ENTERGY CORP annual report, FY2012

Business context and reporting period

Entergy Corporation’s combined Form 10-K covers the fiscal year ended December 31, 2012, with 2011 comparisons. It includes Entergy Corporation and seven registrant subsidiaries. Entergy operates regulated electric and gas utilities in the south-central United States and a wholesale generation business, principally merchant nuclear plants. The filing also provides unaudited quarterly data; fourth-quarter 2012 results included revenue of $2.436 billion, consolidated net income of $302 million, and diluted EPS of $1.67.

Key financial metrics

Operating margin was approximately 12.6% versus 17.9% in 2011; net margin was approximately 8.4% versus 12.2%. Reported margins and earnings reflect the impairment and unusually low effective tax rate described below.

Entergy’s Utility segment generated 78% of consolidated revenue and 110% of net income in 2012; Wholesale Commodities generated 22% of revenue and 5% of net income, with Parent & Other losses offsetting the segment totals. Utility net income was $960 million, down from $1.124 billion. Wholesale Commodities net income fell to $40 million from $492 million; its net revenue declined 9% to $1.854 billion, with lower realized prices and increased outage days among the causes.

Wholesale nuclear fleet capacity factor was 89% versus 93% in 2011. Average realized nuclear revenue per MWh declined to $50.29 from $54.73. At year-end, 85% of planned 2013 nuclear generation was under contract at an expected average contracted energy price of $46/MWh; 73% of planned 2014 output was contracted at $45/MWh.

Debt to capital was 58.7% versus 57.3%; excluding non-recourse securitization bonds, net debt to net capital was 55.8% versus 53.5%. Long-term debt principal and estimated interest totalled $19.439 billion, including $1.292 billion due in 2013. Entergy had $533 million cash, a $3.5 billion credit facility with $2.697 billion available, and $665 million commercial paper outstanding. The company reported compliance with its 65% debt-ratio credit covenant.

Material changes versus the prior comparable period

• Revenue declined by $927 million, reflecting lower fuel and purchased-power pass-through revenue, milder weather and reduced utility usage, as well as weaker wholesale power prices.
• Wholesale nuclear realized prices and capacity factor fell, while unplanned and refueling outage days increased.
• Operating cash flow decreased $189 million, partly due to Hurricane Isaac restoration spending, lower Wholesale Commodities net revenue, tax payments rather than refunds, and a refund to AmerenUE; lower pension contributions partly offset the decline.
• Capital spending increased, including storm restoration, the Grand Gulf uprate, Ninemile 6 construction, and the Waterford 3 equipment replacement.
• Capitalization became more leveraged: net debt to net capital excluding securitization bonds increased 2.3 percentage points.

Outlook, commentary, risks and unusual items

• Unusual earnings items: Entergy recorded a $355.5 million pre-tax ($223.5 million after-tax) Vermont Yankee impairment. The 2012 effective income tax rate was 3.4%, primarily reflecting IRS settlements and tax-position reversals, including an approximately $155 million benefit related to nuclear decommissioning liabilities. The 2011 effective rate was 17.3%, including a $422 million tax benefit from a separate IRS settlement. These items make reported year-over-year earnings less representative of recurring performance.
• Storm recovery: Hurricane Isaac restoration costs were estimated at approximately $370 million. Entergy recorded about $120 million as regulatory assets and $250 million as construction work in progress; recovery remained subject to regulatory review and was not certain as to amount or timing. Entergy Arkansas also estimated $55–$65 million of restoration costs from a December 2012 winter storm.
• Transmission transaction and MISO: Entergy planned to spin off its transmission business and merge it with an ITC subsidiary, with completion targeted for 2013. Required regulatory approvals and transaction conditions remained outstanding. The utilities also targeted MISO integration in December 2013, subject to regulatory conditions and further FERC proceedings. The filing cautions that either initiative could be delayed, conditioned, or fail to deliver expected benefits.
• Utility investment and regulation: Planned 2013 construction and capital investments were $2.367 billion, before any reduction associated with a completed transmission transaction and excluding potentially material future Fukushima-related nuclear requirements. Ninemile 6, an estimated 550 MW gas-fired project costing approximately $721 million before transmission upgrades, was under construction.
• Nuclear and market risks: Merchant nuclear economics were challenged by low forward power prices. Vermont Yankee’s continued operation and state approvals remained uncertain; Indian Point 2 and 3 license renewals and related environmental proceedings were pending. Nuclear safety requirements, spent-fuel storage, decommissioning costs, and environmental compliance could raise costs or prompt further impairments.
• Other exposures: The filing describes pending regulatory and legal matters, including an open DOJ investigation into utility generation, dispatch, and transmission practices; a FERC staff notice alleging violations of reliability requirements; System Agreement cost-allocation proceedings; and a certified Texas customer class action alleging power-price overcharges, with plaintiffs’ expert damages estimates ranging from $153 million to $972 million. Management disputes the allegations; outcomes are uncertain.
• Dividends: Entergy paid $589 million in common dividends in 2012. In January 2013, the Board raised the quarterly dividend to $0.83 per share from $0.75. The Board retains discretion over future dividends.

Most important facts for investors to verify

• Separate recurring earnings and cash generation from the Vermont Yankee impairment and the large, non-recurring tax settlement benefits; confirm the company’s preferred adjusted earnings measures.
• Track regulatory decisions and actual collections for Hurricane Isaac and the Arkansas winter storm, including the timing and amount of any recovery.
• Verify progress, approvals, financing terms, and expected balance-sheet effects of the ITC transaction and MISO integration.
• Monitor Wholesale Commodities’ realized power prices, hedged volumes, outage performance, and the operating outlook for Vermont Yankee and Indian Point.
• Review debt maturities, commercial paper refinancing, liquidity availability, planned capital spending, and pension contribution requirements.
• Follow developments and potential financial exposure in the DOJ, FERC reliability, System Agreement, Texas customer litigation, and material tax matters.

Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2012.