Why did Entergy's reported earnings increase so sharply in 1998?

Most of the increase came from non-recurring items. The company recognized gains of about $327 million on the sale of London Electricity and $30 million on CitiPower, while 1997 had a $234 million UK windfall profits tax charge and large Entergy Gulf States rate reserves. Management estimates that excluding special items, net income would have risen about 20% in 1998.

Why did Entergy cut its dividend, and what does it mean for shareholders?

The Board reduced the quarterly common dividend from $0.45 to $0.30 per share, a $0.15 reduction, to strengthen the balance sheet and fund future investments in generation and competitive businesses. Total 1998 common dividends declared were $1.50 per share versus $1.80 in 1997. The Board said it will re-evaluate the dividend based on earnings and financial strength, so the level is not guaranteed.

What are the biggest regulatory risks facing Entergy's utilities?

The main risks are the pace of retail competition and stranded-cost recovery. Texas and Arkansas were considering restructuring legislation, and the Texas proposal could require Entergy Gulf States to divest some generation. Entergy Gulf States' Texas rate settlement is pending PUCT approval, and the River Bend abeyed plant costs (about $249 million net) remain under appeal. Only Entergy Arkansas had received partial approval of its transition-to-competition filing. Management also notes that if SFAS 71 were discontinued, the impact on financial statements could be material.

How is the power marketing and trading business affecting results?

The power marketing and trading business is driving much of the revenue growth, with revenues rising to about $2.9 billion from $527 million in 1997. However, it has thin margins, since purchased power expense rose by roughly $2.3 billion, and it incurred a $44 million counterparty default loss in 1998. Net income from this segment was negative, at about -$15.5 million. Value-at-risk exposure was not considered material.

What are the largest legal or contingent liabilities disclosed?

The most significant items are the Panda Energy lawsuit, which seeks about $4.8 billion including $3.6 billion in punitive damages; management believes the claims have no merit. The Hindusthan Development arbitration in India seeks $1.1 billion, which management believes is without merit. The Aquila FERC complaint alleges improper transmission reservations, and the Cajun coal contract claims exceeded $1.6 billion, though a February 1999 bankruptcy court order declared Entergy Gulf States not liable. Management does not expect these matters to be material to financial condition, but outcomes cannot be guaranteed.

ETR 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 12, 1999. Cited figures are marked; the original filing is the authoritative source.

Entergy Corporation's 1998 Form 10-K (filed March 12, 1999) reports a year of significant strategic transformation.

Consolidated net income rose to $785.6 million^a, or $3.00 per share, compared with $300.9 million ($1.03 per share) in 1997. The improvement was driven largely by the sale of non-regulated international businesses, most notably London Electricity and CitiPower, which generated gains and about $2.3 billion in sale proceeds. Operating revenues grew to $11.5 billion, though this was mainly due to the power marketing and trading business, which expanded sharply.

Excluding special items, management states that net income would have risen roughly 20% over 1997. Following an August 1998 strategic refocus on domestic utility operations, global power development, and nuclear operations, Entergy reduced its quarterly common dividend from $0.45 to $0.30^b per share in order to strengthen its balance sheet and fund future investments. Debt as a percentage of total capital fell to 48.6% from 56.5% a year earlier.

The main risks for investors are regulatory and competitive. Entergy Gulf States faces pending Texas rate proceedings and a settlement that remains subject to PUCT approval, with a final decision expected in May 1999. Its River Bend recovery is still on appeal, and the Texas and Arkansas legislatures are considering retail competition.

The company also carries significant nuclear and stranded-cost exposure, with roughly $1.6 billion^c of deregulated assets potentially subject to impairment. Several large litigation matters are outstanding, including the Panda Energy suit (approximately $4.8 billion sought), a Hindusthan arbitration seeking $1.1 billion, and the Aquila FERC complaint. Management also expects the proposed Pilgrim Nuclear acquisition to close in the second quarter of 1999.

02—Key points

Key Highlights

Consolidated net income of $785.6 million ($3.00 per share) in 1998, up from $300.9 million ($1.03 per share) in 1997, boosted by gains on the sale of London Electricity ($327 million pre-tax) and CitiPower ($30 million pre-tax).
Operating revenues rose 20.5% to $11.5 billion, driven mainly by the power marketing and trading business, which posted $2.9 billion in revenues, while domestic electric revenues declined to $6.1 billion.
Strategic refocus approved in August 1998 on domestic utilities, global power development, and nuclear power operations, with over $4 billion in asset sales completed and debt reduced; the debt-to-capital ratio improved to 48.6% from 56.5%.
Quarterly common dividend cut to $0.30 per share from $0.45 to strengthen finances and fund new investments, with the company saying it will re-evaluate the dividend level in the future.
Entergy Gulf States' Texas base-rate settlement (February 1999) includes a base-rate freeze through June 2000 and a River Bend recovery cap of $115 million, but still requires PUCT approval, expected in May 1999.
Planned acquisition of Boston Edison's 670 MW Pilgrim Nuclear Station for $80 million, expected to close in Q2 1999, along with the Saltend (1,200 MW) and Damhead Creek (792 MW) UK merchant plants under construction for operation in 2000.
Significant litigation exposure, including the Panda Energy claim (about $4.8 billion sought, with the case remanded for further proceedings), the Hindusthan arbitration ($1.1 billion), and the Aquila FERC complaint.

03—Questions

Frequently Asked Questions

Why did Entergy's reported earnings increase so sharply in 1998?
Most of the increase came from non-recurring items. The company recognized gains of about $327 million on the sale of London Electricity and $30 million on CitiPower, while 1997 had a $234 million UK windfall profits tax charge and large Entergy Gulf States rate reserves. Management estimates that excluding special items, net income would have risen about 20% in 1998.
Why did Entergy cut its dividend, and what does it mean for shareholders?
The Board reduced the quarterly common dividend from $0.45 to $0.30 per share, a $0.15 reduction, to strengthen the balance sheet and fund future investments in generation and competitive businesses. Total 1998 common dividends declared were $1.50 per share versus $1.80 in 1997. The Board said it will re-evaluate the dividend based on earnings and financial strength, so the level is not guaranteed.
What are the biggest regulatory risks facing Entergy's utilities?
The main risks are the pace of retail competition and stranded-cost recovery. Texas and Arkansas were considering restructuring legislation, and the Texas proposal could require Entergy Gulf States to divest some generation. Entergy Gulf States' Texas rate settlement is pending PUCT approval, and the River Bend abeyed plant costs (about $249 million net) remain under appeal. Only Entergy Arkansas had received partial approval of its transition-to-competition filing. Management also notes that if SFAS 71 were discontinued, the impact on financial statements could be material.
How is the power marketing and trading business affecting results?
The power marketing and trading business is driving much of the revenue growth, with revenues rising to about $2.9 billion from $527 million in 1997. However, it has thin margins, since purchased power expense rose by roughly $2.3 billion, and it incurred a $44 million counterparty default loss in 1998. Net income from this segment was negative, at about -$15.5 million. Value-at-risk exposure was not considered material.
What are the largest legal or contingent liabilities disclosed?
The most significant items are the Panda Energy lawsuit, which seeks about $4.8 billion including $3.6 billion in punitive damages; management believes the claims have no merit. The Hindusthan Development arbitration in India seeks $1.1 billion, which management believes is without merit. The Aquila FERC complaint alleges improper transmission reservations, and the Cajun coal contract claims exceeded $1.6 billion, though a February 1999 bankruptcy court order declared Entergy Gulf States not liable. Management does not expect these matters to be material to financial condition, but outcomes cannot be guaranteed.

04—Continue

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