Entergy Corporation — 2019 Form 10-K
Business context and reporting period
Entergy is an integrated electric utility serving about 2.9 million customers in Arkansas, Louisiana, Mississippi and Texas, with a smaller gas distribution business. Its two segments are the regulated Utility and Entergy Wholesale Commodities (EWC), its merchant-generation and nuclear-services business. This combined filing reports the fiscal year ended December 31, 2019; it is not a standalone fourth-quarter filing. The financial statements received an unqualified audit opinion, and management reported effective internal control over financial reporting.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $10.879 billion | $11.009 billion |
| Operating income | $1.390 billion | $469 million |
| Consolidated net income | $1.258 billion | $863 million |
| Net income attributable to Entergy Corporation | $1.241 billion | $849 million |
| Diluted EPS | $6.30 | $4.63 |
| Net cash from operating activities | $2.817 billion | $2.385 billion |
| Cash and cash equivalents at year-end | $426 million | $481 million |
Revenue declined about 1.2%, while operating income and attributable net income rose substantially. Operating margin was approximately 12.8% versus 4.3% in 2018. These comparisons reflect unusual impairment and tax items in both years, not solely underlying operating improvement.
Utility revenue was $9.584 billion, up modestly, with higher approved retail rates partly offset by lower usage and weather. Billed Utility electricity use fell 1% (1,587 GWh). EWC revenue declined to $1.295 billion from $1.469 billion, mainly following Pilgrim’s shutdown and lower capacity prices; its nuclear fleet capacity factor improved to 93% from 84%. EWC reported net income of $149 million versus a $341 million loss in 2018, while Utility net income was $1.426 billion versus $1.495 billion.
Investing cash outflow was $4.510 billion. Construction and capital expenditures were $4.198 billion, so operating cash flow less this spending was approximately negative $1.381 billion. Financing cash flow was positive $1.638 billion; cash declined $55 million year over year. Entergy paid $712 million in common dividends and declared $3.66 per share for 2019.
Debt, liquidity and capital plans
Debt to capital was 65.5% at year-end, down from 66.7%; net debt to net capital excluding securitization bonds was 64.6%, down from 65.5%. Long-term debt, including current maturities, was $17.874 billion gross ($17.079 billion excluding current maturities); commercial paper outstanding was $1.947 billion. Of Entergy Corporation’s $3.5 billion revolving credit facility, $3.054 billion was available at year-end. Total assets were $51.724 billion. Decommissioning and asset-retirement liabilities were $6.159 billion.
Planned construction and capital investment is $4.145 billion in 2020, $3.920 billion in 2021 and $3.635 billion in 2022, subject to regulatory approvals, project execution and market conditions. Projects include generation, transmission, distribution and utility support investments. Management expects Utility-owned capacity to meet MISO reserve requirements in the near term, but says additional resources will be needed longer term. The filing does not provide a numerical consolidated earnings or EPS forecast.
Material changes, outlook and key risks
- Results included a $190 million pretax loss ($156 million after tax) on the August 2019 Pilgrim sale and $100 million of EWC impairment charges ($79 million after tax), versus $532 million of EWC impairments in 2018. A $156 million EWC tax benefit from internal restructuring also materially affected 2019.
- Entergy’s effective tax rate was negative 15.6% in 2019, compared with 595% in 2018; tax benefits and amortization of excess deferred taxes substantially distort year-to-year earnings comparisons. The return of unprotected excess deferred taxes to Utility customers reduced 2019 operating cash flow, although corresponding tax effects generally offset the revenue reductions in net income.
- Entergy is exiting merchant nuclear generation: Indian Point 2 and 3 were planned to shut in 2020 and 2021, and Palisades by May 2022. Their planned sales and shutdowns depend on approvals and other conditions and may result in further losses, impairments, decommissioning costs or funding needs. Entergy expected about $75 million of EWC employee retention and severance costs in 2020 and a further $55 million over 2021–2022.
- Material regulatory and legal exposure includes FERC proceedings over System Energy’s 10.94% allowed return on equity, capital structure and Grand Gulf sale-leaseback billings; the latter includes refund claims of roughly $511–$512 million plus interest by parties. Outcomes and amounts remain uncertain.
- Other principal risks include rate-case outcomes and cost recovery, storm restoration and weather, MISO market and transmission costs, nuclear safety and operations, spent-fuel storage and decommissioning funding, environmental rules, capital-project execution, commodity and interest-rate movements, pension funding, credit access and cyber threats. The filing identifies the DOE’s failure to accept spent fuel as an ongoing source of storage costs; Entergy reported more than $600 million in cumulative DOE judgment recoveries through 2019.
- Management reported the Pilgrim sale closed, but challenges to NRC approvals and related court proceedings remained pending. The New Orleans Power Station was under construction with expected mid-2020 commercial operation; related litigation and regulatory proceedings had not all concluded. Entergy New Orleans’s rate resolution provided for an approximately $45 million annual revenue reduction, with implementation expected in April 2020.
Important facts for investors to verify
- Separate recurring Utility earnings and cash generation from tax benefits, trust investment gains, impairment charges and other unusual items; reconcile reported EPS with management’s adjusted earnings measures.
- Track rate-case and fuel-cost recovery decisions, especially System Energy’s FERC return-on-equity and sale-leaseback cases and Entergy Arkansas’s recovery of opportunity-sale payments.
- Verify shutdown, sale and decommissioning milestones for Indian Point and Palisades, including trust balances, asset-retirement obligations and any additional financial-assurance requirements.
- Assess whether planned capital spending, major generation projects and rising pension contributions can be funded while maintaining leverage, liquidity and dividends.
- Monitor customer usage, weather, EWC market prices and hedging, and the resolution of environmental, storm-restoration and New Orleans power-station matters.