Entergy Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. Entergy operates regulated electric and gas utilities across parts of Arkansas, Louisiana, Mississippi and Texas, alongside a wholesale generation business largely centered on merchant nuclear plants. The combined filing also reports separately for six utility and generation subsidiaries.
Financial performance
- Q2 revenue: $2.666 billion, essentially flat versus $2.669 billion in Q2 2018. Six-month revenue: $5.276 billion, down 2.2% from $5.393 billion.
- Q2 operating income: $338.8 million, versus $91.6 million; operating margin was approximately 12.7%, versus 3.4%. Six-month operating income: $622.0 million, versus $427.3 million; margin was approximately 11.8%, versus 7.9%.
- Q2 net income attributable to Entergy: $236.4 million, versus $245.4 million; diluted EPS was $1.22 versus $1.34. Six-month attributable net income: $491.0 million, versus $378.2 million; diluted EPS was $2.54 versus $2.08.
- Cash flow, six months: Operating cash flow was $1.053 billion, down from $1.080 billion; investing cash outflow was $2.025 billion, versus $1.930 billion; financing cash inflow was $1.127 billion, versus $881 million. Capital expenditures were $2.096 billion.
- Liquidity and debt at June 30: Cash and equivalents were $635.9 million. Long-term debt was $17.204 billion, with $150 million currently maturing; notes payable and commercial paper were $1.635 billion. Debt to capital was 65.5% (65.1% excluding specified securitization bonds); net debt to net capital excluding those bonds was 64.3%. Of Entergy Corporation’s $3.5 billion revolver, $3.344 billion was available.
- Tax: Entergy’s effective tax rate was 0.6% in Q2 2019 and 8.1% for the first half, versus 884.2% and negative 160%, respectively, in 2018. Tax-rate comparisons were strongly affected by deferred-tax amortization and the prior-year IRS audit settlement.
Changes and drivers
- Utility retail pricing and approved rate mechanisms supported revenue, but lower weather-adjusted demand weighed on results: billed retail electricity usage fell 2% in Q2 and 2% in the first half. Revenue movements also reflect customer returns of excess deferred taxes; these reductions were offset by lower income tax expense and generally did not affect net income.
- Q2 operating income improved substantially against a prior-year period that included $143 million of other regulatory charges, largely associated with returning tax benefits to customers. Six-month improvement also reflects higher other income, including gains on decommissioning trust investments, and lower wholesale impairment charges.
- Entergy Wholesale Commodities revenue declined 6% in Q2, primarily following Pilgrim’s May 2019 shutdown. Owned capacity fell from 3,962 MW to 3,274 MW; nuclear fleet capacity factor increased to 92% from 86%.
- Wholesale impairment charges were $16 million in Q2 and $90 million for the first half, compared with $69 million and $142 million in 2018. First-half earnings also include a $29 million tax expense and $5.4 million of other charges related to the Vermont Yankee disposition.
Outlook, risks and notable items
- Management plans to exit merchant nuclear generation by mid-2022. Pilgrim ceased operations in May 2019; Indian Point 2, Indian Point 3 and Palisades were then expected to shut down in 2020, 2021 and 2022, respectively. Planned retention and severance costs are approximately $120 million in 2019, with a further approximately $120 million expected from 2020 through mid-2022.
- The Pilgrim sale to Holtec was expected to close by year-end 2019 for nominal consideration, subject to adjustments and conditions; Entergy reported an adjusted net investment of $200 million at June 30 and expected a loss on the sale. The Indian Point transfer to Holtec was targeted for Q3 2021 after Indian Point 3 is shut down and defueled; adjusted net investment was $265 million, and the ultimate loss depends on trust assets, decommissioning obligations, operating results and tax balances.
- Planned consolidated construction and capital investment is $4.690 billion in 2019, $3.955 billion in 2020 and $3.985 billion in 2021. St. Charles Power Station entered commercial operation in May 2019. The Choctaw Generating Station acquisition remained subject to approvals and potential mechanical and regulatory compliance issues, which could delay closing beyond Q4 2019.
- The Board declared a quarterly common dividend of $0.91 per share in July 2019. Management said the Board considers utility and parent earnings, financial strength and investment opportunities when setting dividends.
- Material regulatory and legal matters include System Energy return-on-equity and Grand Gulf sale-leaseback proceedings, which could result in refunds or lower allowed returns; utility rate and cost-recovery proceedings; and the New Orleans Power Station litigation. A court ruling voiding prior approvals was suspended while an appeal proceeds; the filing said the settlement allowing construction was unaffected and construction continued.
- Other key exposures include nuclear decommissioning costs and trust performance, weather and storm recovery, commodity and counterparty liquidity risks, environmental regulation, and the ability to recover capital and operating costs through rates. Entergy reported that all nuclear plants met NRC decommissioning financial-assurance requirements. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Investor facts to verify
- Reconcile the sharp year-over-year improvement in operating income with 2018 regulatory charges, tax benefits and audit-settlement items, and separate recurring earnings from those effects.
- Track utility sales volumes, weather impacts, rate-case outcomes and the timing and amount of customer tax-benefit returns.
- Monitor merchant nuclear shutdown and sale milestones, decommissioning trust balances, asset-retirement obligations and associated exit costs or losses.
- Review debt maturities, commercial-paper reliance, revolver availability and compliance with the credit-facility debt covenant.
- Follow System Energy’s FERC proceedings and the New Orleans Power Station and rate-case appeals for potential refunds, penalties, project delays or changes in allowed returns.