Entergy Corporation — Q3 2013 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers the quarter and nine months ended September 30, 2013, and includes Entergy Corporation and its separately reporting utility subsidiaries. Entergy operates regulated electric and gas utilities and Entergy Wholesale Commodities (EWC), principally a merchant nuclear generation business. Comparisons below are with the corresponding 2012 periods.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $3.352B | $2.964B | $8.699B | $7.866B |
| Operating income | $388.9M | $690.9M | $1.129B | $977.0M |
| Consolidated net income | $244.2M | $342.7M | $579.2M | $566.5M |
| Net income attributable to Entergy | $239.9M | $337.1M | $565.0M | $550.4M |
| Diluted EPS | $1.34 | $1.89 | $3.16 | $3.10 |
- Revenue rose 13% in Q3 and 11% for the nine-month period. Q3 operating income fell 44%, while nine-month operating income increased 16%. The reported Q3 decline principally reflects the Vermont Yankee impairment.
- Q3 net income attributable to Entergy fell 29%; nine-month net income attributable to Entergy rose 3%. Q3 2013 included a $291.5M pretax ($183.7M after-tax) impairment and related charges for Vermont Yankee. The effective tax rate was 9.1% in Q3 and 27% for the nine months of 2013, versus 40.4% and 16.3%, respectively, in 2012; 2013 benefited from tax-related reversals and adjustments.
- Operating margin, calculated as operating income divided by revenue, was approximately 11.6% in Q3 2013 versus 23.3% in Q3 2012, and 13.0% for the nine months versus 12.4%. Q3 margin was materially affected by the impairment.
- For the nine months, operating cash flow was $2.199B, versus $2.220B; capital expenditures were $1.781B versus $1.869B. Investing activities used $2.058B, and financing activities used $309M. Cash declined from $533M at year-end 2012 to $365M at September 30, 2013.
- At September 30, gross debt to capital was 58.4% (56.8% excluding specified non-recourse securitization bonds); net debt to net capital excluding those bonds was 56.0%, versus 55.8% at year-end 2012. Long-term debt, including current maturities, was approximately $12.482B; notes payable and commercial paper were $1.106B.
- Entergy had $365M cash and $3.342B available under its $3.5B revolving credit facility. It reported compliance with the facility’s 65% consolidated debt-ratio covenant. The Board declared a quarterly common dividend of $0.83 per share.
Material changes and management commentary
- Utility performance: Utility net revenue increased $120M in Q3 and $457M for the nine months, mainly reflecting rate and rider changes, plant-cost recovery, and other regulatory items. Weather-adjusted usage was mixed; nine-month utility retail billed sales declined about 1%.
- EWC performance: Q3 net revenue was nearly unchanged at $494M, but the segment swung to a $92.8M loss from $86.8M of income, primarily because of the Vermont Yankee charge. Nine-month net revenue declined about $21M to $1.370B; higher capacity prices partly offset lower nuclear generation volume and derivative effects. Nuclear fleet capacity factor was 94% in Q3 and 86% for the nine months.
- Vermont Yankee: Entergy plans to cease operations and decommission the plant after its current fuel cycle, expected in Q4 2014, citing low wholesale energy and natural gas prices, plant costs, and regional market structure. The plant and related assets were written down to an estimated fair value of $62M from a carrying value of $349M. The company expects another $55M–$60M of severance and retention costs through the end of 2014, in addition to depreciation of the remaining plant balance.
- Transmission transaction and MISO: The proposed transmission-business spin-off and merger with ITC was not expected to close in 2013; the agreement had been extended to December 31, 2013, with no revised 2014 closing date settled. Federal approvals had been obtained in part, but multiple state proceedings remained contentious or delayed. Entergy Arkansas planned MISO integration for December 19, 2013, subject to unresolved issues concerning its Missouri facilities. Entergy Texas gave notice to leave the System Agreement under a proposed 60-month notice period.
- Costs, investment, and asset events: A workforce redesign is expected to eliminate approximately 800 positions, with total costs estimated at $145M–$185M; approximately $18M had been incurred by September 30. Entergy signed an agreement to sell its district-energy business for about $130M, subject to adjustments, with closing expected in 2013. Preliminary 2014–2016 capital investment plans were $5.8B for Utility and $1.0B for EWC.
- Outages and insurance: The ANO stator-drop incident caused a fatality, injuries, plant damage, and extended outages; restoration and related costs were estimated at about $100M, excluding replacement-power costs. Entergy recorded a $50M insurance receivable, while approximately $45M of specified costs had exceeded that receivable by quarter-end. The insurer disputed the applicable coverage limit, and Entergy Arkansas filed suit against contractors and related parties. Entergy Mississippi estimated $25M–$30M to repair Baxter Wilson Unit 1, with coverage believed available subject to a $20M deductible.
- Management cautions that utility results are seasonal, with peak periods in Q3, and interim results should not be used to estimate full-year results. The filing gives no consolidated full-year earnings guidance.
Risks, contingencies, and regulatory matters
- Rate cases, fuel-cost recovery, storm-cost recovery, MISO implementation, System Agreement changes, and the proposed ITC transaction remain subject to regulatory decisions and potential conditions. Entergy Texas requested a $38.6M base-rate increase; Entergy Arkansas’s updated primary rate-increase request was $145M.
- Hurricane Isaac restoration-cost recovery and storm-reserve replenishment requests for Entergy Gulf States Louisiana and Entergy Louisiana remained pending. Other proceedings include System Agreement cost-equalization and opportunity-sales disputes; management said outcomes and allocations remain uncertain.
- Indian Point license renewal and related environmental and coastal-consistency proceedings continued. The filing describes pending NRC, state, and court matters; the timing and outcome of required approvals remain uncertain.
- Wholesale power markets create earnings, collateral, and liquidity exposure. At September 30, EWC planned nuclear generation was 82% under contract for the remainder of 2013. A $10/MWh market-price increase or decrease was estimated to affect remainder-of-2013 pretax income by +$43M or −$26M, respectively. EWC-related liquidity exposure under guarantees was $200M; a below-investment-grade downgrade could require about $79M of additional cash or letters of credit.
- The filing also identifies environmental compliance spending, nuclear decommissioning and spent-fuel obligations, pension costs, commodity-price volatility, severe weather, and litigation as risks. Management reported no material change in the Form 10-K risk factors and stated that disclosure controls were effective.
Most important facts for investors to verify
- Whether the Vermont Yankee impairment, shutdown costs, decommissioning funding, and expected 2014 closure timetable remain consistent with subsequent filings.
- Whether Utility earnings and cash generation can offset EWC market-price, outage, and collateral risks, and how much reported earnings depend on tax adjustments and regulatory recovery.
- Whether the ITC transaction and MISO transition receive required approvals, on what terms, and with what customer-rate, financing, or execution impacts.
- Final insurance recoveries and total costs for the ANO incident and Baxter Wilson outage, along with the outcomes of related claims and proceedings.
- Progress on pending rate cases, storm-cost recovery, System Agreement disputes, and Entergy Texas’s requested rate increase; compare approved outcomes with the amounts sought.
- Debt maturities, commercial-paper usage, available revolver capacity, capital spending, and dividend sustainability as cash balances and financing needs evolve.