Entergy Corporation — Q2 2023 Form 10-Q Summary
Business context and reporting period
Combined unaudited quarterly report for Entergy Corporation and its listed utility subsidiaries, for the quarter and six months ended June 30, 2023. Entergy’s primary reportable segment is its regulated Utility business serving portions of Arkansas, Louisiana, Mississippi, and Texas. The filing also includes Parent & Other and System Energy. Comparisons below are Entergy Corporation consolidated unless specified.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $2.846bn | $3.395bn | $5.827bn | $6.273bn |
| Operating income | $755.9m | $81.1m | $1.218bn | $647.2m |
| Net income attributable to Entergy | $391.2m | $159.7m | $702.2m | $436.1m |
| Diluted EPS | $1.84 | $0.78 | $3.31 | $2.13 |
| Operating margin | 26.6% | 2.4% | 20.9% | 10.3% |
Operating margins are calculated as operating income divided by operating revenue. Revenue fell 16.2% in Q2 and 7.1% for the first half. The filing attributes much of the decline to lower fuel- and rider-related revenues that generally have offsetting expenses, lower resale revenue, and softer weather-related usage. Utility electric sales declined 5% in Q2 and 3% year to date.
Cash flow and liquidity: Six-month operating cash flow was $1.826bn, versus $816.0m in 2022; investing cash outflow was $2.445bn, versus $3.224bn; financing cash inflow was $1.590bn, versus $2.545bn. Cash ended June at $1.194bn, up from $224.2m at year-end. Construction and capital expenditures were $2.311bn. Management cites improved customer collections, lower fuel costs and storm spending, and timing of fuel-cost recovery as contributors to operating cash flow growth.
Debt: Entergy reported a 66.8% debt-to-capital ratio at June 30 (66.6% excluding securitization bonds); net debt to net capital excluding securitization bonds was 65.6%, compared with 66.5% at year-end. Long-term debt, including current maturities, had a $26.171bn book value. Commercial paper outstanding was $1.108bn. The $3.5bn parent credit facility had $3.347bn available, and Entergy reported compliance with its debt covenant.
Margins and earnings quality: Q2 and year-to-date earnings improved substantially from 2022, but comparisons are materially affected by unusual prior-year items, especially a $551m System Energy regulatory charge and the 2022 Palisades sale gain. First-half 2023 also included the Hurricane Ida securitization’s approximately $129m net reduction in Entergy income tax expense, alongside a $103m pre-tax regulatory charge to provide customer credits. Entergy’s effective tax rate was 25.6% for Q2 and 7.3% for the first half of 2023.
Material changes versus the prior comparable period
- Reported earnings and operating margin increased sharply, largely reflecting the absence of the 2022 System Energy regulatory charge and other unusual prior-period effects; the 2023 storm securitization tax benefit also supported first-half results.
- Lower fuel and purchased-power costs and recovery timing contributed to stronger operating cash flow. Capital spending remained significant, with construction work in progress increasing to $2.191bn from $1.844bn at year-end.
- Entergy issued $425m of 5.15% mortgage bonds in January; subsidiaries also issued debt, including $300m of 5.0% Entergy Mississippi bonds and $325m of 6.0% System Energy bonds. Interest expense increased, in part due to higher borrowing rates and new debt.
- Utility operating revenues benefited from rate increases, while total electricity sales and resale sales were lower. Prior-year storm restoration carrying costs and the timing of securitizations also affect comparisons.
- Effective January 1, 2023, remaining activities of the exited merchant nuclear business moved into Parent & Other and are no longer a separate reportable segment; consolidated results were not affected by the segment presentation change.
Outlook, commentary, risks, contingencies, and unusual items
- The filing provides no consolidated earnings guidance. The Board declared a quarterly common dividend of $1.07 per share in July 2023, unchanged since Q3 2022.
- Entergy Louisiana’s March 2023 Hurricane Ida securitization issued approximately $1.491bn of bonds through the LCDA. Those bonds are not recorded as Entergy debt and are serviced by customer system-restoration charges expected to remain in place for up to 15 years. The transaction also led to a $180m regulatory asset for future recovery.
- System Energy faces multiple FERC proceedings concerning Grand Gulf rates, return on equity, capital structure, sale-leaseback costs, taxes, and prudence. A May 2023 ALJ initial decision recommended approximately $115m of refunds plus $142m interest on certain Unit Power Sales Agreement issues; it is not a final FERC order, and System Energy is challenging the findings. Management says its related regulatory liability is adequate. The filing warns that aggregate refund claims substantially exceed System Energy’s net book value and that financing for substantial adverse refunds may not be available on acceptable terms.
- Other regulatory matters include pending rate filings and fuel-cost recovery proceedings. Entergy Texas’s proposed base-rate settlement would provide a $54m annual increase, with interim rates effective June 2023; the PUCT approved the settlement in August, after quarter-end. Entergy Arkansas’s 2024 formula-rate filing proposes an increase capped at $88.6m. Entergy New Orleans’s requested rate increase remained under review at the filing date.
- Entergy Louisiana proposed a five-year first phase of a ten-year resilience plan requiring approximately $5bn of investment, subject to regulatory approval. Entergy New Orleans sought approval for an initial five-year hardening program of approximately $559m, with customer cost recovery requested. Solar projects and procurement proposals also remain subject to regulatory review and execution risks.
- River Bend was placed in NRC Action Matrix Column 2, effective April 2023, after a wiring inspection issue; it remains there pending supplemental inspection. Waterford 3 returned to Column 1 in May 2023. The filing also identifies potential compliance costs from proposed federal emissions rules, including air pollution and greenhouse-gas regulations.
- Management identifies weather and storms, regulatory outcomes and cost recovery, nuclear safety and performance, fuel and power prices, inflation and interest rates, capital-project execution, environmental rules, and access to capital as important risks. The filing says there were no material changes to the Form 10-K risk factors. Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Separate recurring operating and rate-driven performance from the 2022 regulatory charge, Palisades gain, and 2023 storm-securitization tax benefit when assessing earnings growth.
- Track final FERC decisions and potential refund exposure for System Energy, including whether the preliminary refund estimates change and how any required payments would be funded.
- Monitor debt maturities, interest expense, commercial paper, credit-facility availability, and the effect of continued capital investment on leverage and cash flow.
- Confirm regulatory outcomes and timing for proposed rate increases, fuel-cost recovery, storm-cost recovery, and resilience spending, including potential customer affordability effects.
- Assess River Bend’s supplemental inspection results and the eventual compliance costs and operating implications of environmental regulations.