Entergy Corporation — Q3 2012 Form 10-Q
Business and period. Entergy operates regulated electric utilities in the Gulf South and a competitive wholesale generation business, primarily nuclear. This combined quarterly report covers the three and nine months ended September 30, 2012; financial statements are unaudited. Comparisons are with 2011.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $2.964 billion | $3.396 billion | $7.866 billion | $8.740 billion |
| Operating income | $690.9 million | $600.9 million | $977.0 million | $1.671 billion |
| Consolidated net income | $342.7 million | $633.1 million | $566.5 million | $1.207 billion |
| Net income attributable to Entergy Corporation | $337.1 million | $628.1 million | $550.4 million | $1.192 billion |
| Diluted EPS | $1.89 | $3.53 | $3.10 | $6.67 |
- Revenue declined about 13% in Q3 and 10% year to date. Utility electric sales and revenue were lower; fuel and purchased-power costs are substantially passed through and affect reported revenue.
- Q3 operating income increased despite lower revenue, while nine-month operating income fell sharply, reflecting the $355.5 million Vermont Yankee impairment recorded in Q1, as well as lower wholesale revenue and other costs.
- Operating cash flow for the first nine months was $2.220 billion, versus $2.130 billion. Capital expenditures were $1.869 billion; investing cash outflow was $2.323 billion, financing provided $159 million, and cash ended at $749.7 million.
- At September 30, debt to capital was 57.7% (55.7% excluding non-recourse securitization bonds); net debt to net capital excluding those bonds was 54.1%, versus 53.5% at year-end 2011. Long-term debt, including current maturities, had a reported book value of approximately $12.536 billion.
- Entergy’s $3.5 billion revolving facility had $2.177 billion available after borrowings and letters of credit; the company reported compliance with its debt covenant. Commercial paper outstanding was $154.3 million. The Board declared a quarterly dividend of $0.83 per share.
Material changes and notable items
- Wholesale generation: Nine-month Entergy Wholesale Commodities net revenue declined $150 million, or 10%, primarily from lower realized nuclear power prices and more outage days. Nuclear fleet capacity factor was 88%, versus 93%; average realized revenue was $50.42/MWh, versus $55.31/MWh. Management reported 84% of planned nuclear output contracted for 2013 at a minimum average contracted price of $45/MWh.
- Prior-year tax comparison: 2011 earnings benefited from a $422 million income-tax expense reduction following an IRS settlement involving power-purchase contract mark-to-market treatment. In 2012, an IRS settlement concerning Louisiana Act 55 storm-cost financing produced a $172 million tax benefit, partly offset by regulatory charges reflecting customer sharing. These items make year-over-year earnings comparisons unusually affected by taxes and regulatory accounting.
- Vermont Yankee impairment: Entergy recorded a $355.5 million pre-tax ($223.5 million after-tax) charge in Q1, reducing the plant and related assets from a $517.5 million carrying value to an estimated $162.0 million fair value. The charge reflected lower projected power prices and uncertainty over continued operation.
- Hurricane Isaac: Restoration costs were estimated at $400–$500 million, principally in Louisiana. Entergy recorded about $130 million as regulatory assets and $270 million as construction work in progress. Recovery mechanisms remain subject to regulatory review; the company could not determine the ultimate amount or timing of recovery.
- Capital and projects: Entergy’s preliminary 2013–2015 investment plan totals $6.6 billion: $5.4 billion for Utility and $1.2 billion for Wholesale Commodities. Grand Gulf’s uprate was completed and approved for operation; total project investment was estimated at approximately $874 million, including a co-owner’s share.
Outlook, risks, and contingencies
- The proposed spin-off of the Utility transmission business and merger with an ITC subsidiary remained subject to regulatory, tax, nuclear-license, and other approvals. The outcome and timing were uncertain.
- Utility companies continued pursuing entry into MISO, with approvals and conditions varying by jurisdiction. Arkansas and New Orleans proceedings remained unresolved in the filing’s updates.
- Nuclear operating and license-renewal matters remain significant, particularly Indian Point 2 and 3. The NRC also paused final licensing decisions dependent on its spent-fuel Waste Confidence determination while revising that determination.
- A Texas power-price class action was certified; Entergy defendants appealed. Plaintiffs’ experts estimated damages in a broad range of $153 million to $972 million, which Entergy disputed.
- Other exposures include rate-case and fuel-cost recovery decisions, storm-cost recovery, environmental compliance costs, commodity and power-price movements, nuclear outages, pension costs, and financing needs. Management reported no material change to the risk factors in the 2011 Form 10-K.
- Management stated disclosure controls were effective and that no quarterly change materially affected, or was reasonably likely to materially affect, internal control over financial reporting.
Important facts for investors to verify
- How much of the Isaac restoration estimate is ultimately approved for recovery, by what mechanism, and on what schedule.
- Whether wholesale power prices, nuclear availability, and contracted prices support future Wholesale Commodities earnings and cash generation.
- Whether the Vermont Yankee impairment assumptions and continued-operation outlook change, and the status of Indian Point licensing and spent-fuel proceedings.
- Progress, conditions, and expected timing for the ITC transaction and MISO transition, including any impact on costs, rates, or capital structure.
- Final outcomes of the Texas rate order and class-action appeal, and other material regulatory, tax, and environmental proceedings.