Entergy Corporation — Q2 2018 Form 10-Q
Business context and reporting period. The combined, unaudited filing covers the quarter and six months ended June 30, 2018, with comparative periods in 2017. Entergy operates regulated electric and gas utilities across Arkansas, Louisiana, Mississippi, Texas and New Orleans, alongside Entergy Wholesale Commodities (EWC), its merchant-generation and nuclear decommissioning business. The report also includes separate filings for regulated subsidiaries; figures below focus on Entergy Corporation and subsidiaries on a consolidated basis.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $2.669 billion | $2.619 billion | $5.393 billion | $5.207 billion |
| Operating income | $91.6 million | $168.8 million | $427.3 million | $364.3 million |
| Consolidated net income | $248.9 million | $413.4 million | $385.1 million | $499.4 million |
| Net income attributable to Entergy Corp. | $245.4 million | $409.9 million | $378.2 million | $492.5 million |
| Diluted EPS | $1.34 | $2.27 | $2.08 | $2.74 |
- Margins: Operating margin was about 3.4% in Q2 2018 versus 6.4% a year earlier; for the six-month periods it was about 7.9% versus 7.0%. Consolidated net margin was about 9.3% versus 15.8% in Q2 and 7.1% versus 9.6% year to date. Tax and impairment items materially distort period comparisons.
- Segment results: Q2 Utility net income was $378.4 million versus $246.4 million; EWC recorded a $56.3 million loss versus $223.9 million income. For six months, Utility net income was $596.3 million versus $414.0 million, while EWC recorded a $74.1 million loss versus $196.7 million income.
- Cash flow: Six-month operating cash flow was $1.080 billion, up from $819.7 million. Construction and capital expenditures were $1.885 billion; net cash used in investing was $1.930 billion, while financing provided $881.3 million. Cash rose to $812.8 million from $781.3 million at year-end 2017.
- Debt and liquidity: At June 30, debt to capital was 68.5% (67.1% at year-end 2017); excluding non-recourse securitization bonds, net debt to net capital was 66.9% versus 65.2%. Balance-sheet long-term debt, including current maturities, was about $15.875 billion, with $1.984 billion of notes payable and commercial paper. Entergy had $1.945 billion of commercial paper outstanding and $390 million drawn under its $3.5 billion revolving facility, leaving $3.104 billion available after letters of credit. The company reported compliance with its credit-facility covenant.
- Dividend and equity financing: The Board declared a quarterly dividend of $0.89 per share in July. Entergy entered forward-sale agreements for 15.3 million shares in June, initially priced at $74.45 per share; settlement is expected by June 7, 2019.
Material changes versus prior comparable periods
- Q2 revenue increased about 1.9% year over year and six-month revenue about 3.6%. Utility billed retail usage rose 2% in Q2 and 5% year to date, supported by weather; year-to-date usage also benefited from a new industrial customer. EWC’s Q2 net revenue increased $22 million, mainly from fewer refueling outage days, but its six-month net revenue fell $90 million, including the absence of a 2017 FitzPatrick reimbursement and lower realized wholesale energy prices.
- Entergy’s Q2 net income declined $164.5 million year over year; six-month net income declined $114.4 million. The comparisons are affected by unusual tax items: Q2 2017 included a $373 million tax benefit from a change in tax classification of EWC entities, while 2018 included a $52 million Entergy Louisiana tax benefit from settlement of the 2012–2013 IRS audit. The filing also reports EWC impairment charges of $69 million in Q2 2018 and $194 million in Q2 2017; six-month charges were $142 million and $405 million, respectively.
- Utility net revenue included a $278 million year-to-date reduction for returning unprotected excess deferred taxes to customers, substantially offset by lower income tax expense. This regulatory pass-through is not, in itself, a net-income reduction.
- Debt to capital increased, primarily reflecting net debt issuance. Six-month long-term debt issuance generated approximately $790 million net cash after repayments, while capital spending increased compared with 2017.
Outlook, commentary, risks and unusual items
- EWC exit strategy: Entergy plans to reduce its merchant nuclear fleet. Planned shutdown dates include Pilgrim by May 31, 2019; Indian Point 2 by April 30, 2020; Indian Point 3 by April 30, 2021; and Palisades by May 31, 2022. Entergy signed agreements on July 30, 2018 to sell Pilgrim and Palisades to a Holtec subsidiary, subject to regulatory and other conditions; expected closings are by end-2019 and end-2022, respectively. Vermont Yankee’s proposed sale to NorthStar remained subject to state and NRC approvals, then expected in Q3 or Q4 2018.
- Management expected about $155 million of EWC employee retention and severance costs in 2018, of which $60 million had been incurred by June 30, and about $215 million from 2019 through mid-2022. Further fuel, refueling and capital costs may be expensed for impaired plants. The filing does not provide a clear full-year EPS or earnings guidance figure.
- Regulatory matters: Entergy Texas filed a base-rate case seeking an approximately $118 million incremental revenue requirement (excluding $48 million of costs moved from riders into base rates) and proposed returning about $202 million of excess deferred taxes over two years, subject to PUCT review. Entergy Arkansas filed for a rate adjustment limited by a four-percent annual revenue cap, equivalent to $65.4 million. Entergy Louisiana’s approved formula-rate framework includes tax-benefit returns and transmission-cost recovery provisions.
- Litigation and contingencies: System Energy faces FERC complaints challenging its 10.94% return on equity and the Grand Gulf sale-leaseback renewal, including requests for refunds or rate changes; outcomes and potential financial exposure are uncertain. The Mississippi Attorney General’s long-running complaint remained pending, with summary-judgment motions unresolved. Entergy Texas’s appeal concerning a $10.9 million customer refund was reversed by the Fifth Circuit, while a state-court appeal remained pending.
- New Orleans Power Station: The City Council approved construction of a 128 MW gas-fired facility, targeted for January 2020, but opponents filed legal challenges. The City Council also initiated an investigation into allegations that attendees or speakers supporting the project were paid to participate. Entergy New Orleans separately sought approval for three solar projects totaling 90 MW.
- Other risks and unusual items: Entergy Louisiana recorded an $85.4 million increase in River Bend’s decommissioning liability and related asset based on a revised cost study. Entergy estimated a $2.2 million remediation liability for a 2016 transformer-oil release in Texas; final requirements remained under review. Management identified regulatory decisions, nuclear operations and decommissioning, storms and cost recovery, commodity prices, capital access, and environmental requirements among the principal risks.
- Entergy adopted accounting standards affecting recognition of decommissioning-trust equity investment gains and losses; these changes contributed to large opening-equity reclassifications and can increase earnings volatility. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of 2018 earnings reflects recurring utility performance versus tax settlements, tax-law pass-throughs, and EWC impairments; compare results on a consistent, adjusted basis.
- Debt maturities, commercial-paper refinancing needs, borrowing costs, and compliance with the revolving-credit covenant as investment and construction spending continue.
- Regulatory approval, timing and customer treatment for deferred-tax refunds and pending utility rate cases, including Entergy Texas and Entergy Arkansas.
- Whether the EWC plant-sale agreements close on expected terms and how decommissioning trusts, asset-retirement obligations and future severance costs affect proceeds and losses.
- Potential rate, refund or accounting consequences of System Energy’s FERC proceedings and the Mississippi Attorney General litigation.
- Progress, costs and legal or investigative outcomes for the New Orleans Power Station, together with the Texas environmental remediation estimate.