Entergy Corporation (ETR) — Q3 2020 Form 10-Q
Business context and period. This combined, unaudited filing covers the quarter and nine months ended September 30, 2020, for Entergy Corporation and its listed utility subsidiaries. Entergy operates regulated electric and gas utilities across parts of the southern United States and a wholesale power business primarily involving merchant nuclear plants. Financial figures below refer to Entergy Corporation consolidated results unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $2.904 billion | $3.141 billion | $7.744 billion | $8.416 billion |
| Operating income | $778 million | $520 million | $1.617 billion | $1.142 billion |
| Net income attributable to Entergy | $521 million | $365 million | $1.000 billion | $856 million |
| Diluted EPS | $2.59 | $1.82 | $4.98 | $4.38 |
| Cash flow from operating activities | — | — | $2.370 billion | $2.118 billion |
- Revenue declined 8% for the nine-month period, while net income attributable to Entergy rose 17%. The revenue decline reflects lower utility sales and reduced wholesale business revenues; lower fuel and purchased-power costs and other expense changes also affected comparisons.
- Utility billed retail electric sales fell 3% in the first nine months, including declines of 8% in commercial and 2% in industrial volumes. Management attributed weaker volumes principally to COVID-19 and, in Louisiana and Texas, Hurricane Laura impacts.
- Wholesale business revenue fell from $1.024 billion to $747 million for the nine months, primarily due to the Pilgrim and Indian Point 2 shutdowns and lower realized wholesale capacity prices. 2019 results included material Pilgrim sale and impairment charges; 2020 included $16 million of wholesale asset impairment charges.
- Cash flow from investing activities was a $3.256 billion use; financing activities provided $1.700 billion. Construction and capital expenditures were $3.176 billion for the nine months.
- At September 30, cash and cash equivalents were $1.240 billion. Debt-to-capital was 66.7%, or 66.5% excluding non-recourse securitization bonds; net debt-to-net capital excluding those bonds was 65.2%, versus 64.6% at year-end 2019.
- Entergy had $3.344 billion available under its $3.5 billion revolving credit facility and $1.398 billion of commercial paper outstanding. The company reported compliance with its credit-facility debt covenant.
Material changes and notable items
- Hurricane Laura: Restoration costs were estimated at $1.5–$1.7 billion, largely at Entergy Louisiana and Entergy Texas. At quarter-end, Entergy recorded approximately $205 million of regulatory assets and $1.295 billion of construction work in progress for incurred costs. Recovery and timing remain subject to regulatory review.
- Subsequent storms: Hurricane Delta, in October, was estimated to require $250–$300 million of restoration spending. Hurricane Zeta also caused significant damage in October; the filing did not provide a clear cost estimate.
- COVID-19: Management expected lower 2020 sales, particularly in commercial and industrial classes, and continued customer-payment and operating-cash-flow pressure. The allowance for doubtful accounts increased to $73.4 million from $7.4 million at year-end 2019; the filing identifies $51 million of incremental pandemic-related bad-debt expense deferred as regulatory assets. Recovery of deferred costs is not assured.
- Merchant nuclear exit: Indian Point 2 ceased operations in April 2020. Entergy expects to exit merchant nuclear generation by mid-2022, including planned sales of Indian Point and Palisades. The Indian Point transfer was targeted for May 2021 and Palisades by the end of 2022, subject to conditions. Management estimated about $70 million of 2020 retention and severance expense, with $57 million incurred through September, plus about $55 million in 2021–2022.
- Tax matters: The IRS settlement concerning Hurricane Isaac Act 55 financing reduced first-quarter income tax expense by about $32 million, with a related $29 million regulatory charge at Entergy Louisiana for customer sharing. Separately, the IRS partially disallowed a decommissioning-tax position; the filing reports a $1.5 billion decrease in Entergy’s unrecognized tax benefits. The filing also describes a separate $402 million tax payable recorded by System Energy, offset at the consolidated level by tax-loss carryovers.
- Regulatory and legal exposure: FERC proceedings concerning System Energy’s Grand Gulf rates include an ALJ initial decision proposing refunds, including an estimated $422 million plus interest for one issue and about $19 million for another. These are not final FERC determinations; any refunds depend on the FERC’s decision. Additional complaints and a return-on-equity proceeding remain pending.
Outlook and management commentary
- No full-year earnings or EPS guidance is stated in the provided filing text. Management expected COVID-19-related sales declines and customer-payment effects to continue through 2020.
- Entergy’s preliminary 2021–2023 capital investment estimate was approximately $11.9 billion for the Utility segment and $20 million for Wholesale Commodities, excluding nuclear fuel. Estimates remain subject to review and change.
- The Board declared a quarterly common dividend of $0.95 per share in October 2020, up from $0.93. Entergy also committed to net-zero carbon emissions by 2050, subject to its stated focus on reliability and affordability.
- Management cited weather and storm exposure, regulatory outcomes and cost recovery, nuclear operations and decommissioning, commodity and capital-market conditions, and pandemic effects as material uncertainties. Grand Gulf was expected to move to NRC oversight Column 2 following third-quarter unplanned scrams; the other Entergy nuclear plants were in Column 1.
Most important facts for investors to verify
- Whether and when regulators authorize recovery or financing of Laura, Delta, and Zeta restoration costs, and the ultimate cost of the storms.
- Whether COVID-19 customer arrears, bad debt, sales weakness, and deferred costs worsen or are recoverable.
- The final outcomes and potential financial effects of the System Energy/FERC complaints, including any refunds or prospective rate changes.
- Execution, closing conditions, decommissioning trust balances, and final gains or losses for the planned Indian Point and Palisades transactions.
- Debt, liquidity, and capital-spending needs, including the effect of storm restoration and the planned 2021–2023 investment program.