Business context and reporting period
Entergy Corporation’s unaudited combined Form 10-Q covers the three months ended March 31, 2020, compared with the first quarter of 2019. Entergy operates regulated electric and gas utilities across parts of Arkansas, Louisiana, Mississippi and Texas, and a merchant nuclear generation business that it is exiting. The filing also includes separate reports for its utility subsidiaries and System Energy Resources.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $2.427 billion | $2.610 billion |
| Operating income | $399.8 million | $283.3 million |
| Net income attributable to Entergy Corporation | $118.7 million | $254.5 million |
| Diluted EPS | $0.59 | $1.32 |
| Cash from operating activities | $659.1 million | $501.2 million |
| Capital expenditures | $1.044 billion | $951.6 million |
| Cash and cash equivalents at period end | $1.464 billion | $983.5 million |
- Revenue fell about 7%; reported net income fell about 53%. Operating income increased, but the bottom line was weighed down by investment losses and other non-operating items.
- Operating margin was approximately 16.5%, up from 10.9%; net margin was approximately 4.9%, down from 9.8%.
- Operating cash flow less construction/capital expenditures was negative by approximately $384.5 million. Investing cash use totaled $1.045 billion and financing provided $1.425 billion.
- Long-term debt, including current maturities, had a reported book value of approximately $19.46 billion. Commercial paper outstanding was $1.942 billion. The $3.5 billion parent credit facility had $922 million drawn and $2.572 billion available, net of letters of credit.
- Debt-to-capital was 67.2%; net debt-to-net capital excluding securitization bonds was 65.3%, compared with 64.6% at year-end 2019. Entergy said it was complying with its credit-facility covenant.
- The Board declared a quarterly common dividend of $0.93 per share, unchanged since Q3 2019.
Material changes versus the prior period
- Entergy Wholesale Commodities revenue declined 23% to $333 million, reflecting Pilgrim’s shutdown and sale and lower realized wholesale energy and capacity prices. Its segment result swung from $96.5 million of net income to a $111.0 million net loss.
- The Utility segment’s net income increased to $319.8 million from $230.6 million. Utility billed retail electric sales fell about 1%; total billed electric sales, including resale, fell about 4%.
- Entergy recorded $211 million of pre-tax losses on Entergy Wholesale Commodities nuclear decommissioning-trust investments amid March equity-market declines associated with COVID-19. Consolidated interest and investment income/loss moved from $228.1 million of income to a $216.9 million loss.
- First-quarter 2020 included a $5 million merchant-nuclear impairment charge, versus $74 million in Q1 2019. The effective consolidated tax rate was unusually negative at (136.6%), influenced by tax items including an IRS settlement and stock-based compensation deductions.
- Cash increased substantially, primarily alongside higher financing cash flow. Subsidiaries issued $1.065 billion of long-term mortgage bonds in March; consolidated financing cash flow also reflected debt issuance and repayments.
Outlook, commentary, risks and unusual items
- COVID-19: Management said first-quarter effects on sales and cash flow were minimal, but expected lower 2020 sales—particularly commercial and industrial—potentially weaker customer payment patterns, higher uncollectible-account expense, and uncertain effects on revenue, liquidity and capital needs. Service disconnections were suspended; most utility companies obtained accounting orders to defer certain pandemic-related costs. Entergy planned expense reductions that it said would not affect safety or reliability.
- Merchant-business exit: Indian Point 2 ceased operations on April 30, 2020; Indian Point 3 was planned to shut down in April 2021 and Palisades in May 2022. The Indian Point sale was targeted for May 2021 and the Palisades sale by the end of 2022. Management expected employee retention and severance expenses of approximately $75 million in 2020, with $21 million incurred by March 31, and approximately $55 million in 2021–2022.
- Regulatory exposure: In an ongoing FERC proceeding concerning System Energy’s Grand Gulf sale-leaseback and rate treatment, an administrative law judge’s non-final initial decision identified potential refunds, including an estimated $397 million plus approximately $96 million interest for one issue and an estimated $18 million for depreciation adjustments; a separate lease-payment remedy was not quantified. The FERC may accept, reject or modify the decision, and any refunds would depend on its final order.
- Other proceedings: System Energy’s separate return-on-equity complaints remain pending. Rate cases, fuel-cost recovery and other regulatory decisions could affect future customer rates and recovery of costs. Entergy generally stated it did not expect the ultimate resolution of proceedings to materially adversely affect results, cash flows or financial condition, subject to matters discussed in the filing.
- Pension and projects: Qualified pension assets declined from $6.3 billion at year-end to $5.4 billion at March 31, a reported 12% loss. Lake Charles Power Station entered commercial operation in March 2020; the New Orleans Power Station was expected to enter service in mid-2020. Entergy gave no clear consolidated full-year earnings guidance in the provided filing text.
Investor verification priorities
- Review whether COVID-19-related sales declines, customer arrears and uncollectible expense materially affected subsequent-quarter cash flow, and how much deferred cost regulators ultimately authorize for recovery.
- Track the final FERC disposition and any customer-refund exposure in the Grand Gulf sale-leaseback proceeding, distinguishing the ALJ’s interim findings from a final order.
- Assess the duration and magnitude of merchant-nuclear trust investment volatility, decommissioning obligations, sale outcomes and remaining exit costs.
- Reconcile debt maturities, commercial paper and revolving-credit availability against capital spending and liquidity needs; note the reported leverage measures and their differing definitions.
- Confirm the realized effect of unusual tax items and regulatory rate changes on recurring earnings, rather than relying on the quarter’s unusually low reported effective tax rate.