Entergy Corporation: Q2 2020 Form 10-Q Summary
Business context and reporting period
Entergy Corporation is an electric utility holding company with regulated utility operations across parts of Arkansas, Louisiana, Mississippi and Texas, plus a merchant nuclear generation business, Entergy Wholesale Commodities (EWC). This combined quarterly report covers the quarter and six months ended June 30, 2020; it also includes separate financial statements for certain subsidiaries.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $2.413 billion | $2.666 billion | $4.840 billion | $5.276 billion |
| Operating income | $439.3 million | $338.8 million | $839.1 million | $622.0 million |
| Net income attributable to Entergy | $360.5 million | $236.4 million | $479.2 million | $491.0 million |
| Diluted EPS | $1.79 | $1.22 | $2.39 | $2.54 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $1.448 billion | $1.053 billion |
Q2 operating margin was approximately 18.2%, compared with 12.7% a year earlier; six-month operating margin was approximately 17.3%, versus 11.8%. These are calculated from reported operating income and revenue. The quarter’s earnings improvement included a $225 million pre-tax gain on EWC nuclear decommissioning trust investments as equity markets rebounded. For the six-month period, lower EWC investment gains and other items contributed to a modest decline in attributable net income.
Six-month investing cash outflow was $2.198 billion, mainly reflecting construction and capital expenditures; financing cash inflow was $1.260 billion. Cash and cash equivalents ended June 30 at $935 million, up from $426 million at year-end 2019. Construction and capital expenditures were $2.185 billion for the six months.
At June 30, total debt to capital was 66.8%; net debt to net capital, excluding securitization bonds, was 65.6%, up from 64.6% at December 31, 2019. Commercial paper outstanding was approximately $1.946 billion against a $2 billion program limit. Entergy’s $3.5 billion revolving credit facility had $3.334 billion available, and Entergy was in compliance with its debt covenant. The Board declared a quarterly common dividend of $0.93 per share in July.
Material changes versus prior comparable periods
- Consolidated Q2 revenue fell about 9.5% year over year, while operating income and attributable net income increased. Utility revenue declined, with lower sales and fuel-related pass-through revenue partly offset by rate increases.
- Utility billed retail electricity sales declined 3% in Q2 and 2% for the six-month period. Commercial and industrial demand weakened amid COVID-19; residential usage rose in some areas.
- EWC revenue fell 31% in Q2 and 26% for the six months, primarily reflecting the shutdown of Indian Point 2 in April 2020 and Pilgrim in May 2019, as well as lower capacity prices. EWC owned capacity declined from 3,274 MW to 2,246 MW.
- Six-month operating cash flow increased $395 million year over year, helped by timing of fuel-cost recovery, lower outage spending, and DOE litigation proceeds; delayed customer collections and higher pension contributions partly offset the increase.
- Debt and interest expense rose with debt issuance. Entergy Corporation issued $1.2 billion of senior notes in May 2020; subsidiaries also issued mortgage bonds during the period.
Outlook, management commentary, risks and unusual items
- Management expects COVID-19 to reduce 2020 sales, particularly in commercial and industrial classes, and to adversely affect customer payment patterns, collections, operating cash flow and uncollectible accounts. The duration and financial impact remain uncertain. Utilities suspended or limited service disconnections; regulators authorized some COVID-related cost deferrals, but future recovery is subject to review and is not assured.
- Management said major projects and capital spending had not been materially affected as of the filing, and was pursuing expense reductions intended not to compromise safety or reliability. It reported $1.235 billion of utility-company mortgage bonds and $1.2 billion of Entergy Corporation senior notes issued from March onward.
- Entergy plans to exit EWC merchant nuclear generation by mid-2022. Indian Point 2 ceased operations in April 2020; Indian Point 3 was planned to shut down in April 2021, with its sale to Holtec targeted for May 2021 after defueling. Palisades’ sale was expected by the end of 2022. Management estimated approximately $70 million of 2020 retention and severance costs, with $38 million incurred by June 30, and approximately $60 million more in 2021–2022.
- The IRS settlement concerning Hurricane Isaac Act 55 financing reduced Entergy Louisiana’s tax expense by approximately $58 million, with a $29 million pre-tax regulatory charge to reflect sharing savings with customers. Entergy also expected to concede a System Energy tax position in Q3 2020, potentially reducing uncertain tax positions by approximately $400 million while increasing System Energy taxes payable.
- Significant regulatory exposure remains at System Energy. A FERC administrative law judge’s non-final decision addressed Grand Gulf sale-leaseback, uncertain-tax-position rate-base and depreciation issues. If certain findings are upheld, estimated refunds include approximately $409 million plus interest for one issue and approximately $19 million for another; the lease-renewal remedy was not quantified. The FERC may accept, reject or modify the decision, and no refunds are due unless ordered. The LPSC also authorized potential additional FERC complaints concerning Grand Gulf rates and performance.
- Entergy disclosed other regulatory and legal matters, including appeals concerning the New Orleans Power Station and a disputed Arkansas opportunity-sales refund. The filing states management did not expect the ultimate resolution of proceedings generally to materially adversely affect results, cash flows or financial condition, except as otherwise discussed.
Most important facts for investors to verify
- Whether COVID-19-related sales declines, late payments and credit losses persist, and whether deferred pandemic costs are approved for recovery.
- How much of Q2 earnings growth came from the $225 million pre-tax EWC trust-investment gain, and whether operating performance supports earnings excluding that item.
- Outcomes and potential financial effects of the Grand Gulf/FERC proceedings, including any refund liability or prospective rate changes.
- Progress, timing, costs and sale terms for the planned EWC nuclear exits, including Indian Point and Palisades decommissioning trust and asset-retirement assumptions.
- Debt maturities, refinancing and liquidity needs, covenant headroom, and the effect of planned capital spending on leverage and cash flow.
- Regulatory approval and recovery for rate-plan filings, fuel costs, solar projects and other major utility investments.