Entergy Corporation — FY2010 Form 10-K
Reporting period: Year ended December 31, 2010; the filing also reports fourth-quarter results. This combined 10-K covers Entergy Corporation and seven registrant subsidiaries. Entergy operates regulated electric and gas utilities in four states and a wholesale generation business centered on six nuclear plants.
Key financial results
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Operating revenue | $11.488 billion | $10.746 billion | +6.9% |
| Operating income | $2.267 billion | $2.285 billion | -0.8% |
| Consolidated net income | $1.270 billion | $1.251 billion | +1.5% |
| Net income attributable to Entergy Corporation | $1.250 billion | $1.231 billion | +1.6% |
| Diluted EPS | $6.66 | $6.30 | +5.7% |
| Operating cash flow | $3.926 billion | $2.933 billion | +$993 million |
| Cash and cash equivalents, year-end | $1.294 billion | $1.710 billion | -$415 million |
Operating margin was approximately 19.7%, versus 21.3% in 2009. Operating cash flow benefited substantially from $703 million of Louisiana storm-cost financing proceeds and lower storm-restoration spending; higher pension contributions partly offset the increase. Investing activities used $2.574 billion, including $1.974 billion of construction and capital expenditures. Financing activities used $1.767 billion, including $879 million of share repurchases and $604 million of common dividends.
Debt and liquidity: Debt to capital was 57.3% (55.3% excluding Arkansas and Texas securitization bonds); net debt to net capital excluding those bonds was 52.1%, versus 51.5% in 2009. Entergy reported $1.294 billion of cash and $1.809 billion of available capacity under its $3.5 billion revolving credit facility. It was in compliance with its credit-facility debt-ratio covenant.
Fourth-quarter results
Q4 2010 revenue was $2.533 billion, operating income $394 million, consolidated net income $233 million, and diluted EPS $1.26. Compared with Q4 2009, revenue rose from $2.499 billion while operating income fell from $503 million, net income from $319 million, and diluted EPS from $1.64. The filing text does not provide a clear quarter-specific explanation for the decline in operating income and earnings.
Material changes and unusual items
- Utility net revenue increased $357 million to $5.051 billion, principally from higher sales and weather effects (+$231 million) and retail electric pricing (+$137 million). Retail billed electricity usage increased 8%.
- Entergy Wholesale Commodities net revenue declined $164 million, or 7%, to $2.200 billion. Lower realized nuclear prices and reduced output from additional planned and unplanned outage days contributed; nuclear capacity factor fell to 90% from 93%, and average realized price declined to $59.16/MWh from $61.07.
- Wholesale nuclear output was 96% forward-sold for 2011 at an average contracted energy price of $53/MWh, and 87% for 2012 at $49/MWh. Management expected lower realized prices in 2011.
- Entergy sold its 61% interest in the Harrison County 550 MW plant for $219 million, recording a $44.2 million pretax gain.
- After abandoning the proposed non-utility nuclear spin-off, Entergy recorded $64 million of capital-cost write-offs, $39 million of debt-financing-cost write-offs, and approximately $16 million of additional unwind costs. A related $19 million tax benefit was recorded.
- Effective in 2010, Entergy consolidated nuclear-fuel variable-interest entities under revised accounting guidance. Prior segment information was restated after the internal combination of the former non-utility nuclear and non-nuclear wholesale businesses into Entergy Wholesale Commodities.
Outlook, risks and contingencies
- Planned construction and capital investments were $2.599 billion for 2011, $2.651 billion for 2012, and $2.165 billion for 2013. These are plans, not earnings guidance; the filing provides no consolidated EPS guidance.
- Entergy expected 2011 pension contributions of approximately $368.8 million and other postretirement contributions of approximately $78 million. Pension contribution estimates remained subject to updated plan valuations.
- Waterford 3 steam-generator replacement was delayed after the manufacturer found cladding separation. The planned spring 2011 installation was postponed; the prior project estimate was about $511 million, and Entergy said cost and carrying costs were likely to increase. A revised estimate was pending.
- Regulatory and market exposure includes pending rate and fuel-cost proceedings, cost allocation disputes under the System Agreement, and uncertainty over successor arrangements as Arkansas and Mississippi plan to withdraw in 2013 and 2015, respectively. The current transmission-coordination arrangement was extended to November 2012; RTO alternatives remained under review.
- The Department of Justice began a civil investigation in September 2010 into competitive issues involving utility generation procurement, dispatch, and transmission practices. Entergy also reported potential NERC reliability-standard violations under review.
- Wholesale nuclear results depend on market prices, operating performance, and license renewals. Vermont Yankee’s license and state approvals were key uncertainties ahead of 2012; its $424 million net carrying value was not considered impaired at year-end. License renewals for other merchant plants were also subject to regulatory and legal proceedings.
- Environmental rules could require substantial spending. Entergy Arkansas estimated its share of White Bluff scrubbers and related controls at approximately $500 million, while the project was suspended pending regulatory developments. Indian Point cooling-tower retrofits were estimated at at least $1.19 billion, with a proposed wedgewire alternative estimated at $200–$250 million; costs and feasibility remained uncertain.
- The DOE had not begun accepting spent nuclear fuel, requiring continued on-site storage investment. Entergy had DOE damage claims, several of which were appealed; timing and further recoveries were uncertain.
- Potential liabilities also include tax positions, rate and power-sales litigation, environmental remediation, asbestos claims, and nuclear-insurance assessments. Entergy reported $805 million of unrecognized tax benefits and interest net of unused tax attributes for which payment timing could not be reasonably estimated.
Most important facts for investors to verify
- Whether operating cash flow can be sustained without the one-time storm-financing inflow, and how pension contributions affect future cash generation.
- Wholesale power prices and realized margins as forward contracts reset, particularly the contracted prices and hedge coverage for 2011–2012.
- The revised cost, schedule, and regulatory recovery treatment for Waterford 3, plus the outcome of the Acadia Unit 2 acquisition approvals and closing.
- Developments in the System Agreement, RTO/ICT decisions, DOJ investigation, and material rate or fuel-cost proceedings.
- Progress on nuclear license renewals, spent-fuel storage, decommissioning funding, and environmental compliance estimates.
- Entergy’s debt, available credit capacity, covenant compliance, and the sustainability of dividends and repurchases alongside planned capital spending.
Audit and controls: Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also reported effective disclosure controls and internal controls as of December 31, 2010.