01—Abstract
Summary
Summary of the 10-K filed March 10, 1997. Cited figures are marked; the original filing is the authoritative source.
Entergy Corporation's 1996 annual report (filed March 10, 1997) covers a combined 10-K for the parent and its six registrants (Entergy Arkansas, Gulf States, Louisiana, Mississippi, New Orleans, and System Energy).
Consolidated 1996 operating revenues rose to $7.16 billiona from $6.29 billion, but net income fell to $420 million ($1.83 per share) from $520 million ($2.28 per share). The decline was driven mainly by a $174 million after-tax write-off of River Bend rate deferrals under SFAS 121, partly offset by a reversal of a Cajun-River Bend litigation accrual. Excluding these items, management says net income would have risen about 17%, reflecting lower O&M expense from restructuring and efficiency programs.
Return on average common equity fell to 6.41% from 8.11%. The filing marks a strategic pivot toward non-utility growth. Entergy closed the $1.2 billionb CitiPower acquisition (Australian electric distribution) in January 1996, agreed in February 1997 to acquire control of London Electricity plc for $2.1 billion, and built out telecom/security monitoring operations.
Entergy's net investment in non-domestic-utility businesses was $812 millionc at year-end, and these ventures reduced 1996 consolidated net income by about $25.4 million. Much of the acquisition debt is non-recourse to the parent. The key investor risks are the River Bend litigation and the regulatory transition to competition.
Texas and Louisiana regulators are still deciding how much of about $467 milliond of River Bend plant cost can be recovered; an adverse outcome could mean up to $278 million in additional after-tax write-offs and up to $204 million in refunds. Entergy's common dividend was held at $1.80 per share, and Entergy Gulf States has paid no common dividend since 1994. The filing also notes pending FERC matters, a $80 million IRS deficiency assertion, and tightened competitive pressures on industrial customers.
02—Key points
Key Highlights
- Consolidated operating revenues rose 14% to $7.16 billion in 1996, driven by fuel cost recovery and the CitiPower acquisition
- Net income fell to $420.0 million ($1.83/share) from $520.0 million ($2.28/share), due to a $174 million after-tax River Bend write-off under SFAS 121
- Return on average common equity dropped to 6.41% from 8.11%; excluding one-time items, management reports net income would have grown about 17%
- Diversification: CitiPower (Australia) acquired for ~$1.2 billion in January 1996; London Electricity (UK, ~2 million customers) acquisition for $2.1 billion closed February 1997
- Major contingent risk: an adverse Texas Supreme Court/PUCT outcome on River Bend could trigger up to $278 million after-tax write-off and up to $204 million in refunds
- Dividend held at $1.80/share; Entergy Gulf States has paid no common dividend since Q3 1994 to improve its capital structure
- Competitive pressure is rising: 2.4 million retail customers served, several large industrial customers building cogeneration, and utilities in Arkansas, Gulf States, and Louisiana filed transition-to-competition plans
03—Questions
Frequently Asked Questions
Why did Entergy's net income decline in 1996 even though revenues grew?
The main reason was a $174 million after-tax write-off of River Bend rate deferrals required by SFAS 121, adopted January 1, 1996. The 1995 results also included a one-time $35.4 million cumulative-effect benefit that did not recur. These effects were partly offset by reversing a Cajun-River Bend litigation accrual at Entergy Gulf States. Management says underlying earnings improved due to lower operating and maintenance costs from restructuring.
How much risk does the River Bend matter pose to investors?
It is the largest identified contingency. About $467 million of River Bend capitalized costs are not currently recovered through rates. Based on the Texas Supreme Court's January 1997 remand and the Louisiana proceedings, a write-off of up to $278 million (after tax) and refunds of up to $204 million could result. Management believes recovery of the Allowed Deferrals is probable, but the outcome is not predictable.
What do the international and telecom investments mean for Entergy's risk profile?
These businesses are largely funded by non-recourse debt. For example, $1.7 billion of the London Electricity acquisition debt and CitiPower's $870 million facility are non-recourse to Entergy Corporation. Entergy's net equity investment in non-utility businesses was $812 million at year-end 1996. These ventures reduced 1996 net income by about $25.4 million and carry foreign-exchange, expropriation, and repatriation risks, though management expects profits in the near term.
Is the dividend secure?
The annual common dividend was $1.80 per share in both 1995 and 1996, and the Board sets it at its discretion. Management states it will not recommend dividend increases unless justified by adequate earnings growth. Earnings per share of $1.83 in 1996 roughly covered the $1.80 dividend. Dividend payments from subsidiaries totaled $554.2 million in 1996, and Entergy Gulf States has suspended its common dividend since 1994, which limits the parent's flexibility.
How is the utility business facing deregulation?
Several subsidiaries have filed transition-to-competition plans seeking accelerated recovery of nuclear investments over seven years and protection for captive customers. Entergy Mississippi and Entergy Louisiana already operate incentive-rate plans. Industrial customers are exploring cogeneration and self-generation, and Entergy Louisiana's two large industrial customers representing about 17% of its industrial sales are building their own plants. The company also faces FERC open-access rules (Order 888), which could affect wholesale and transmission revenue.
04—Continue