Entergy Corporation — Q2 2015 Form 10-Q
Business context and period. Entergy operates regulated electric and gas utilities across parts of Arkansas, Louisiana, Mississippi and Texas, and Entergy Wholesale Commodities (EWC), which owns and operates merchant generation, principally nuclear. This combined report covers the quarter and six months ended June 30, 2015; financial statements are unaudited. Comparisons are with the same 2014 periods.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $2.713bn | $2.997bn | $5.633bn | $6.205bn |
| Operating income | $377.4m | $454.5m | $920.2m | $1.194bn |
| Consolidated net income | $153.7m | $194.3m | $456.7m | $600.3m |
| Net income attributable to Entergy Corporation | $148.8m | $189.4m | $446.9m | $590.6m |
| Diluted EPS | $0.83 | $1.05 | $2.48 | $3.29 |
Revenue declined 9.5% in Q2 and 9.2% for the first half; operating income fell 17.0% and 22.9%, respectively. Attributable net income decreased 21.4% in Q2 and 24.3% for the first half. Operating margin was approximately 13.9% in Q2 versus 15.2% a year earlier, and 16.3% for the first half versus 19.3%.
- Segment performance: Utility net revenue rose $70m in Q2 and $143m for the first half, primarily from rate increases and usage/weather effects. Utility net income was $204.0m in Q2 versus $212.1m, and $431.8m for the first half versus $417.6m.
- EWC weakness: EWC net revenue declined $121m in Q2 and $342m for the first half. EWC reported a $3.5m Q2 loss versus $26.5m income and $119.9m first-half income versus $268.9m. Key drivers were the December 2014 Vermont Yankee shutdown, lower realized energy and capacity prices, and outage/mark-to-market effects.
- Cash flow: First-half operating cash flow was $1.338bn, down from $1.529bn. Investing cash outflow was $1.370bn, including $1.096bn of construction and capital expenditures; financing cash outflow was $480m. Cash fell from $1.422bn at year-end 2014 to $910m at June 30, 2015.
- Debt and liquidity: Debt to capital was 57.0% (55.6% excluding non-recourse securitization bonds); net debt to net capital excluding those bonds was 53.9%, versus 53.4% at year-end. Long-term debt was $12.092bn, current maturities $795m, and notes payable/commercial paper $940m. The $3.5bn revolving facility had $271m drawn and $3.220bn available; commercial paper outstanding was $895m. Entergy was in compliance with its credit-facility debt covenant.
- Dividends: Q2 dividends declared were $0.83 per share. The board declared another $0.83 quarterly dividend in July 2015.
Material changes and management commentary
- Utility rate increases partly offset weaker consolidated results; first-half retail utility revenue benefited from approved rate-plan adjustments. Q2 utility sales were affected by weather and unbilled sales, while industrial usage was reduced by refinery outages. First-half billed retail utility sales were nearly flat overall.
- EWC owned capacity fell from 6,068 MW to 5,463 MW following Vermont Yankee’s retirement. Its nuclear fleet capacity factor was 89% in both first-half periods, but average nuclear revenue per MWh fell from $67.83 to $55.85.
- EWC had contracted 88% of planned nuclear generation for the remainder of 2015 at an expected average energy price of $44/MWh, and 81% for 2016 at $47/MWh, based on June 30 market prices. Management described merchant nuclear economics as challenging and warned that poor market economics or regulatory changes could lead to lost revenue, impairments, higher depreciation, transition costs or accelerated decommissioning.
- First-half capital spending increased from $960m to $1.096bn. Management cited higher project scope, nuclear safety/compliance work and outage work among the drivers.
- Entergy recorded a $77.6m reduction in an estimated nuclear decommissioning liability, with a corresponding reduction in the related asset retirement cost asset. The filing also reports an approximately $20m reduction in income tax expense following finalized IRS computations for the 2006–2007 audit.
Outlook, risks and contingencies
- No consolidated earnings guidance is provided in the supplied filing text. Management cautions that interim results are seasonal and should not be used as a full-year estimate.
- At Arkansas Nuclear One (ANO), the NRC classified a flood-barrier violation as having substantial safety significance and moved the site into an enhanced-inspection status. Entergy Arkansas expected incremental costs of approximately $50m in 2015 ($18m incurred by June 30) and $35m in 2016, excluding remediation and response costs.
- Indian Point license-renewal and environmental proceedings remain pending. The NRC’s supplemental environmental review schedule was delayed, with a new final supplement expected in September 2016; hearings on certain contentions were scheduled for November 2015.
- The Union Power Station acquisition remained subject to approvals. After opposition in Texas, Entergy Texas withdrew its rate case and its acquisition application was dismissed in July; the power block was proposed for acquisition by Entergy New Orleans, subject to City Council approval and other conditions. Arkansas and Louisiana approvals were still pending, with closing targeted for late 2015.
- Other material uncertainties include rate and fuel-cost recovery proceedings, MISO transmission charges and System Agreement matters, the Mississippi Attorney General litigation, environmental compliance costs, commodity prices, weather and storms, nuclear plant performance, pension funding and access to capital. The filing says there were no material changes to the risk factors in the 2014 Form 10-K.
- Entergy Wholesale Commodities’ power-contract guarantees represented $154m of liquidity exposure at June 30, plus $12m posted cash collateral. A downgrade below investment grade could have required approximately $55m of additional collateral under certain agreements.
- The July 2015 issuance of $650m of 4.0% senior notes, the $98.7m New Orleans storm-recovery bond issuance, and the July 2015 Union Power developments occurred after quarter-end.
Most important facts for investors to verify
- Whether EWC’s lower wholesale prices, Vermont Yankee retirement and future plant operating costs continue to pressure earnings and cash generation.
- Whether the ANO inspection process leads to additional remediation costs, operating restrictions or schedule changes beyond the disclosed estimates.
- Final outcomes and timing of the Union Power approvals, the Louisiana utility combination, rate cases and fuel-cost recovery proceedings.
- Whether Entergy can sustain capital investment and dividends while managing debt, pension contributions and collateral/liquidity requirements.
- How much of first-half performance reflects recurring operations versus tax-audit benefits, trust-fund gains, mark-to-market movements and other timing or regulatory items.