Entergy Corporation — Q2 2014 Form 10-Q
Business context and reporting period
For the quarter and six months ended June 30, 2014; comparisons are with the same 2013 periods. Entergy operates regulated electric and gas utilities across parts of Arkansas, Louisiana, Mississippi, and Texas, and Entergy Wholesale Commodities (EWC), which primarily owns and operates nuclear plants selling power to wholesale customers. This combined filing also contains separate reports for subsidiary registrants.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $2.997 billion | $2.738 billion | $6.205 billion | $5.347 billion |
| Operating income | $454.5 million | $346.5 million | $1.194 billion | $740.6 million |
| Consolidated net income | $194.3 million | $168.1 million | $600.3 million | $335.0 million |
| Net income attributable to Entergy Corporation | $189.4 million | $163.7 million | $590.6 million | $325.1 million |
| Diluted EPS | $1.05 | $0.92 | $3.29 | $1.82 |
| Operating margin | 15.2% | 12.7% | 19.3% | 13.9% |
Operating margin is operating income divided by operating revenue. Six-month revenue growth reflected higher EWC revenue and increased Utility revenue, including fuel-cost recovery; those recovery revenues generally move with associated fuel and purchased-power costs.
- Segment performance: Q2 Utility net income was $212.1 million versus $200.6 million; EWC was $26.5 million versus $11.5 million. For six months, Utility net income was $417.6 million versus $328.4 million, and EWC was $268.9 million versus $93.6 million.
- Cash flow: Six-month operating cash flow was $1.529 billion, up from $1.116 billion. Investing used $1.391 billion and financing used $227 million; cash declined from $739 million to $650 million. Capital expenditures were $960 million. The operating cash flow increase reflected higher net revenues and lower income-tax payments, partly offset by higher pension contributions and lower fuel-cost recovery.
- Debt and liquidity: Debt-to-capital was 56.9%, or 55.4% excluding non-recourse securitization bonds; net debt-to-net capital excluding those bonds was 54.1%, down from 54.8% at year-end 2013. Entergy had $909 million of commercial paper outstanding and $650 million of cash. Its $3.5 billion credit facility had $3.297 billion available; Entergy reported compliance with its debt covenant.
- Dividend and investment: The Board declared a quarterly common dividend of $0.83 per share, unchanged from 2010. Planned construction and capital investments total $2.465 billion for 2014, $2.260 billion for 2015, and $2.170 billion for 2016.
Material changes versus prior period
- Six-month diluted EPS rose to $3.29 from $1.82, with higher EWC net revenue the largest earnings driver. EWC’s six-month net revenue increased $343 million, mainly from higher realized wholesale prices, increased generation, and positive mark-to-market activity. Its nuclear fleet capacity factor was 89%, versus 82%.
- Utility six-month net revenue rose $161 million, supported by rate increases and 6% higher billed retail electricity usage; favorable weather and industrial sales contributed. Q2 weather was less favorable than in 2013, while industrial sales increased.
- Utility operation and maintenance expense fell year over year, including from lower payroll and fewer prior-year ANO incident and transmission-business separation costs. EWC expenses included Vermont Yankee shutdown costs.
- The effective tax rate was 39.9% for Q2 2014 versus 30.3% in Q2 2013; for six months it was 36.5% versus 36.2%. The Q2 comparison reflected, among other items, a prior-year state deferred-tax adjustment.
Outlook, risks, contingencies, and unusual items
- No specific consolidated earnings guidance is stated in the supplied filing text. Management cautions that interim results are seasonal and should not be used as a basis for estimating full-year results; peak periods typically occur in the first and third quarters.
- Entergy planned to shut down Vermont Yankee by the end of 2014. The plant was expected to stop generating in Q4 after its current fuel cycle; shutdown and retention costs were recorded, and decommissioning estimates could change.
- At Arkansas Nuclear One, total assessment, restoration, and replacement-property costs were about $95 million as of June 30. Entergy Arkansas had collected $33 million from its insurer and was pursuing further recovery; the insurer asserted a $50 million policy sublimit that Entergy disputed. The NRC classified two findings as “yellow,” placing ANO in its degraded cornerstone column and prompting supplemental inspection.
- Entergy Mississippi estimated $45–$60 million to repair Baxter Wilson Unit 1, with work expected to continue into late 2014. Insurance is subject to a $20 million deductible; recovery treatment remained pending before the regulator.
- Entergy Louisiana faced potential Waterford 3 steam-generator project and replacement-power cost disallowances: LPSC staff testimony recommended up to $71 million and an intervenor recommended $141 million. Entergy disputed the proposed disallowances; a hearing was scheduled for December 2014.
- Other material uncertainties include rate and fuel-cost recovery proceedings, MISO market and transmission-cost effects, proposed termination of System Agreement participation, nuclear operating-license proceedings, commodity-price movements, weather and storm restoration, and evolving environmental requirements. Management reported no material change to the risk factors in its 2013 Form 10-K.
- In August 2014, Louisiana Act 55 bond proceeds supported storm-restoration financing and purchases by Entergy subsidiaries of preferred interests in a consolidated Entergy affiliate bearing a 7.5% annual distribution rate. The bonds are obligations of the state financing authority, not Entergy, and are non-recourse to the companies.
- Management reported effective disclosure controls and no quarterly change in internal control over financial reporting that materially affected, or was reasonably likely to materially affect, those controls.
Important facts for investors to verify
- Whether EWC’s stronger realized power prices and generation, including Vermont Yankee’s final operating period, persist; review the disclosed hedge positions, forward sales, and collateral requirements.
- Progress and potential financial consequences of ANO’s NRC supplemental inspection and insurance/legal recovery, and the final repair cost and regulatory recovery for Baxter Wilson.
- Outcomes of the Waterford 3 prudence review and the pending utility rate, fuel-cost, MISO, and System Agreement proceedings.
- Execution of the 2014–2016 capital plan, pension contributions, debt maturities, and continued compliance with credit-facility covenants.
- Whether the planned Vermont Yankee shutdown and subsequent decommissioning costs match current estimates, and the effect of regulatory and environmental changes.