Entergy Corporation — Q1 2011 Form 10-Q
Business context and period. This combined, unaudited quarterly filing covers Entergy Corporation and its separately reporting utility and generation subsidiaries for the three months ended March 31, 2011, compared with Q1 2010. Entergy operates regulated electric utilities and Entergy Wholesale Commodities, which primarily owns nuclear plants selling power to wholesale customers. The filing cautions that utility results are seasonal and Q1 results should not be treated as a full-year forecast.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $2.541 billion | $2.759 billion | Down 7.9% |
| Operating income | $510.9 million | $476.7 million | Up 7.2% |
| Consolidated net income | $253.7 million | $218.8 million | Up 15.9% |
| Net income attributable to Entergy Corporation | $248.7 million | $213.8 million | Up 16.3% |
| Diluted EPS | $1.38 | $1.12 | Up 23.2% |
| Operating margin | 20.1% | 17.3% | Improved |
Operating margin is operating income divided by operating revenue. Revenue fell largely because of lower fuel and purchased-power recovery revenues and lower competitive-business revenue; these pass-through items do not translate directly into earnings. The filing reports an effective tax rate of 39.3%, versus 40.3% in Q1 2010. Diluted EPS also reflects fewer average diluted shares outstanding: 180.1 million versus 191.3 million.
Segment performance and operating trends
- Utility: Net revenue increased $18 million to $1.148 billion. Higher retail pricing and a 911 GWh increase in weather-adjusted usage contributed, partly offset by milder weather’s effect on gas revenue and other items. Utility segment net income rose to $168.7 million from $143.0 million.
- Entergy Wholesale Commodities: Net revenue declined $40 million, or 7%, to $525 million; segment net income increased to $123.2 million from $90.5 million, supported in part by lower operating and financing expenses versus prior-year costs associated with the abandoned spin-off plan. Nuclear capacity factor fell to 91% from 94%, and nuclear billed output declined to 9,913 GWh from 10,255 GWh, mainly due to increased forced outages. Average realized nuclear revenue was $57.46/MWh versus $58.72/MWh.
Cash flow, debt and liquidity
- Cash from operating activities was $323.1 million, down from $674.3 million. Management cited higher pension contributions, lower deferred fuel collections, incentive-compensation payments and lower Wholesale Commodities net revenue.
- Investing activities used $896.8 million, compared with $515.4 million used in Q1 2010. Capital expenditures were $486.6 million and nuclear fuel purchases were $301.0 million.
- Cash and cash equivalents declined to $726.2 million from $1.294 billion at year-end 2010. Financing activities provided $5.8 million; Entergy repurchased $54.4 million of shares.
- Debt to capital was 57.6%, or 55.7% excluding specified Arkansas and Texas securitization bonds. Net debt to net capital, excluding those bonds, was 54.0%, versus 52.1% at year-end 2010. Entergy reported compliance with its credit-facility debt covenant.
- Entergy Corporation’s $3.465 billion revolving facility had $1.727 billion drawn, $25 million of letters of credit and $1.713 billion available at March 31, 2011; it expires in August 2012. Consolidated current assets were $3.778 billion and current liabilities were $2.311 billion.
- The Board declared quarterly dividends of $0.83 per share in January and April 2011, unchanged from the prior quarter.
Material developments, outlook and risks
- Forward power sales: Entergy had sold forward 96% of planned Wholesale Commodities nuclear output for the rest of 2011 at an average contracted price of $53/MWh, and 87% of 2012 output at $49/MWh. Management estimated that a $10/MWh change in annual average power prices would change 2011 pretax net income by $13 million, based on stated assumptions. These contracts limit market exposure but also constrain realized prices.
- Capital projects and acquisitions: Entergy Louisiana acquired the 580 MW Acadia Unit 2 on April 29, 2011; a May rate filing implemented a $43.1 million net rate increase. Entergy Arkansas and Entergy Mississippi signed agreements to acquire the Hot Spring and Hinds gas-fired plants, respectively, with expected total costs of approximately $277 million and $246 million. Both transactions remained subject to approvals and other conditions, with closings expected in mid-2012.
- Waterford 3: The steam-generator replacement project was delayed; following inspections, management said the plant could safely operate another full cycle and did not then anticipate a mid-cycle outage. If replacement occurs at the Fall 2012 refueling outage, estimated project cost, including carrying costs, was approximately $687 million.
- Nuclear and legal exposure: The NRC’s post-Japan nuclear review could lead to additional operating costs or capital requirements. Vermont Yankee received a 20-year license renewal through 2032, but Entergy sued Vermont over the state’s effort to stop operation after March 2012; litigation and potential impairment remain risks. The plant’s $420 million carrying value was not considered impaired at March 31.
- Regulatory matters: An LPSC staff audit recommended disallowing $23 million of historical fuel-clause costs, estimated at $43 million with interest; Entergy Gulf States Louisiana disputed the findings, had recorded a provision, and a hearing was scheduled for November 2011. Entergy Texas was to refund approximately $72.7 million of fuel over-collections, including interest.
- Other unusual item: System Energy reduced its Grand Gulf decommissioning liability by $38.9 million following a revised cost study, with a corresponding regulatory-asset reduction.
- Outlook: The filing provides no specific consolidated earnings guidance. Entergy said it proposed joining MISO, targeting implementation in December 2013, subject to regulatory review. It also stated that no material changes had occurred to the risk factors in its 2010 Form 10-K.
Investor verification priorities
- Check subsequent nuclear outage performance and the effect of forced outages on Wholesale Commodities output, revenue and earnings.
- Assess contracted power prices, hedge positions, collateral requirements and the sensitivity of results to power and gas prices.
- Track operating cash flow, pension funding, capital spending, cash balances, debt maturities and revolving-credit availability.
- Verify regulatory outcomes and recoverability for the fuel-cost audit, fuel refunds, project cost recovery, and proposed MISO participation.
- Monitor Acadia integration, the status and approvals for Hot Spring and Hinds, and Waterford 3’s revised cost and schedule.
- Follow Vermont Yankee litigation and any developments that could affect continued operation or the plant’s carrying value.