Entergy Corporation — FY 2011 Form 10-K
Business context and reporting period. This combined filing covers Entergy Corporation and seven registrant subsidiaries. The financial summary below focuses on Entergy Corporation and subsidiaries for the fiscal year ended December 31, 2011, compared with FY 2010; it is an annual report, not a standalone fourth-quarter filing. Entergy operates regulated electric utilities in the southern United States and a wholesale generation business, principally six nuclear plants.
Key financial results
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Operating revenue | $11.229 billion | $11.488 billion | Down 2.3% |
| Operating income | $2.013 billion | $2.267 billion | Down 11.2% |
| Consolidated net income | $1.367 billion | $1.270 billion | Up 7.6% |
| Net income attributable to Entergy Corporation | $1.346 billion | $1.250 billion | Up 7.7% |
| Diluted EPS | $7.55 | $6.66 | Up 13.4% |
| Cash flow from operating activities | $3.129 billion | $3.926 billion | Down $797 million |
| Cash and cash equivalents at year-end | $694 million | $1.294 billion | Down $600 million |
- Operating margin was approximately 17.9%, versus 19.7% in 2010. Earnings increased despite lower operating income, primarily because income tax expense fell to $286 million from $617 million.
- The effective tax rate was 17.3%, versus 32.7%. The main driver was a $422 million reduction in tax expense from an IRS settlement covering the tax treatment of power purchase contracts. Entergy Louisiana recorded a $199 million regulatory charge because some benefits are to be shared with customers.
- Cash flow from operations remained positive, but declined mainly because FY 2010 included $703 million of proceeds from Louisiana Act 55 storm-cost financings. FY 2011 investing cash outflow was $3.447 billion, including $2.040 billion of construction and capital expenditures; financing cash outflow was $282 million.
- At year-end, debt to capital was 57.3% (55.0% excluding securitization bonds); net debt to net capital, excluding securitization bonds, was 53.5%, up from 52.1%. Long-term debt including current maturities was approximately $12.236 billion. Entergy had $694 million cash and $1.503 billion available under its approximately $3.5 billion revolving facility, which expires in August 2012; management intended to renew it.
Material changes and operating performance
- Utility operations generated 79% of consolidated revenue and 82% of net income. Utility net revenue fell $147 million to $4.904 billion, principally reflecting the customer-sharing charge related to the tax settlement; retail price increases and higher usage partly offset the decline.
- Entergy Wholesale Commodities net revenue fell 7% to $2.044 billion. Lower contracted power prices, higher fuel expense and the absence of the Harrison County plant (sold in 2010) outweighed higher generation volume. Nuclear fleet capacity factor improved to 93% from 90%, while average realized nuclear revenue declined to $54.73/MWh from $59.16/MWh.
- Entergy sold 88% of planned nuclear generation forward for 2012 at an average contracted energy price of $49/MWh, and 81% for 2013 at $45–$50/MWh. Management said realized prices could decline again in 2012.
- Acquisitions included the approximately $300 million purchase of Acadia Unit 2 for the Utility and the approximately $346 million purchase of Rhode Island State Energy Center for Wholesale Commodities. The prior-year Harrison County sale generated a $44 million pretax gain.
- Consolidated assets rose to $40.702 billion from $38.685 billion. Common equity was $8.961 billion; FY 2011 common dividends paid were $590 million and share repurchases were $235 million. The January 2012 quarterly dividend was raised to $0.83 per share from $0.75 before the second quarter of 2010.
Outlook, risks and unusual items
- Transmission transaction: In December 2011 Entergy agreed to separate its Utility transmission business and merge it with an ITC Holdings subsidiary, with completion planned for 2013. The transaction requires regulatory, shareholder and other approvals and may not close on the proposed terms or schedule.
- Grid and market transition: Utility companies proposed joining MISO by December 2013. Estimated transition and implementation costs were up to $105 million, or up to $140 million including costs to preserve alternatives. Entergy Arkansas and Entergy Mississippi are scheduled to leave the System Agreement in December 2013 and November 2015, respectively; successor arrangements and cost allocation remain uncertain.
- Capital requirements: Planned construction and capital investments were $2.943 billion for 2012, $2.106 billion for 2013 and $2.051 billion for 2014. Significant projects include the Grand Gulf uprate, estimated at approximately $754 million including a co-owner’s share, and the delayed Waterford 3 steam-generator replacement, now estimated at approximately $687 million including carrying costs, versus an earlier estimate of $511 million. Waterford work was expected during the fall 2012 outage and remains subject to regulatory prudence review.
- Generation and licensing: Pilgrim’s license was due to expire in June 2012; Indian Point 2 and 3 renewals remained under review, with contested proceedings and state water and coastal approvals outstanding. NRC post-Fukushima reviews could require additional plant work and spending. Vermont Yankee’s renewed license was challenged, although Entergy reported a favorable federal court ruling in January 2012 that was appealed.
- Tax, regulatory and legal exposure: The filing reports approximately $812 million of unrecognized tax benefits and interest net of unused tax attributes and payments, with settlement timing uncertain. A separate U.K. Windfall Tax dispute had approximately $239 million of tax and interest at issue; an appeal was pending. Other matters include a DOJ civil investigation into utility generation procurement, dispatch and transmission practices; an FERC reliability investigation; System Agreement disputes; and ratepayer litigation. Management said it could not predict all outcomes.
- Other unusual items: A transmission-cost allocation error led Entergy Mississippi and Entergy New Orleans to restate 2009 and 2010 financial statements; Entergy said the error had no effect on consolidated financial statements. A $34.1 million pretax decommissioning-liability reduction produced a 2011 expense credit in Wholesale Commodities. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of FY 2011 earnings growth was attributable to the one-time IRS settlement, and what earnings and customer-sharing effects are expected after 2011.
- Whether wholesale power prices and realized nuclear revenues continue to fall, and the effects of forward-sale prices, plant availability and license-renewal outcomes.
- Final cost, schedule, cost recovery and prudence review for Waterford 3, and the budget and NRC approval path for the Grand Gulf uprate.
- Renewal of the $3.5 billion revolving credit facility before August 2012, and liquidity needs against debt maturities, pension funding and the planned capital program.
- Regulatory approvals, financing and customer impacts of the proposed ITC transaction and MISO transition; confirm whether either plan changes materially.
- Results and potential financial effects of the tax appeal, regulatory audits, investigations and litigation, including the transmission-cost restatements at the two subsidiaries.