Entergy Corporation — Q3 2014 Form 10-Q Summary
Business context and reporting period. Entergy operates regulated electric and gas utilities in the south-central United States and the Entergy Wholesale Commodities (EWC) business, principally merchant nuclear generation. This combined filing covers the quarter and nine months ended September 30, 2014; financial figures below are consolidated Entergy Corporation results unless noted. The filing also includes separate reports for utility subsidiaries.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $3.458 billion | $3.352 billion | $9.664 billion | $8.699 billion |
| Operating income | $492.9 million | $388.9 million | $1.687 billion | $1.129 billion |
| Consolidated net income | $234.9 million | $244.2 million | $835.3 million | $579.2 million |
| Net income attributable to Entergy Corporation | $230.0 million | $239.9 million | $820.6 million | $565.0 million |
| Diluted EPS | $1.27 | $1.34 | $4.56 | $3.16 |
| Dividends declared per common share | $0.83 | $0.83 | $2.49 | $2.49 |
- Q3 revenue rose about 3%, but net income attributable to Entergy fell about 4%; reported diluted EPS declined from $1.34 to $1.27. Nine-month revenue increased about 11%, and attributable net income rose about 45%, with diluted EPS up from $3.16 to $4.56.
- Q3 Utility net income was $315.3 million versus $352.3 million a year earlier; EWC reported a $32.7 million loss versus a $92.8 million loss. For nine months, Utility net income was $732.8 million versus $680.7 million, while EWC net income was $236.3 million versus $0.8 million.
- Operating margin was approximately 14.3% in Q3 2014 versus 11.6% in Q3 2013, and 17.5% for the first nine months versus 13.0%. These are calculated from reported operating income and revenue.
- Nine-month operating cash flow was $2.891 billion, compared with $2.199 billion. Investing cash outflow was $2.168 billion and financing cash outflow was $394 million. Cash and cash equivalents ended the period at $1.069 billion, up from $739 million at year-end 2013.
- At September 30, Entergy reported $11.635 billion of long-term debt, $1.114 billion of currently maturing long-term debt, and $891 million of notes payable and commercial paper. Debt-to-capital was 56.7% (55.2% excluding specified non-recourse securitization bonds); net debt-to-net capital excluding those bonds was 53.0%, down from 54.8% at year-end 2013.
- Entergy’s $3.5 billion credit facility had $3.247 billion available after $245 million of borrowings and $8 million of letters of credit. Commercial paper outstanding was $776 million. Entergy stated it was in compliance with the facility’s 65% debt-ratio covenant.
Material changes and notable items
- Q3 results included $102.9 million pretax ($66.9 million after tax) of Vermont Yankee-related charges, primarily associated with an updated decommissioning study, and a $60.9 million pretax ($40.5 million after tax) write-off of Entergy Mississippi regulatory assets for new nuclear development costs. The comparable 2013 quarter included $291.5 million pretax ($183.7 million after tax) of Vermont Yankee impairment and related charges.
- For the first nine months, EWC net revenue increased $333 million to $1.703 billion, principally due to higher realized wholesale energy and capacity prices and fewer unplanned outage days. Utility net revenue increased $179 million to $4.401 billion, reflecting rate changes and higher billed usage, partly offset by less favorable Q3 weather.
- Reported nine-month cash from operations included $310 million received through Louisiana Act 55 storm-cost financing. The related bonds are obligations of the Louisiana public authority and are described as non-recourse to Entergy and the participating utilities.
- Entergy’s debt-to-capital ratio improved from 57.9% at year-end 2013, primarily because retained earnings increased. Pension contributions were $320 million through September; management expected total 2014 qualified-plan contributions of $399 million.
Outlook, commentary, risks, and contingencies
- Entergy was developing its 2015–2017 capital plan and preliminarily anticipated $7.8 billion of Utility investment and $0.9 billion for EWC. These estimates remain subject to revision. The Ninemile 6 gas project was expected to enter service by year-end 2014.
- The Board declared a quarterly dividend of $0.83 per share in October 2014, unchanged from the quarterly rate paid since Q2 2010. The filing provides no clear consolidated full-year earnings or EPS guidance; management cautions that interim results are seasonal and should not be used alone to estimate full-year results.
- Vermont Yankee was expected to stop generating in Q4 2014. Updated decommissioning cost and cash-flow timing assumptions increased the recorded decommissioning liability and contributed to impairment charges. Execution, final decommissioning costs, and shutdown timing remain important uncertainties.
- At Arkansas Nuclear One (ANO), the NRC had classified two findings as “yellow with substantial safety significance.” A further preliminary yellow finding related to flood-barrier effectiveness was under NRC review. If finalized as yellow, the plant could face substantially increased NRC oversight.
- Entergy Louisiana faced a prudence review of its Waterford 3 steam-generator replacement project. Regulators’ staff identified potential disallowances of up to $71 million, and an intervenor sought $141 million of project-cost disallowances; Entergy disputed the proposed disallowances. An evidentiary hearing was scheduled for December 2014.
- Other material uncertainties include rate-case and fuel-cost recovery outcomes; MISO market rules and transmission costs; pending System Agreement cost-allocation and termination proceedings; nuclear license renewal and environmental permitting; power and fuel prices, hedging and collateral needs; storms and restoration-cost recovery; and pension, decommissioning, and environmental compliance costs.
- For EWC, a $10/MWh change in market energy prices was estimated to affect pretax income by approximately +$61 million or -$55 million for the remainder of 2014, based on September 30 market conditions and planned generation and hedges. A credit downgrade below investment grade could have required approximately $136 million of additional cash or letters of credit under certain agreements.
- Entergy reported no material change in the Form 10-K risk factors and stated that disclosure controls were effective, with no material quarter change in internal control over financial reporting.
Investor facts to verify
- Reconcile the quarter’s lower net income and EPS with the Vermont Yankee and Mississippi write-offs, the effective tax rate, and underlying segment performance.
- Track Vermont Yankee shutdown and decommissioning assumptions, including future cost-study updates and cash-flow timing.
- Confirm the final NRC assessment and required corrective actions at ANO, including potential effects on operations and oversight.
- Monitor Waterford 3 cost-recovery proceedings and the resolution of major rate, fuel-recovery, and System Agreement matters.
- Assess whether reported operating cash flow, available credit capacity, debt maturities, capital spending, pension funding, and EWC collateral exposure remain adequate as market and regulatory conditions change.