Entergy Corporation — Q1 2014 Form 10-Q
Business context and reporting period. This combined quarterly filing covers Entergy Corporation and its utility subsidiaries for the three months ended March 31, 2014, compared with Q1 2013. Entergy operates regulated electric and natural-gas utilities in the South and a wholesale power business, Entergy Wholesale Commodities (EWC), centered on nuclear generation. Amounts below are consolidated unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $3.209 billion | $2.609 billion | Up 23% |
| Operating income | $740 million | $394 million | Up 88% |
| Consolidated net income | $406 million | $167 million | Up 143% |
| Net income attributable to Entergy Corporation | $401 million | $161 million | Up 149% |
| Diluted EPS | $2.24 | $0.90 | Up $1.34 |
| Operating cash flow | $767 million | $544 million | Up $223 million |
| Cash and cash equivalents, March 31 | $908 million | $263 million | Up $646 million |
Operating margin was approximately 23.1%, versus 15.1% in Q1 2013; net margin attributable to Entergy was approximately 12.5%, versus 6.2%. Common dividends declared were $0.83 per share in both periods.
- Segment earnings: Utility consolidated net income was $205 million, up from $128 million. EWC net income was $242 million, up from $82 million. Parent and other recorded a $42 million loss, compared with a $43 million loss.
- Revenue drivers: Utility net revenue increased $114 million to $1.337 billion, principally from higher usage due to colder, more favorable weather and higher billed sales, plus rate changes. Retail electric usage rose 9%. EWC net revenue rose $255 million to $748 million, chiefly from higher realized wholesale power prices in the Northeast and positive mark-to-market changes.
- Cash flow and investment: Investing activities used $656 million, including $483 million of construction and capital expenditures and $143 million of nuclear fuel purchases. Financing provided $58 million. Cash increased $169 million during the quarter.
- Debt and liquidity: Debt-to-capital was 57.5%, or 55.9% 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 $1.205 billion of notes payable and commercial paper and $422.7 million of current maturities on the balance sheet. Its $3.5 billion credit facility had $3.376 billion available; $1.059 billion of commercial paper was outstanding. Entergy reported compliance with its 65% credit-facility debt-ratio covenant.
Material changes versus prior period
- Higher EWC wholesale prices and favorable Utility volume/weather effects were the main contributors to the earnings increase. EWC average realized revenue per MWh increased to $90.68 from $58.66; nuclear fleet capacity factor was 82% versus 83%.
- Retail electric sales across the Utility business increased 2,307 GWh, or 9%; total Utility billed sales, including sales for resale, rose 15%.
- Utility other operation and maintenance expense declined $23 million, while Entergy-wide depreciation and amortization increased $28 million and interest expense increased $8 million.
- Effective income tax rate fell to 34.8% from 41.1%, partly reflecting a $21.5 million deferred state tax reduction from a New York tax-law change.
Outlook, commentary, risks, and unusual items
- Outlook: No consolidated earnings guidance is provided in the supplied filing text. Management cautions that results are seasonal and interim results should not be used to estimate full-year performance. Vermont Yankee was expected to stop operating in Q4 2014, after its current fuel cycle. The March 2014 state settlement allowed operation through December 31, 2014 and includes transition payments and a new $25 million site-restoration fund.
- Wholesale price exposure: Based on March 31 market conditions, a $10/MWh change in average energy prices was estimated to affect EWC pre-tax net income for the remainder of 2014 by approximately +$148 million or −$142 million. EWC had $264 million of liquidity exposure under guarantees and $73 million of posted cash collateral; a downgrade below investment grade could have required about $114 million of additional cash or letters of credit.
- ANO stator incident: Cumulative assessment, restoration, and replacement costs were $95 million at March 31. Entergy Arkansas collected $33 million from its insurer during Q1 and is pursuing further recovery. The insurer asserts a $50 million course-of-construction sublimit, which Entergy disputes; related litigation is pending. The regulator deferred review of recovery for $65.9 million of 2013 fuel and purchased-power costs until further information is available.
- Baxter Wilson outage: Entergy Mississippi estimated repair costs of $45–$60 million, expected to continue into late 2014. The company believes property insurance applies subject to a $20 million deductible; its request to defer net repair costs for possible recovery remained pending before the MPSC.
- Regulatory matters: Utility companies completed integration into MISO in December 2013, with ongoing uncertainty around market rules, transmission costs, and related proceedings. Entergy Louisiana and Entergy Gulf States Louisiana sought to terminate System Agreement participation effective in 2019, subject to FERC action. Entergy Texas had an $18.5 million annual base-rate increase under interim rates from April 1; a unanimous stipulation was awaiting PUCT final processing.
- Other items: Entergy Arkansas recorded a $43.6 million increase in ANO decommissioning liabilities with a corresponding asset increase. The filing reports no material change in previously disclosed risk factors and no material change in internal control over financial reporting.
Investor verification priorities
- Verify how much of the exceptional Q1 earnings increase is sustainable versus driven by cold-weather wholesale prices, mark-to-market activity, and the New York tax benefit.
- Monitor EWC hedge coverage, market-price sensitivity, collateral requirements, Vermont Yankee shutdown and decommissioning costs, and Indian Point licensing proceedings.
- Track insurance and litigation recoveries, regulator treatment of ANO costs, and repair spending and cost recovery for Baxter Wilson.
- Confirm final outcomes of Entergy Texas rate proceedings, MISO-related cost recovery, System Agreement termination notices, and other rate cases.
- Review debt maturities, commercial-paper usage, credit-facility covenant headroom, planned capital spending, and expected pension contributions; Entergy estimated $400 million of 2014 qualified pension contributions.