Entergy Corporation — Q3 2015 Form 10-Q
Business context and reporting period
Entergy operates regulated electric and gas utilities across parts of Arkansas, Louisiana, Mississippi and Texas, and a competitive power business that includes merchant nuclear plants. This combined filing covers the quarter and nine months ended September 30, 2015; financial statements are unaudited. The filing also reports separate results for subsidiary registrants. On October 1, 2015, Entergy Louisiana and Entergy Gulf States Louisiana completed their business combination, after the reporting date.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $3.371 billion | $3.458 billion | $9.005 billion | $9.664 billion |
| Operating income (loss) | ($965 million) | $493 million | ($45 million) | $1.687 billion |
| Consolidated net income (loss) | ($718 million) | $235 million | ($262 million) | $835 million |
| Net income (loss) attributable to Entergy Corporation | ($723 million) | $230 million | ($276 million) | $821 million |
| Diluted EPS | ($4.04) | $1.27 | ($1.54) | $4.56 |
The results include $1.642 billion of pre-tax ($1.062 billion after-tax) impairment and related charges, principally for FitzPatrick and Pilgrim. This unusual non-cash charge was the dominant cause of the reported losses. Utility net revenue increased $105 million in Q3 and $248 million for the nine-month period; Entergy Wholesale Commodities net revenue fell $75 million and $417 million, respectively.
For the nine months, operating cash flow was $2.350 billion, down from $2.891 billion. Investing cash outflow was $2.186 billion, including $1.702 billion of construction and capital expenditures; financing cash outflow was $545 million. Cash and cash equivalents ended September at $1.041 billion, versus $1.422 billion at year-end 2014.
At September 30, total debt to capital was 60.2%, or 58.7% excluding non-recourse securitization bonds; net debt to net capital excluding those bonds was 56.7%. Long-term debt including current maturities was approximately $13.331 billion. Entergy had $782 million of notes payable and commercial paper. Its $3.5 billion credit facility had $2.966 billion available after borrowings and letters of credit; Entergy was in compliance with its 65% debt-ratio covenant. The common dividend declared for Q3 was $0.83 per share; in October the Board declared $0.85 per share.
Material changes versus the prior comparable period
- Q3 operating revenue edged down about 3%; nine-month revenue declined about 7%, mainly reflecting lower competitive-business revenue.
- Wholesale Commodities revenue was pressured by Vermont Yankee’s 2014 shutdown, lower realized wholesale and capacity prices, and unfavorable mark-to-market activity. Nuclear fleet capacity factor was 92% in Q3 versus 90% a year earlier; owned capacity fell with Vermont Yankee’s retirement.
- Utility results benefited from higher billed usage and rate increases. Utility billed retail electricity usage rose 6% in Q3 and 2% for the nine-month period, supported by weather and industrial demand.
- Cash from operations declined, reflecting lower Wholesale Commodities revenue and the absence of $310 million of Louisiana storm-financing proceeds received in 2014, among other factors. Capital expenditures increased.
Outlook, management commentary, risks and unusual items
- In October, Entergy decided to close FitzPatrick at the end of its current fuel cycle, expected in late 2016 or early 2017, and Pilgrim no later than June 1, 2019. Management cited poor market conditions, inadequate market compensation for nuclear attributes, and rising operating costs. The filing provides no explicit consolidated earnings guidance.
- Entergy estimated 2016–2018 capital investment of approximately $8.4 billion for Utility and $0.6 billion for Wholesale Commodities, excluding nuclear fuel. Plans remain subject to regulatory requirements, project changes, market conditions and access to capital.
- Management preliminarily estimated up to approximately $175 million of severance and employee-retention charges associated with the FitzPatrick and Pilgrim closures. Pilgrim’s enhanced NRC inspection response was estimated to cost $45–$60 million in operating expense, excluding possible additional remediation or capital costs. ANO’s NRC oversight status was expected to result in about $50 million of incremental 2015 costs and $35 million in 2016, excluding remediation and response costs.
- Entergy estimated FitzPatrick and Pilgrim fair values of $29 million and $65 million, respectively, compared with pre-impairment carrying values of $742 million and $718 million. Impairment estimates rely partly on unobservable assumptions, including future margins, discount rates, tax benefits and potential DOE litigation recoveries.
- Other post-quarter developments include an agreement to sell the 583 MW Rhode Island State Energy Center for approximately $490 million, subject to adjustments and approvals; the sale was expected to close in 2015. The planned Union Power Station acquisition remained subject to approvals, including pending Arkansas and New Orleans proceedings. A proposed 980 MW St. Charles generating station was subject to Louisiana regulatory approval.
- Material ongoing risks include nuclear licensing and safety oversight, low wholesale power prices, regulatory recovery of costs and rate-case outcomes, System Agreement/MISO proceedings, environmental compliance, storm exposure, and pension and decommissioning obligations. The filing identifies pending legal and regulatory matters; management generally did not expect their resolution to materially harm results, cash flows or financial condition except as described.
Important facts for investors to verify
- How the FitzPatrick and Pilgrim closure schedules, impairment assumptions, decommissioning liabilities and potential exit costs evolve.
- Whether NRC oversight actions at ANO and Pilgrim lead to additional operating, remediation or capital costs.
- Regulatory approvals and customer cost-recovery treatment for the Union Power Station transaction, capital projects and rate proceedings.
- Wholesale power and capacity-price trends, contracted output, hedge positions and related collateral or liquidity requirements.
- Execution of the capital plan, cash generation, refinancing needs and compliance with credit-facility covenants.