluff scrubber and low-NOx burner spending estimated at approximately $500 million for Entergy Arkansas’s share, with timing uncertain; proposed federal air and coal-residual rules could add costs. Indian Point cooling-water alternatives were estimated at $200–$250 million for wedgewire screens or at least $1.19 billion for cooling towers, with substantial uncertainty.
Management said ordinary-course legal, regulatory and tax matters were not expected to have a material adverse effect overall. Risk factors were reported as unchanged from the 2009 Form 10-K. Disclosure controls were deemed effective, with no material internal-control change reported.

Most important facts for investors to verify

Whether improved earnings and Utility demand persist after weather effects, while separating recurring operating performance from tax benefits and storm-financing cash receipts.
Actual cash generation, working-capital and fuel-cost recovery trends, and progress against planned capital spending, debt levels and repurchase commitments.
Final regulatory outcomes and customer impacts for System Agreement matters, the Entergy Texas settlement/refund, Little Gypsy cost recovery and the Acadia acquisition.
Non-Utility Nuclear realized prices, outage performance, collateral needs and the costs and consequences of abandoning the planned spin-off.
Vermont Yankee license and state approvals, related impairment exposure, and nuclear remediation and environmental compliance costs.