Entergy Corporation — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. Entergy operates regulated electric and gas utilities across parts of Arkansas, Louisiana, Mississippi and Texas, and a competitive wholesale generation business primarily comprising nuclear plants in the northern United States. This combined filing also includes separate reports for six operating subsidiaries.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $2.724 billion | $2.588 billion |
| Operating income | $335.7 million | $195.5 million |
| Consolidated net income | $136.2 million | $86.1 million |
| Net income attributable to Entergy Corporation | $132.8 million | $82.6 million |
| Diluted EPS | $0.73 | $0.46 |
| Operating cash flow | $557.4 million | $529.4 million |
| Investing cash flow | $(974.4) million | $(811.8) million |
| Financing cash flow | $841.4 million | $177.6 million |
| Cash and cash equivalents at March 31 | $1.206 billion | $1.083 billion |
Utility net revenue rose $55 million to $1.460 billion; management attributed the increase mainly to 9% higher billed electricity use, including favorable weather and stronger industrial demand, plus rate increases. Wholesale Commodities net revenue fell $112 million to $382 million, primarily reflecting the absence of FitzPatrick reimbursement-agreement revenue recorded in Q1 2017 and more unplanned outage days; higher realized energy and capacity prices partly offset the decline.
Capital expenditures were $931.5 million, up from $794.4 million. Long-term debt, including current maturities, was $16.852 billion at quarter-end; notes payable and commercial paper were $805 million. Cash was $1.206 billion. Debt to capital was 68.4% (67.7% excluding securitization bonds); net debt to net capital excluding those bonds was 66.1%, compared with 65.2% at year-end 2017. Entergy reported $2.369 billion of available capacity under its $3.5 billion corporate credit facility and compliance with its debt covenant.
Material changes versus Q1 2017
- Revenue increased about 5%, while net income attributable to Entergy increased to $132.8 million from $82.6 million. The filing attributes improved earnings in part to stronger Utility results and lower impairment charges, partly offset by weaker wholesale revenue and higher interest expense.
- Utility billed electricity sales increased 9% to 31,276 GWh; residential usage rose 22%, commercial 5%, and industrial 3%.
- Wholesale nuclear capacity factor increased to 83% from 80%, but billed energy sales declined 6% to 7,885 GWh. Owned capacity fell to 3,962 MW from 4,800 MW, including the 2017 sale of FitzPatrick.
- Q1 2018 wholesale impairment charges were $73 million ($58 million after tax), versus $212 million ($138 million after tax) in Q1 2017. Q1 2017 also included a $16 million pre-tax gain on the FitzPatrick sale. FitzPatrick reimbursement-agreement revenue increased reported revenue in Q1 2017 but, according to Entergy, was offset by related expenses and did not affect net income.
- Cash increased by $424 million during the quarter, mainly reflecting financing inflows, including debt issuance and credit-facility borrowings; investing outflows also increased.
Outlook, commentary, risks and unusual items
- Entergy provided no specific full-year earnings guidance in the supplied filing text. Management cautioned that utility results are seasonal and interim results should not be used as a basis for estimating full-year performance.
- Entergy expects approximately $165 million of employee retention, severance and related costs in 2018, of which $26 million had been incurred by March 31, and approximately $205 million from 2019 through mid-2022 as it reduces its merchant fleet. Management expects further nuclear fuel and capital-related spending to be expensed for impaired plants, except Palisades.
- Planned merchant nuclear shutdowns are Pilgrim in May 2019, Indian Point 2 in April 2020, Indian Point 3 in April 2021, and Palisades in May 2022. Indian Point license-renewal decisions were expected in Q4 2018; the Vermont Yankee sale remained subject to state and NRC approvals.
- The Tax Cuts and Jobs Act prompted regulatory proceedings concerning customer refunds and utility rates. Entergy reclassified amounts expected to be returned within 12 months as current liabilities. Treatment and timing differ by jurisdiction; Entergy Louisiana recorded a $27 million regulatory liability in Q1 under its rate-plan settlement framework.
- In March 2018, the City Council approved construction of a 128 MW New Orleans power unit, targeted for commercial operation in January 2020, subject to permits. Opponents filed a judicial-review petition and a separate open-meetings lawsuit in April.
- The Fifth Circuit reversed a lower-court ruling concerning a $10.9 million Entergy Texas customer-refund matter, reinstating the PUCT decision; Entergy Texas was considering its legal options, and a state-court appeal remained pending. Other material regulatory exposures include FERC proceedings concerning System Energy’s return on equity and historical system cost allocations.
- Entergy Louisiana increased its River Bend decommissioning liability and related asset by $85.4 million following a revised cost study. The filing also notes a $4.4 million Q1 settlement charge for non-qualified pension benefits.
- Adoption of accounting guidance for equity investments in decommissioning trusts moved subsequent unrealized gains and losses into earnings. The January 1, 2018 cumulative transition adjustment increased retained earnings and reduced accumulated other comprehensive income by $633 million; this was an accounting reclassification, not quarterly operating income.
- Key stated risks include rate and cost-recovery outcomes, nuclear operations and licensing, merchant power prices and planned plant exits, weather and storm recovery, environmental requirements, capital-project execution, tax-law effects, and access to financing. Management reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Utility rate decisions and tax-benefit flowbacks deliver the expected cost recovery and customer-return timing.
- Progress, costs and required approvals for merchant-plant exits, the Vermont Yankee sale, and Indian Point license renewals.
- Actual severance and impairment charges compared with management’s estimates, and their impact on earnings and cash generation.
- Debt maturities, refinancing needs, credit-facility availability and compliance with the 65% debt-ratio covenant.
- Outcomes and potential financial effects of the Texas refund appeal, System Energy FERC proceedings, and New Orleans project litigation.
- How weather, storm restoration, nuclear outages, and construction spending affect quarterly cash flow and full-year results.