Business context and reporting period
Entergy Corporation’s combined Form 10-K covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. Entergy operates regulated electric and gas utilities across Arkansas, Louisiana, Mississippi, and Texas, and a merchant-generation business, Entergy Wholesale Commodities (EWC). The Utility segment generated 85% of 2017 consolidated revenue; EWC generated 15%.
Key financial metrics
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Operating revenue | $11.074 billion | $10.846 billion | Up 2.1% |
| Operating income (loss) | $1.260 billion | $(886) million | Improved substantially; 2016 included much larger EWC impairment charges |
| Consolidated net income (loss) | $425 million | $(565) million | 2017 diluted EPS was $2.28, versus a $3.26 loss per share |
| Net income attributable to Entergy Corporation | $412 million | $(584) million | 2017 basic EPS was $2.29 |
| Operating cash flow | $2.624 billion | $2.999 billion | Down $375 million |
| Investing cash flow | $(3.841) billion | $(3.850) billion | Included $3.608 billion of construction and capital expenditures in 2017 |
| Financing cash flow | $811 million | $688 million | 2017 reflected increased commercial paper borrowings |
| Cash and cash equivalents, year-end | $781 million | $1.188 billion | Down $407 million |
Consolidated net margin was approximately 3.8% in 2017, compared with approximately negative 5.2% in 2016. The filing does not provide a single consolidated gross-margin measure; utility net revenue (revenue less fuel, purchased power, and specified regulatory charges or credits) was $6.318 billion, up from $6.179 billion.
At year-end, Entergy reported a 67.1% debt-to-capital ratio and a 65.2% net debt-to-net-capital ratio, both excluding non-recourse securitization bonds. Long-term debt, including current maturities, was approximately $15.075 billion; notes payable and commercial paper were $1.578 billion. Entergy had $781 million of cash, $1.467 billion of commercial paper outstanding, and $3.284 billion of available capacity under its $3.5 billion parent credit facility. The filing states that Entergy was in compliance with its credit-facility covenant.
Material changes versus the prior comparable period
- Annual results turned profitable, substantially reflecting the decline in EWC impairment charges: $538 million in 2017 versus $2.836 billion in 2016. The 2016 charges largely wrote down Palisades and Indian Point assets.
- 2017 results included a $560 million income tax expense from remeasuring deferred taxes after federal corporate tax rates fell from 35% to 21%, partly offset by tax benefits from changes in the tax classification of EWC entities and the FitzPatrick sale. The tax effects also created a $2.9 billion regulatory liability for amounts expected to be returned to customers.
- Utility net revenue rose $139 million, mainly from rate changes and other regulatory items; less favorable weather reduced the increase. EWC net revenue fell about $73 million, principally reflecting the FitzPatrick sale and lower nuclear generation volume.
- FitzPatrick, an 838-MW plant, was sold to Exelon in March 2017 for approximately $110 million, plus Exelon’s assumption of certain liabilities; Entergy recorded a $16 million pretax gain. Entergy Wholesale Commodities owned capacity fell from 4,800 MW to 3,962 MW.
- Operating cash flow declined $375 million, including higher nuclear outage spending, severance and retention payments, and the Waterford 3 customer refund. Capital expenditures rose to $3.608 billion from $2.780 billion.
- The fourth quarter remained loss-making: consolidated net loss was $476 million and diluted loss per share was $2.66, versus a $1.766 billion loss and $9.86 diluted loss per share in fourth quarter 2016.
Outlook, management commentary, risks and unusual items
- Merchant business exit: Management plans to end merchant nuclear generation by mid-2022. Pilgrim was scheduled to shut in 2019; Indian Point 2 and 3 by April 2020 and April 2021; and Palisades on May 31, 2022. The Vermont Yankee sale to NorthStar was planned for 2018, subject to regulatory and other conditions. Management expected employee retention and severance costs of approximately $165 million in 2018 and $205 million from 2019 through mid-2022.
- Capital needs: Planned construction and capital investments were $4.165 billion for 2018, $3.715 billion for 2019, and $3.335 billion for 2020. Entergy expected the tax-law changes to reduce operating cash flow as tax savings flow to customers and said it expected to issue approximately $1 billion of equity before the end of 2019 to help fund incremental cash needs.
- Regulatory and project exposure: Rate cases and recovery of fuel, purchased power, storm, and construction costs remain important to earnings and cash flow. Major generation projects included St. Charles and Lake Charles in Louisiana, Montgomery County in Texas, and proposed New Orleans generation. Approval, cost recovery, timing, and construction risks remain.
- System Energy proceedings: Regulators challenged the 10.94% return on equity under the Grand Gulf Unit Power Sales Agreement; the FERC set a January 2017 refund-effective date and consolidated the complaint with a rate proceeding. Separately, an administrative law judge recommended Entergy Arkansas pay $86 million plus interest in the opportunity-sales proceeding; the matter remained pending, and Entergy Arkansas had recorded a liability and a regulatory asset for its estimated retail share.
- Nuclear operations and decommissioning: ANO remained in NRC Column 4 oversight, and Grand Gulf was in Column 2 with risk of increased oversight. Spent-fuel storage, decommissioning costs and trust-fund adequacy are sensitive to operating lives, regulatory requirements, market returns, and the timing of federal waste disposal. Entergy’s nuclear units also face outage, safety, fuel-supply, and insurance risks.
- Other risk and accounting matters: Weather and hurricanes, environmental rules, litigation, commodity prices, credit support needs, pension assumptions, and access to capital may affect results. Management reported effective internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and, for Entergy Corporation, internal controls.
Most important facts an investor should verify
- How much of 2017’s return to profitability reflects recurring Utility performance versus impairments, tax remeasurement, tax-classification changes, and other unusual items.
- Whether regulatory decisions on the tax-law savings and excess deferred taxes will support the expected customer refunds without materially weakening cash flow, credit metrics, or financing needs.
- Progress, final costs, regulatory recovery, and in-service timing for planned generation, transmission, distribution, and advanced-metering investments.
- Resolution and potential financial effects of the System Energy return-on-equity complaint and Entergy Arkansas opportunity-sales proceeding.
- Execution of the EWC shutdown and Vermont Yankee sale plans, including severance costs, decommissioning funding, and any changes to plant operating lives.
- Liquidity and leverage trends, including commercial paper usage, debt maturities, planned equity issuance, and the ability to sustain dividends amid capital spending and lower operating cash flow.