ENTERGY CORP quarterly report, Q3 FY2011

Entergy Corporation — Q3 2011 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2011; comparative periods are 2010. The combined filing covers Entergy Corporation and its utility subsidiaries. Entergy operates regulated electric and gas utilities and Entergy Wholesale Commodities (EWC), which owns six nuclear plants and other wholesale generation assets. Results are seasonal, with utility demand typically peaking in the third quarter; management cautions against treating interim results as a full-year forecast.

Financial performance

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Operating revenue	$3.396 billion	$3.332 billion	$8.740 billion	$8.954 billion
Operating income	$601 million	$771 million	$1.671 billion	$1.874 billion
Consolidated net income	$633 million	$498 million	$1.207 billion	$1.037 billion
Net income attributable to Entergy Corporation	$628 million	$493 million	$1.192 billion	$1.022 billion
Diluted EPS	$3.53	$2.62	$6.67	$5.38
Operating margin (operating income / revenue, calculated)	17.7%	23.1%	19.1%	20.9%

Quarterly comparison: Revenue increased about 2%, while operating income declined about 22%. Attributable net income increased about 27%, largely because of the IRS tax settlement described below.
Nine-month comparison: Revenue declined about 2% and operating income about 11%, while attributable net income increased about 17%, again principally reflecting the tax settlement.
Tax settlement: An August 2011 IRS settlement on the tax treatment of power purchase and sale contracts reduced Q3 income tax expense by $422 million. Entergy Louisiana recorded a $199 million regulatory charge because part of the benefit is to be shared with customers over 15 years. The settlement also affected deferred taxes, tax basis and net operating loss carryovers.
Segments: Utility net income was $528 million in Q3 and $950 million for nine months, versus $338 million and $711 million, respectively, in 2010. EWC net income was $131 million in Q3 and $320 million for nine months, down from $144 million and $339 million.
EWC operating trends: Q3 nuclear capacity factor improved to 98% from 91%, and nuclear billed generation rose to 10,645 GWh from 9,888 GWh. Average realized nuclear revenue fell to $56.07/MWh from $61.41/MWh. Lower contracted power prices, the 2010 sale of Harrison County and higher fuel expense reduced EWC net revenue; improved generation volume partly offset those effects.

Cash flow, debt and liquidity

Nine-month cash flow: Operating cash flow was $2.130 billion, down from $3.165 billion. Investing used $2.396 billion, compared with $1.995 billion used in 2010; financing used $42 million, compared with $949 million used. Cash declined from $1.294 billion to $987 million.
The lower operating cash flow primarily reflects the absence of $703 million of Louisiana storm-financing proceeds received in 2010, higher pension contributions and weaker EWC net revenue. Investing outflow included the approximately $300 million Acadia Unit 2 acquisition, higher nuclear fuel purchases and construction spending.
Capitalization at September 30: Debt-to-capital was 57.3%; excluding non-recourse securitization bonds it was 55.1%. Net debt to net capital, excluding those bonds, was 52.8%, compared with 52.1% at year-end 2010. Long-term debt, including current maturities, had a reported book value of $12.264 billion.
Credit facility: Entergy Corporation had $3.463 billion of revolving capacity, $1.870 billion drawn and $25 million in letters of credit, leaving $1.568 billion available. The facility expires in August 2012; Entergy said it intends to renew it. The company reported compliance with its 65% debt-ratio covenant.
Approximately $2.022 billion of long-term debt was classified as currently maturing, in part because the revolving facility had entered its final year. The filing reports cash and facility availability, but does not provide a single consolidated current-ratio or working-capital assessment.

Material changes, outlook and notable items

Utility net revenue was pressured by the $199 million customer-sharing regulatory charge tied to the tax settlement. Industrial weather-adjusted usage grew, while milder comparative weather weighed on Q3 volume. Rate actions in Texas and Louisiana supported revenue; New Orleans rate reductions partly offset them.
EWC forward sales covered 94% of planned nuclear generation for the remainder of 2011 at an average contracted energy price of $52/MWh, and 89% for 2012 at $49/MWh. Management expected realized prices to decline in 2011. The filing estimates a $6 million pretax income effect in 2011 for a $10/MWh change in annual average market energy prices, based on September 30 conditions and hedges.
Capital plans: Preliminary 2012–2014 estimates are $6.0 billion for Utility and $1.1 billion for EWC. The Grand Gulf uprate estimate increased from $575 million to approximately $734 million, including SMEPA’s share. Waterford 3 steam-generator replacement was estimated at approximately $687 million, including carrying costs, with replacement expected for the Fall 2012 outage.
Entergy Louisiana completed the approximately $300 million purchase of Acadia Unit 2 in April 2011. Proposed acquisitions of the Hot Spring and Hinds gas plants remained subject to approvals, cost-recovery decisions and transmission studies. Entergy also agreed to acquire the Rhode Island State Energy Center for approximately $346 million, subject to regulatory and other conditions.
Utility companies proposed joining MISO, targeting December 2013. Estimated transition and implementation costs could reach $105 million, plus approximately $35 million to preserve alternatives; costs could rise with extended litigation. Approvals and transmission arrangements remained pending.
Key exposures: Vermont Yankee’s NRC license was renewed through 2032, but litigation over state authority and water-quality certification remained pending. Entergy reported no impairment at September 30; the plant’s net carrying value, including nuclear fuel, was $459 million. Potential post-Fukushima nuclear requirements could increase operating costs and capital needs.
Environmental rules and proceedings may require additional emissions controls and spending; costs were not yet estimable for several matters. FERC System Agreement proceedings could change inter-company production-cost payments; preliminary estimates for the June–December 2005 bandwidth remedy were subject to a compliance filing and could change.
Entergy’s Board declared quarterly common dividends of $0.83 per share during 2011. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

How much of the $422 million tax benefit is nonrecurring, how the $199 million customer-sharing charge and 15-year sharing obligation affect future customer rates, and the settlement’s effect on deferred taxes and tax attributes.
Whether underlying Utility and EWC earnings, operating margins and cash generation can sustain performance after excluding the tax settlement and other period-specific items.
Whether EWC can manage lower contracted power prices, outage and nuclear-license risks, and collateral exposure; the filing cites $55 million of liquidity exposure under guarantees and a possible additional $47 million collateral requirement if Entergy fell below investment grade.
Progress, final cost and regulatory cost recovery for the Grand Gulf uprate, Waterford 3 replacement, MISO transition and announced generation acquisitions.
Renewal of the August 2012 revolving facility, refinancing of near-term debt maturities, and the effect of continued capital spending, dividends and share repurchases on liquidity and leverage.
Outcomes and potential costs of Vermont Yankee litigation, environmental rulemaking, rate proceedings and FERC System Agreement matters; management states that no material change occurred in the Form 10-K risk factors.