Entergy Corporation — Q1 2019 Form 10-Q
Business context and period. Entergy reported for the three months ended March 31, 2019, compared with Q1 2018. Its principal businesses are regulated electric and gas utilities in the South and Entergy Wholesale Commodities (EWC), which owns and operates merchant power assets, primarily nuclear plants. The combined filing also includes separate subsidiary reports; figures below are Entergy Corporation consolidated unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $2.610 billion | $2.724 billion | Down 4.2% |
| Operating income | $283.3 million | $335.7 million | Down 15.6% |
| Consolidated net income | $258.6 million | $136.2 million | Up 89.9% |
| Net income attributable to Entergy Corporation | $254.5 million | $132.8 million | Up 91.6% |
| Diluted EPS | $1.32 | $0.73 | Up 80.8% |
| Operating cash flow | $501.2 million | $557.4 million | Down $56.2 million |
Operating margin was approximately 10.9%, versus 12.3% a year earlier; these percentages are calculated from reported operating income and revenue. The sharp increase in net income occurred despite lower operating income: other income rose to $201.7 million from $13.9 million, chiefly reflecting much higher investment income, including gains on EWC decommissioning trust investments. The effective tax rate was 14.2%, compared with 24.3%, with excess deferred-tax amortization among the principal factors.
- Utility net revenue: $1.416 billion, down $43.6 million year over year. The $61 million reduction from returning unprotected excess deferred taxes to customers was offset in income tax expense and did not affect net income. Less favorable weather reduced residential and commercial sales; industrial usage increased.
- EWC: Net revenue rose $10.6 million to $393 million, mainly from higher nuclear generation volume and fewer non-refueling outage days. Fleet capacity factor was 85%, versus 83%; average energy price was $51.43/MWh, versus $52.29/MWh.
- Cash and investment: Cash and cash equivalents were $983.5 million at quarter-end, up from $481.0 million at year-end. Investing cash outflow was $951.0 million, including $951.6 million of construction and capital expenditures and substantial decommissioning-trust purchases and sales. Financing provided $952.3 million.
- Debt and access to liquidity: Long-term debt was $17.17 billion, with $150 million currently maturing; commercial paper outstanding was approximately $1.942 billion. Debt-to-capital was 67.8% (66.1% net debt to net capital excluding securitization bonds), versus 66.7% and 65.5%, respectively, at year-end. Of Entergy Corporation’s $3.5 billion credit facility, $3.174 billion was available. The company reported compliance with its credit-facility debt covenant.
Material changes and developments
- Retail electric revenue declined 6% overall, and billed retail electricity sales fell 3%. Weather-related softness in residential and commercial usage was partly offset by industrial growth. Rate increases at several utilities supported pricing.
- Utility operating cash flow decreased, reflecting customer tax-benefit returns, less favorable weather, increased nuclear outage spending and higher interest paid; lower pension contributions and fuel-cost recovery timing partly offset the decline.
- Entergy issued debt at several subsidiaries during the quarter. Entergy Arkansas issued $350 million of 4.20% bonds; Entergy Louisiana issued $525 million of 4.20% bonds; and Entergy Texas issued $700 million of bonds, using part of the proceeds to refinance $500 million of maturing debt. System Energy refinanced $134 million of higher-rate bonds with 2.50% bonds.
- Entergy adopted the new lease standard in January, recognizing about $263 million of right-of-use assets and corresponding lease liabilities. Management said adoption did not materially affect net income or cash flow.
Outlook, risks and unusual items
- EWC exit: Management plans to shut down and sell its remaining merchant nuclear plants. The Vermont Yankee plant and its decommissioning trust and obligation were transferred to NorthStar in January 2019. The Pilgrim sale, for nominal stated consideration subject to adjustments, was expected to close by year-end 2019; Entergy reported an adjusted net investment of $180 million at March 31. An April 2019 agreement would transfer Indian Point to Holtec after Indian Point 3 shuts down and is defueled, with closing targeted for Q3 2021 and subject to regulatory and other conditions; adjusted net investment was $315 million at quarter-end. Planned shutdowns are Pilgrim in May 2019, Indian Point 2 in April 2020, Indian Point 3 in April 2021 and Palisades in May 2022.
- EWC recorded $74 million of impairment and related charges in Q1 (about $58 million after tax). Entergy expected approximately $130 million of employee retention and severance costs in 2019, of which $34 million had been incurred by March 31, plus approximately $110 million from 2020 through mid-2022. Further fuel and capital costs may be expensed as incurred due to impairment of plant values.
- The Vermont Yankee disposition generated a $29 million net tax expense because a deferred tax asset could not be fully realized, plus $5.4 million of other charges ($4.2 million after tax).
- Regulatory proceedings remain significant. These include System Energy return-on-equity complaints and a Grand Gulf sale-leaseback complaint seeking potential refunds and rate-base adjustments; hearings were scheduled for September and November 2019. Entergy Louisiana recorded a provision for a consultant-recommended $7.3 million customer refund, plus interest, related to a fuel-cost audit. Entergy New Orleans also faced a City Council prudence investigation, with advisors recommending a $1.5–$2 million penalty; the company disputed that recommendation.
- Other execution and regulatory risks include approval and a potential mechanical issue affecting the planned Choctaw Generating Station acquisition, rate recovery for capital investments, fuel and purchased-power recovery, weather and storm restoration, nuclear safety and decommissioning obligations, and commodity prices. Entergy disclosed no material changes to the risk factors in its 2018 Form 10-K.
- Entergy provided no overall earnings guidance in the supplied filing text. The Board declared a quarterly dividend of $0.91 per share in April 2019, unchanged from the prior quarterly rate.
Important facts for investors to verify
- How much of the Q1 earnings increase reflects recurring operating performance versus investment gains, tax effects and the Vermont Yankee disposition.
- Updated timing, approvals, trust-fund balances, decommissioning liabilities and expected losses for the Pilgrim and Indian Point transactions, as well as costs of the broader EWC exit.
- Final outcomes and potential customer refunds or rate impacts in System Energy’s FERC proceedings, the Louisiana fuel-cost audit and other rate cases.
- Debt, commercial-paper refinancing needs, capital spending and available credit capacity, including the effect of planned utility and generation investments.
- Whether weather-normalized demand, industrial load growth and regulatory rate recovery offset weaker retail sales and higher financing and operating costs.