Entergy Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016. The combined filing also includes separate reports for Entergy’s utility subsidiaries and System Energy. Entergy operates regulated electric and gas utilities and the non-utility Entergy Wholesale Commodities (EWC) business, principally merchant nuclear generation.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $2.588 billion | $2.610 billion | Down 0.8% |
| Operating income | $174.8 million | $498.2 million | Down 64.9% |
| Consolidated net income | $86.1 million | $235.2 million | Down 63.4% |
| Net income attributable to Entergy Corporation | $82.6 million | $230.0 million | Down 64.1% |
| Diluted EPS | $0.46 | $1.28 | Down $0.82 |
| Operating cash flow | $529.4 million | $532.8 million | Down $3.4 million |
Calculated operating margin was approximately 6.8%, versus 19.1% in Q1 2016; net income attributable to Entergy was approximately 3.2% of revenue, versus 8.8%. The filing presents no separate formal guidance for these margins.
- Segments: Utility net income was $167.6 million, down from $199.7 million. EWC reported a $27.2 million loss, versus $79.6 million income. Parent & Other recorded a $54.4 million loss, compared with $44.0 million.
- Utility revenue drivers: Utility net revenue increased $29 million to $1.404 billion, mainly from rate increases; this was partly offset by a 2% decline in billed retail electricity usage (517 GWh), principally reflecting residential and weather-related usage.
- EWC: Net revenue increased $28 million to $494 million, mainly due to the FitzPatrick reimbursement agreement, partly offset by lower realized wholesale energy prices. Nuclear fleet capacity factor fell to 80% from 90%; billed EWC energy declined 10% to 8,363 GWh.
- Cash and investment: Cash and cash equivalents were $1.083 billion at March 31, down from $1.188 billion at year-end. Investing used $811.8 million, including $794.4 million of construction/capital expenditures; financing provided $177.6 million. The filing reports no company-wide liquidity ratio.
- Debt and liquidity: Debt to capital was 65.4%, or 64.4% excluding specified non-recourse securitization bonds; net debt to net capital excluding those bonds was 62.7%, up from 61.8% at year-end. Entergy had $1.1 billion of commercial paper outstanding and $225 million drawn on its $3.5 billion revolver, with $3.269 billion available after letters of credit. It reported compliance with the credit-facility debt covenant.
- Dividend: Q1 declared dividends were $0.87 per share, versus $0.85 a year earlier. The Board declared another $0.87 quarterly dividend in April.
Material changes and unusual items
- Q1 included $212 million of EWC impairment charges ($138 million after tax), reflecting shortened estimated operating lives as management reduces the merchant nuclear fleet. Management said similar costs may continue to be expensed over the plants’ remaining operating lives.
- Entergy completed the sale of the 838 MW FitzPatrick plant to Exelon in March for $110 million, including the $10 million signing fee received in 2016, plus Exelon’s assumption of certain liabilities. The sale generated a $16 million pretax gain and a $44 million income tax benefit. Entergy received $100 million of sale proceeds in Q1; reimbursement-agreement amounts largely offset specified expenses and had no material net-income effect.
- The effective tax rate was 8.3%, versus 37.3% in Q1 2016, largely reflecting the FitzPatrick tax-basis remeasurement; the benefit was partly offset by an $11.5 million write-off of stock-based compensation deferred tax assets and other tax items.
- Capital spending increased year over year, particularly in Utility construction. Q1 investing cash use was substantially lower than in 2016, when Entergy acquired the Union Power Station for approximately $948 million.
Outlook, risks and contingencies
- Management’s EWC strategy is to reduce merchant-fleet exposure. It expected approximately $110 million of employee retention and severance costs in 2017 ($24 million incurred by March 31) and approximately $225 million from 2018 through 2021. Planned shutdown assumptions in the filing include Palisades in 2018, Pilgrim in 2019, Indian Point 2 in 2020 and Indian Point 3 in 2021; these plans and licensing assumptions remain subject to change and regulatory matters.
- Utility generation investments remain subject to approval and other permits: Lake Charles Power Station, estimated at $872 million and 994 MW, was awaiting Louisiana approval; Montgomery County, estimated at $937 million and 993 MW, was awaiting Texas approval. Entergy New Orleans was reassessing its proposed project, estimated at $216 million for 226 MW, and was considering a smaller unit plus renewable resources. In April, Entergy Louisiana agreed to purchase a proposed 360 MW Washington Parish peaking plant upon completion in 2021, subject to approvals.
- A January 2017 complaint by Arkansas and Mississippi regulators at FERC seeks to lower System Energy’s 10.94% return on equity under the Grand Gulf Unit Power Sales Agreement; complainants proposed 8.37%–8.67% and sought a refund-effective date. System Energy disputes the proposed range, has recorded a provision against revenue, and awaits FERC action.
- Other important exposures include rate and fuel-cost recovery proceedings, MISO market and transmission costs, nuclear operations and licensing, decommissioning obligations, environmental rules, weather and storm restoration, commodity-price and counterparty risk, and litigation. Management stated that risk factors were not materially changed from the 2016 Form 10-K and generally did not expect pending matters to have a material adverse effect, subject to disclosed exceptions.
- Q1 EWC nuclear generation was 86% contracted for the remainder of 2017. A $10/MWh market-price increase was estimated to raise remaining-2017 pretax income by $22 million; a decrease of that size was estimated to reduce it by $19 million. The filing cautions that projections depend on market prices, generation, and contracting.
- Management stated that interim results are seasonal and should not be treated as a full-year estimate. No specific consolidated earnings guidance is provided in the supplied filing text.
Most important facts for investors to verify
- Whether the EWC impairment and merchant-fleet exit costs, including the stated future retention and severance estimates, develop as expected.
- FERC’s outcome and any revenue refunds or rate impacts from the System Energy return-on-equity complaint.
- Approval, final cost, timing, and customer cost recovery for the proposed generation projects and related utility capital program.
- Whether operating cash flow and liquidity remain adequate as construction spending, debt maturities, commercial paper, and dividend payments continue.
- Performance and licensing status of the remaining nuclear fleet, decommissioning funding and liabilities, and the market-price and collateral exposures associated with EWC contracts.