Business Context and Reporting Period
This Form 8-K Current Report, dated January 29, 2018, is filed by Entergy Texas, Inc. and its affiliated registrants (including Entergy Corporation, Entergy Arkansas, Inc., Entergy Louisiana, LLC, Entergy Mississippi, Inc., Entergy New Orleans, LLC, and System Energy Resources, Inc.). The filing primarily addresses the financial and operational impacts of the Tax Cuts and Jobs Act (H.R.1), signed into law on December 22, 2017.
Key Financial Metrics and Impacts
- Deferred Tax Liability Adjustment: Entergy preliminarily expects an approximate $4 billion reduction in consolidated net deferred tax liabilities due to the new 21% federal corporate income tax rate.
- Regulatory Liability: The reduction in deferred tax liabilities corresponds to an increase in net regulatory liabilities. Approximately two-thirds of this liability is expected to be amortized over ~30 years, with the remainder amortized over a shorter period.
- Deferred Tax Asset Adjustment: Entergy expects an approximate $0.6 billion reduction in net deferred tax assets not subject to ratemaking, resulting in a corresponding charge to income tax expense.
- 2017 Earnings Impact: The re-measurement is recorded as a special item in December 2017 and is not expected to affect 2017 consolidated operational earnings or Utility, Parent & Other adjusted earnings.
- Interest Deductibility: The Act's limitation on interest expense deductibility is not expected to have a material effect on financial results.
Material Changes and Outlook
The primary material change is the re-measurement of deferred tax assets and liabilities necessitated by the Tax Cuts and Jobs Act. Going forward, the Act is expected to benefit customers through lower rates derived from reduced income tax expense and the return of deferred taxes. Additionally, rate base is expected to increase.
Guidance and Outlook: Entergy affirms its previously disclosed Utility, Parent & Other adjusted earnings per share (EPS) outlook:
- 2018: $4.50 to $4.90
- 2019: $4.90 to $5.30
- 2020: $5.20 to $5.60
While certain credit metrics are expected to be adversely affected, Entergy expects to maintain an investment-grade credit rating. Financing for incremental cash requirements will likely involve a mix of utility company debt, parent debt, and new external equity.
Risks and Contingencies
The amount and timing of earnings and cash impacts depend heavily on regulatory treatment. Entergy's utility subsidiaries are working with regulators to determine the appropriate path forward, which may include:
- Determining the period over which income tax benefits are provided to customers.
- Accelerating depreciation or amortization for certain assets.
- Increasing or modifying capital investments (e.g., grid modernization).
Standard forward-looking risks include uncertainties in rate proceedings, storm remediation costs, nuclear plant relicensing and operating costs, decommissioning trust fund values, and legislative or regulatory changes.
Investor Verification Checklist
- Verify the final regulatory treatment of the $4 billion deferred tax liability reduction in each jurisdiction.
- Monitor the specific amortization schedules approved by regulators for the regulatory liability.
- Review upcoming 10-Q and 10-K filings for the final accounting of the $0.6 billion deferred tax asset charge.
- Track credit rating agency responses to the anticipated adverse effects on credit metrics.
- Confirm the timing of the fourth-quarter earnings call for detailed disclosures regarding the Act's effects.