Entergy Corporation — FY2016 Form 10-K
Business context and reporting period. This combined filing covers Entergy Corporation and six registrant subsidiaries for the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. Entergy operates regulated electric and gas utilities across Arkansas, Louisiana, Mississippi, and Texas, and a merchant generation business, Entergy Wholesale Commodities (EWC). The utility segment generated 83% of consolidated revenue and 89% of assets in 2016.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenue | $10.846 billion | $11.513 billion |
| Operating income (loss) | $(886) million | $(299) million |
| Consolidated net income (loss) | $(565) million | $(157) million |
| Net income (loss) attributable to Entergy Corporation | $(584) million | $(177) million |
| Diluted EPS | $(3.26) | $(0.99) |
| Cash from operating activities | $2.999 billion | $3.291 billion |
| Construction and capital expenditures | $2.780 billion | $2.501 billion |
| Cash and cash equivalents, year-end | $1.188 billion | $1.351 billion |
| Debt to capital | 64.8% | 59.1% |
Utility net revenue (revenue less fuel, purchased power, and specified regulatory charges) rose to $6.179 billion from $5.829 billion. EWC net revenue declined to $1.542 billion from $1.666 billion. Utility net income increased to $1.151 billion from $1.115 billion, while EWC’s net loss widened to $1.493 billion from $1.066 billion. The filing reports a 59.1% effective tax rate in 2016, affected by significant tax items.
Fourth-quarter results were particularly weak: consolidated net loss was $1.766 billion and diluted loss per share was $9.86. The filing attributes the year’s results principally to major EWC impairment charges.
Material changes versus 2015
- Revenue fell about 5.8%; the consolidated net loss widened. Operating results included $2.836 billion of impairment and related charges ($1.829 billion net of tax), primarily for Palisades and Indian Point 2 and 3. In 2015, comparable impairment and related charges were $2.036 billion.
- Utility net revenue benefited from rate increases and the inclusion of customer credits associated with the 2015 Louisiana business combination. EWC revenue was pressured by lower realized wholesale prices, the prior-year sale of Rhode Island State Energy Center, and lower nuclear generation volume.
- Operating cash flow declined $292 million. Investing cash use increased to $3.850 billion, including approximately $949 million for the Union Power Station purchase. Financing activities provided $688 million, compared with $753 million used in 2015.
- Debt to capital rose 5.7 percentage points, which management attributed primarily to 2016 debt issuance and lower retained earnings. Net debt to net capital, excluding securitization bonds, was 61.8%, compared with 55.0%.
Outlook, management commentary, risks, and unusual items
- Merchant business exit: Entergy plans to end merchant nuclear generation by 2021. Disclosed plans include selling FitzPatrick to Exelon, selling shutdown Vermont Yankee to NorthStar, and closing Pilgrim, Palisades, and Indian Point 2 and 3 on announced schedules. The FitzPatrick sale was expected to close in the first half of 2017, subject to remaining approvals. The Vermont Yankee transaction was expected to close by the end of 2018 and has trust-funding and other conditions.
- Plant decisions and agreements: Entergy agreed to terminate the Palisades power purchase agreement in 2018; Consumers Energy is to pay $172 million, subject to regulatory approval. A January 2017 settlement with New York State provides for Indian Point 2 and 3 to cease commercial operation by April 2020 and April 2021, respectively, subject to conditions and possible reliability extensions.
- Spending and costs: Planned construction and capital investment totals $3.750 billion in 2017, $3.670 billion in 2018, and $3.405 billion in 2019. A nuclear fleet initiative is expected to add $870 million to Utility capital costs over 2017–2019, already included in those estimates, and about $125 million of Utility O&M expense in 2017. EWC expects about $100 million of severance and retention costs in 2017 and $235 million from 2018 through 2021.
- Financing and liquidity: Year-end cash was $1.188 billion. Entergy had a $3.5 billion revolving credit facility, with $2.794 billion available after borrowings and letters of credit, and $344 million of commercial paper outstanding. Management reported compliance with the credit-facility debt covenant. Expected 2017 contributions include approximately $409 million to pension plans and $53 million to other postretirement plans.
- Regulatory and operating exposure: The System Agreement ended in August 2016, but related cost-allocation proceedings remain unresolved. The APSC and MPSC challenged System Energy’s 10.94% return on equity under the Grand Gulf Unit Power Sales Agreement; FERC action was pending. ANO remained in NRC Column 4, Pilgrim in Column 4, and Grand Gulf in Column 2 at year-end. A Grand Gulf outage lasted until January 31, 2017.
- Contingencies and taxes: Entergy Arkansas recorded an $87 million estimated liability in the opportunity-sales proceeding, with final payment amounts unresolved. Entergy Louisiana’s Waterford 3 settlement requires an approximately $71 million customer refund in January 2017. Net unrecognized tax benefits after unused tax attributes were approximately $978 million; the timing of potential payments beyond 12 months could not be reasonably estimated.
- Tax and other unusual items: 2016 included a $238 million reduction in income tax expense from a tax election involving an EWC nuclear subsidiary and benefits from the 2010–2011 IRS audit settlement. DOE spent-fuel litigation judgments and related receipts reduced certain costs; additional recoveries on other claims remain uncertain. Future results are also exposed to rate-case outcomes, fuel and power costs, nuclear performance, decommissioning estimates, environmental requirements, weather, and capital-market access.
Management stated that internal control over financial reporting was effective at December 31, 2016. Deloitte & Touche issued an unqualified opinion on the consolidated financial statements and, for Entergy Corporation, an unqualified opinion on internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the $2.836 billion impairment charge, its cash-flow and tax effects, and the assumptions used to value the EWC plants.
- Track completion, proceeds, liabilities, and decommissioning-fund transfers for the FitzPatrick and Vermont Yankee transactions, plus approvals and customer impacts for Palisades and Indian Point.
- Assess the effect of the System Agreement termination and pending FERC proceedings, including the challenge to System Energy’s return on equity and the Entergy Arkansas opportunity-sales liability.
- Monitor 2017–2019 capital spending, nuclear operating and maintenance costs, pension contributions, and available liquidity against the company’s plans.
- Review whether regulatory approvals support planned utility rate recovery and proposed generation, metering, and transmission investments.