ENTERGY CORP quarterly report, Q3 FY2022

Entergy Corporation — Q3 2022 Form 10-Q

Business context and period. Entergy is primarily a regulated electric utility serving parts of Arkansas, Louisiana, Mississippi, and Texas, with a small natural-gas business. The filing covers the quarter and nine months ended September 30, 2022, compared with the same 2021 periods. Entergy completed its exit from merchant nuclear power with the June 2022 sale of Palisades.

Key financial results

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Operating revenue	$4.219 billion	$3.354 billion	$10.492 billion	$9.020 billion
Operating income	$954.7 million	$827.9 million	$1.602 billion	$1.504 billion
Net income attributable to Entergy	$560.6 million	$531.0 million	$996.7 million	$859.6 million
Diluted EPS	$2.74	$2.63	$4.88	$4.26
Operating cash flow	Not separately presented for the quarter	Not separately presented for the quarter	$1.809 billion	$2.011 billion

Revenue rose about 26% in Q3 and 16% year to date. Management attributed Utility revenue growth principally to higher fuel and rider recoveries, rate increases, and increased electricity use. Many fuel and rider revenues are designed to offset corresponding expenses and therefore do not materially increase net income.
Reported operating margin was approximately 22.6% in Q3 versus 24.7% a year earlier, and 15.3% year to date versus 16.7%. These comparisons reflect, among other items, pass-through revenues and significant regulatory charges.
Utility electricity sales increased 8% in Q3 and 4% year to date. Entergy cited favorable weather, recovery from Hurricane Ida-related disruption, and stronger demand across customer classes.

Cash, debt, and capital

At September 30, Entergy reported $1.003 billion of cash and cash equivalents. Nine-month operating cash flow declined $202 million year over year, while investing cash outflow was $4.369 billion, including $3.853 billion of construction and capital expenditures.
Reported debt-to-capital was 69.0% (68.8% excluding specified non-recourse securitization bonds); net debt-to-net capital excluding those bonds was 68.0%, versus 69.1% at year-end 2021.
Long-term debt, including current maturities, was approximately $26.220 billion; notes payable and commercial paper were $1.387 billion. Entergy had $1.387 billion of commercial paper outstanding under a $2 billion program.
The parent’s $3.5 billion revolving credit facility had $3.347 billion available after $150 million of borrowings and $3 million of letters of credit. Entergy reported compliance with the facility covenant.
Entergy expects approximately $15.5 billion of Utility capital investment during 2023–2025. It had used or contracted approximately $1.078 billion of its equity distribution program by September 30, including approximately $870 million of unsettled forward sales; management expected to settle existing forwards by year-end 2022 and anticipated approximately $130 million of additional equity issuance through 2024.
The Board declared a quarterly common dividend of $1.07 per share in October 2022, up from $1.01.

Material changes and unusual items

Q3 net income attributable to Entergy increased about 6%; nine-month net income increased about 16%. The year-to-date comparison includes substantial one-time regulatory and transaction effects.
System Energy recorded a $551 million pre-tax regulatory charge in Q2 related to a partial settlement and offer of settlement concerning pending FERC proceedings. This drove System Energy to a $321 million nine-month net loss, compared with $82 million net income in 2021.
Entergy recorded a $166 million pre-tax gain on the Palisades sale. The sale transferred its decommissioning trust and related asset-retirement obligations.
Louisiana storm-cost securitization reduced Entergy’s income tax expense by a net $283 million, partly offset by a $224 million pre-tax regulatory charge to reflect customer-sharing obligations. The securitization also supported debt repayment and storm reserves.
Entergy Wholesale Commodities revenue declined to $62 million in Q3 from $162 million, principally following Palisades’ shutdown and sale. The exit from merchant nuclear power is complete.

Outlook, risks, and contingencies

Regulatory and litigation exposure: A FERC-contingent settlement provides for a $235 million refund to Entergy Mississippi. If the other retail regulators joined, the total refund would be $588.25 million. Entergy recorded a $588 million regulatory liability, including amounts for potential refunds to other utility customers. Other FERC proceedings remain pending, with claims and estimates varying by proceeding; outcomes and timing are uncertain.
Storm recovery: Entergy Louisiana sought approval to recover approximately $2.64 billion of storm costs, including carrying costs; LPSC staff recommended recovery and securitization, with a hearing scheduled for December 2022. Entergy New Orleans received authorization to proceed with a $206 million storm securitization, while certification of certain Hurricane Ida costs remained pending.
Projects and cost recovery: The proposed 1,215 MW Orange County power station’s estimated cost rose from an initial $1.2 billion to approximately $1.55–$1.58 billion. An administrative proposal recommended approval subject to a $1.37 billion cost-recovery cap and other conditions; final PUCT approval was pending. Management also cited solar-panel tariff uncertainty and supply-chain constraints that could increase project costs or delay schedules.
Fuel and customer balances: High fuel prices increased deferred fuel balances and customer-bill pressure. Entergy Louisiana deferred approximately $225 million of fuel expense during April–September 2022 for recovery through its fuel-adjustment mechanism. Entergy Texas reported a $103.1 million cumulative under-recovery at March 2022 and sought regulatory approval to carry it forward.
Tax and pension risks: Entergy said it may be subject to the Inflation Reduction Act’s 15% corporate alternative minimum tax beginning in 2026, but could not yet assess the future impact; no 2022 financial-statement effect was expected. Qualified pension assets lost 24% through September, declining from $7 billion to $5 billion; Entergy expected $400 million of 2022 pension contributions and had contributed $170 million by September.
Operations and regulation: Waterford 3 was placed in NRC Action Matrix Column 2 following a radiation-monitor calibration issue; Entergy said the issue was corrected and a supplemental NRC inspection remained necessary. Entergy’s forward-looking risk disclosures also cite severe weather, environmental rules, nuclear operations, interest rates, inflation, supply-chain disruptions, and the ability to recover capital and operating costs from customers.
Guidance: The filing provides planned capital investment but no clear consolidated earnings or EPS guidance for 2022.

Important facts for investors to verify

Whether and when FERC approved the System Energy settlement, and the final refund exposure across all pending proceedings.
Whether storm-recovery costs and proposed securitizations received final regulatory approval, and how recovery affects customer bills and cash flow.
The settlement of Entergy’s forward equity sales, resulting share issuance and dilution, and actual equity needs against the stated investment plan.
Project approval, final cost and recoverability for Orange County, and the schedule and economics of solar projects facing tariff and supply-chain risks.
Progress in recovering deferred fuel costs and the effect of fuel prices, weather, and customer usage on margins and operating cash flow.
Developments in pension asset performance and required contributions, the potential CAMT impact, and Waterford 3’s NRC status.