Business context and reporting period
Entergy Corporation filed this combined Form 10-K for the fiscal year ended December 31, 2018, covering Entergy and six registrant subsidiaries. The business is principally regulated electric utility operations in Arkansas, Louisiana, Mississippi and Texas, plus the Entergy Wholesale Commodities (EWC) merchant-generation business. Utility generated 87% of consolidated revenue in 2018.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $11.009 billion | $11.074 billion |
| Operating income | $469 million | $1.360 billion |
| Consolidated net income | $863 million | $425 million |
| Net income attributable to Entergy Corporation | $849 million | $412 million |
| Diluted EPS | $4.63 | $2.28 |
| Cash from operating activities | $2.385 billion | $2.624 billion |
| Cash and cash equivalents at year-end | $481 million | $781 million |
Revenue declined about 0.6%. Operating income fell substantially, while net income and EPS rose largely because of tax-related benefits and other nonrecurring items. The 2018 income tax benefit was $1.037 billion despite a $174 million pretax loss; the reported effective tax rate was 595%, reflecting the unusual relationship between tax benefits and pretax income.
Capital spending was significant: construction and capital expenditures were $3.942 billion, above operating cash flow. Investing cash outflow was $4.106 billion, while financing provided $1.420 billion. At year-end, long-term debt including current maturities was about $16.168 billion; commercial paper outstanding was $1.942 billion. Debt to capital was 66.7%, or 65.6% net debt to net capital excluding securitization bonds. Entergy had $3.274 billion available under its $3.5 billion revolving credit facility and reported compliance with its debt covenant.
Common dividends paid were $648 million, and 2018 dividends declared were $3.58 per share. The Board declared a $0.91-per-share dividend in January 2019.
Material changes versus the prior comparable period
- Utility net revenue decreased to $5.625 billion from $6.318 billion, principally reflecting the return of excess deferred tax amounts to customers and other regulatory adjustments; higher usage and favorable weather partly offset the decline. Billed Utility electricity usage increased 4%.
- Utility segment net income rose to $1.495 billion from $773 million, substantially influenced by tax benefits and accounting effects.
- EWC net revenue declined to $1.277 billion from $1.469 billion, reflecting lower realized energy prices, lower generation volume, and the absence of FitzPatrick-related reimbursement revenue received in 2017. EWC’s net loss widened to $341 million from $172 million.
- Entergy recorded $532 million of EWC impairment charges in 2018 ($421 million after tax), compared with $538 million in 2017. Fourth-quarter 2018 also included $173 million of impairment and related charges for Vermont Yankee and a $117.5 million Pilgrim decommissioning-related impairment.
- Quarterly results were volatile: fourth-quarter 2018 consolidated net loss was $62 million and diluted loss per share was $0.36, compared with a $476 million consolidated net loss and $2.66 diluted loss per share in fourth-quarter 2017.
Outlook, management commentary, risks and unusual items
Management’s strategy is to invest in and modernize the regulated utility business while exiting merchant nuclear generation. Entergy planned capital investments of $4.640 billion in 2019, $3.475 billion in 2020 and $3.755 billion in 2021. The filing does not provide a clear consolidated earnings-per-share forecast for 2019.
- Entergy expects to cease merchant nuclear generation by 2022. Pilgrim was scheduled to shut down May 31, 2019; Indian Point 2 and 3 by April 2020 and April 2021; and Palisades by May 31, 2022. Pilgrim and Palisades were under agreements to be sold after shutdown, subject to conditions. Vermont Yankee was sold to NorthStar on January 11, 2019.
- Management expected approximately $120 million of EWC employee retention and severance costs in 2019 and approximately $110 million over 2020–2022. Further impairments and decommissioning-cost revisions remain possible.
- Tax-related items materially affected 2018 results, including amortization of excess accumulated deferred income taxes, utility restructuring, a decommissioning-trust tax restructuring, and tax audit settlements. The company reported a $2.1 billion regulatory liability for income taxes at year-end; customer refunds and credits reduce near-term operating cash flow.
- Material regulatory uncertainty includes FERC proceedings over System Energy’s 10.94% return on equity and Grand Gulf sale-leaseback costs, and continued System Agreement-related proceedings. Entergy Arkansas paid $135 million, including interest, to other utility subsidiaries in December 2018 in the opportunity-sales proceeding.
- Entergy New Orleans recorded a $5 million settlement offer associated with the New Orleans Power Station show-cause matter; the City Council approved a settlement proposal in February 2019. The project’s estimated cost is $210 million. The filing also describes ongoing rate, reliability, fuel-cost recovery and environmental proceedings.
- Key risks include regulatory decisions and cost recovery, storm damage and recovery timing, fuel and wholesale power prices, nuclear safety and operating performance, decommissioning funding, spent-fuel storage, environmental requirements, capital-market access, pension assumptions, and cybersecurity. Management reported that malware found on a business network in 2018 was remediated and did not affect operational systems or materially affect operations.
The financial statements received an unqualified audit opinion. Management and the independent auditor reported effective internal control over financial reporting for Entergy Corporation as of December 31, 2018.
Important facts for investors to verify
- Reconcile the $849 million attributable net income and $4.63 diluted EPS with the large tax benefits, impairment charges, and fourth-quarter loss; assess the recurring earnings contribution.
- Track the timing and regulatory treatment of tax-related customer refunds, including their effect on operating cash flow and financing needs.
- Review funding for the $4.640 billion 2019 capital plan, debt maturities, commercial paper refinancing, and remaining equity-forward settlements due by June 7, 2019.
- Monitor EWC shutdown and sale conditions, expected decommissioning obligations, trust-fund adequacy, and additional impairment exposure.
- Follow the System Energy FERC return-on-equity and sale-leaseback proceedings, Entergy Arkansas opportunity-sales recovery, and major state rate cases and cost-recovery audits.