Entergy Corporation — Q3 2017 Form 10-Q
Business context and period. This combined, unaudited quarterly report covers the three and nine months ended September 30, 2017, with comparable 2016 results. Entergy operates regulated electric and gas utilities across Arkansas, Louisiana, Mississippi, Texas and New Orleans, plus Entergy Wholesale Commodities (EWC), its merchant generation and nuclear decommissioning business. The report also contains separate filings for affiliated operating companies; figures below focus on Entergy Corporation and subsidiaries unless noted.
Financial results and liquidity
Amounts are in millions of dollars except per-share data. Margins are calculated from reported figures.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $3,243.6 | $3,124.7 | $8,450.6 | $8,197.1 |
| Operating income | $729.5 | $772.1 | $1,047.8 | $1,712.5 |
| Operating margin | 22.5% | 24.7% | 12.4% | 20.9% |
| Consolidated net income | $401.6 | $393.2 | $901.1 | $1,201.0 |
| Net income attributable to Entergy Corporation | $398.2 | $388.2 | $890.7 | $1,185.4 |
| Diluted EPS | $2.21 | $2.16 | $4.94 | $6.60 |
- Revenue and earnings: Q3 revenue increased 3.8% year over year, while operating income fell 5.5%; consolidated net income increased 2.1%. Nine-month revenue increased 3.1%, but operating income fell 38.8% and net income fell 25.0%. The nine-month comparison includes major impairment and tax items described below.
- Cash flow: Nine-month operating cash flow was $1,712.8, down from $2,252.4 in 2016. Investing used $2,827.7, including $2,622.1 of construction/capital expenditures; financing provided $473.4. Cash declined $641.6 from $1,187.8 at the start of the year to $546.3 at September 30.
- Debt and liquidity: September 30 debt-to-capital was 64.6% (64.8% at year-end 2016); excluding non-recourse securitization bonds, it was 63.8%. Net debt to net capital excluding those bonds rose to 62.9% from 61.8%. The balance sheet reported $13,977.5 of long-term debt, $1,352.7 of notes payable and commercial paper, and $869.2 of currently maturing long-term debt. Entergy had $1.3 billion of commercial paper outstanding and $546.3 of cash. Its $3.5 billion credit facility had $3,344 million of available capacity; Entergy was in compliance with its 65% facility debt-ratio covenant.
- Dividend: The Board declared a quarterly common dividend of $0.89 per share in October 2017, up from $0.87. Q3 dividends declared were $0.87 per share, compared with $0.85 a year earlier.
Material changes versus the prior period
- Utility nine-month net revenue was nearly flat at $4,765 million versus $4,758 million. Higher rates and recovery mechanisms were largely offset by less favorable weather and lower volume; industrial usage improved.
- EWC nine-month net revenue declined $19 million to $1,136 million, with the FitzPatrick sale and lower nuclear output partly offset by lower nuclear fuel expense and Exelon reimbursements. EWC’s nuclear capacity factor was 79% versus 85%; billed nuclear output was 20,861 GWh versus 24,670 GWh.
- Entergy recorded $422 million of EWC impairment charges in the first nine months ($274 million after tax), principally reflecting the shortened expected operating lives of merchant nuclear assets under the fleet-reduction strategy.
- Nine-month income tax expense included a $373 million reduction, net of unrecognized tax benefits, resulting from elections to treat two EWC nuclear-plant subsidiaries as corporations for federal tax purposes. FitzPatrick’s sale also generated a $44 million tax benefit and a $16 million pretax gain. The reported nine-month effective tax rate was negative 10.8%, versus 11% in 2016; comparisons also reflect significant 2016 tax benefits and the DOE spent-fuel litigation settlement effects.
- FitzPatrick, an 838 MW plant, was sold to Exelon in March 2017 for $110 million plus assumption of certain liabilities. The sale reduced EWC owned capacity; total owned capacity was 3,962 MW versus 4,880 MW a year earlier.
Outlook, management commentary, risks and contingencies
- Capital plan: Entergy preliminarily anticipates $10.7 billion of Utility investment and $0.4 billion of EWC investment during 2018–2020, excluding EWC nuclear fuel. Estimates remain subject to regulatory, project, market and financing changes. Major projects include Lake Charles ($872 million estimated, expected operation by mid-2020), Montgomery County ($937 million estimated, expected operation by mid-2021; generation cost recovery capped at $831 million subject to exclusions), and the proposed New Orleans Power Station ($232 million for a 226 MW turbine or $210 million for a 128 MW alternative, with approvals pending). A proposed Washington Parish peaking plant is estimated at $261 million, subject to approvals.
- EWC fleet and costs: Management expected approximately $110 million of 2017 employee retention and severance expense, of which $89 million had been incurred by September 30, and approximately $400 million from 2018 through spring 2022. Planned shutdown assumptions used in the filing include Pilgrim by May 31, 2019, Indian Point 2 on April 30, 2020, Indian Point 3 on April 30, 2021, and Palisades in spring 2022. These plans depend on operations, approvals and license matters.
- Palisades: Michigan regulators conditionally approved only $136.6 million of a proposed $172 million early PPA termination payment. Entergy and Consumers Energy ended the amendment agreement; Entergy plans to continue operating Palisades under the existing PPA until spring 2022 rather than shutting it in 2018. The revised operating-life assumption changed asset and decommissioning accounting.
- Hurricane Harvey: Entergy Texas estimated restoration costs of $75–$105 million and expected costs toward the lower end. Recovery through regulatory mechanisms, securitization or other financing is being pursued but remains subject to review; the company stated it could not predict the ultimate recoverable amount or timing.
- Regulatory and legal exposure: A FERC administrative law judge’s initial decision would require Entergy Arkansas to pay $86 million plus interest in a contested opportunity-sales proceeding; the FERC’s final determination and payment amount remain unresolved. System Energy faces a complaint seeking a reduction from its 10.94% return on equity; complainants’ analysis proposed 8.37%–8.67%. FERC set a January 23, 2017 refund-effective date and ordered settlement proceedings; System Energy is recording a provision, but the ultimate effect is uncertain.
- Other material regulatory matters include pending rate proceedings and fuel-cost reviews. Entergy Arkansas’s proposed $71.1 million formula-rate revenue increase remained subject to a final order. Entergy Mississippi’s attorney-general case was set for trial in November 2018. Entergy disclosed no material change to its Form 10-K risk factors; principal risks include regulation and rate recovery, nuclear operations and licensing, weather and storm restoration, environmental requirements, commodity prices, capital access, decommissioning and litigation.
- Management stated that interim results are seasonal and should not be used as a full-year estimate. The filing provides no clear company-wide annual earnings or EPS guidance. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of the $422 million EWC impairment and the $373 million tax benefit is nonrecurring, and what normalized earnings look like excluding them.
- Final FERC outcomes and potential cash or rate impacts for the $86 million opportunity-sales decision and System Energy’s return-on-equity proceedings.
- Actual Hurricane Harvey restoration costs and the regulatory mechanism, amount and timing of recovery.
- Progress, final approvals and cost recovery for major generation and grid investments, including the New Orleans Power Station and the proposed Arkansas rate increase.
- Updated EWC shutdown, license-renewal and decommissioning assumptions, including the costs and timing of the planned fleet exit.
- Cash generation, commercial-paper refinancing and covenant headroom against the backdrop of substantial planned capital investment and a 62.9% adjusted net debt-to-net-capital ratio.