Entergy Corporation — Q2 2012 Form 10-Q Summary
Business context and reporting period
Entergy filed a combined, unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The filing covers Entergy Corporation and its separately reporting utility subsidiaries. Entergy operates regulated electric and gas utilities in the South and the Entergy Wholesale Commodities business, which sells power from nuclear and other generation assets.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $2.519 billion | $2.803 billion | $4.902 billion | $5.344 billion |
| Operating income | $343.0 million | $558.7 million | $286.1 million | $1.070 billion |
| Consolidated net income | $370.6 million | $320.6 million | $223.8 million | $574.3 million |
| Net income attributable to Entergy Corporation | $365.0 million | $315.6 million | $213.3 million | $564.2 million |
| Diluted EPS | $2.06 | $1.76 | $1.20 | $3.14 |
For the first six months, operating cash flow was $1.188 billion, investing cash flow was negative $1.500 billion, and financing cash flow was negative $98.7 million. Cash declined from $694.4 million at year-end 2011 to $283.4 million at June 30, 2012. Capital expenditures were $1.252 billion.
At June 30, total debt to capital was 57.4%, or 55.3% excluding specified securitization bonds; net debt to net capital excluding those bonds was 54.7%, compared with 53.5% at year-end. Entergy had a $3.5 billion revolving credit facility, with $2.022 billion available after borrowings and letters of credit. It reported compliance with the facility’s debt covenant. The Board declared a quarterly dividend of $0.83 per share in July.
Material changes versus prior comparable periods
- Q2 consolidated net income rose year over year, substantially reflecting tax benefits from IRS and court outcomes. This did not translate into higher six-month earnings: six-month net income fell sharply, largely because of the Vermont Yankee impairment.
- Utility net revenue fell by $153 million in Q2, primarily due to a $165 million regulatory charge reflecting the sharing with Louisiana customers of benefits from the Act 55 tax settlement. Weather-adjusted usage increased 4%, but milder weather reduced sales.
- Wholesale Commodities net revenue fell 6% in Q2 and 10% for the six-month period, primarily due to lower contracted nuclear power prices. Its Q2 nuclear fleet capacity factor was 85%, versus 91% a year earlier; average realized nuclear revenue was $48.67/MWh versus $52.38/MWh.
- Operating expenses included a $355.5 million pretax ($223.5 million after-tax) first-quarter impairment of Vermont Yankee. Conversely, a revised decommissioning study produced a $49 million second-quarter expense credit for a Wholesale Commodities plant.
Outlook, commentary, risks and unusual items
- Taxes and customer sharing: The Act 55 settlement generated a $172 million Entergy income tax benefit, including $143 million for Entergy Louisiana and $20 million for Entergy Gulf States Louisiana; customer-sharing regulatory charges substantially offset the utility benefit. A Fifth Circuit decision also affirmed Entergy’s U.K. windfall-tax credit, allowing reversal of uncertain-tax-position provisions. The reported effective tax rates were therefore unusually low or negative.
- Vermont Yankee: Entergy wrote the plant and related assets down from $517.5 million to estimated fair value of $162.0 million, citing lower power-price forecasts and uncertainty about continued operation. Vermont proceedings and related appeals remained ongoing.
- Wholesale price exposure: Entergy estimated that a $10/MWh change in annual average nuclear-market energy prices would affect 2012 pretax net income by $19 million. It had sold forward 90% of planned nuclear output for the remainder of 2012 at an average contracted energy price of $49/MWh, and 84% of planned 2013 output at $45–$50/MWh.
- Regulatory and strategic execution: Utility companies’ proposed move to MISO remained subject to regulatory approvals and conditions; the Arkansas regulator had not found its application in the public interest at that time. The proposed transmission-business spin-off and merger with an ITC subsidiary remained subject to approvals and other conditions.
- Other exposures: A Texas power-price lawsuit was certified as a class action; plaintiffs’ experts estimated damages of $153 million to $972 million under various scenarios, which Entergy disputed. Nuclear license-renewal, spent-fuel, environmental compliance, storm recovery, commodity prices, and pension funding also remain relevant risks. Management cautioned that seasonal utility results, with peak demand typically in Q3, make interim results unsuitable as a full-year estimate.
- No specific full-year earnings guidance is provided in the supplied filing text. The report states that the NRC’s Grand Gulf uprate work was completed in June and the NRC approved operation at uprated capacity in July; the project’s estimated total investment was approximately $874 million, including SMEPA’s share.
Important facts for investors to verify
- How much of first-half earnings reflects tax settlements and reversals of uncertain-tax-position provisions, versus recurring operations, and how customer sharing affects future periods.
- Vermont Yankee’s operating and regulatory status, impairment assumptions, and potential further impairment or operating consequences.
- Realized power prices, hedge coverage, nuclear outage performance, and collateral or liquidity requirements in Wholesale Commodities.
- Progress and final conditions for MISO membership and the proposed transmission spin-off and merger; related costs and customer-rate recovery.
- Developments in the Texas class action, utility rate cases and fuel refunds, nuclear proceedings, and environmental requirements.
- Cash generation, capital spending, debt maturities, available credit, and pension contributions. Verify that the reported debt ratios and liquidity remain within applicable covenants.