Why did Entergy report a net loss in 2016?

The loss was driven by $2.84 billion in pre-tax impairment and related charges, or $1.83 billion after tax, primarily writing down the Palisades, Indian Point 2, and Indian Point 3 plants to fair value. These impairments followed management's decision to shut or sell its merchant nuclear fleet because of low wholesale power prices and market design issues. Excluding these charges, the company would have reported earnings of roughly $1.27 billion attributable to common equity.

What is the outlook for the merchant nuclear business?

Entergy plans to exit merchant generation entirely by 2021. FitzPatrick is expected to close to Exelon in 2017, Vermont Yankee is to be sold to NorthStar by end-2018, Palisades will shut October 1, 2018 after a $172 million PPA termination payment from Consumers Energy (subject to regulatory approval), Pilgrim will close by mid-2019, and Indian Point 2 and 3 will shut by April 2020 and April 2021 under a January 2017 settlement with New York State. Remaining decommissioning and spent fuel obligations stay with Entergy.

How stable is the Utility earnings base?

The Utility segment is the core of the business, generating $1.15 billion of net income in 2016. Its rates are largely set through formula rate plans in Arkansas, Louisiana, and Mississippi, which reduce regulatory lag, and fuel costs are generally passed through to customers. Risks include the timing of fuel recovery (which reduced operating cash flow in 2016), pending rate proceedings, and the ongoing System Agreement litigation, which could require payments by Entergy Arkansas. The planned Utility capital program of more than $3.3 billion per year supports rate base growth.

Is Entergy's balance sheet under strain?

Leverage has increased. Debt-to-capital rose to 64.8% in 2016 from 59.1% in 2015, largely due to new long-term debt issuances and lower retained earnings after the impairments. Excluding securitization bonds, the ratio was 63.8%. Operating cash flow declined to $3.0 billion from $3.3 billion, and the company remained in compliance with its 65% covenant. Management indicated that investor-focused ratings and access to capital markets remain key considerations, and a rating downgrade could increase collateral requirements, particularly for Entergy Wholesale Commodities contracts.

What regulatory risks should investors monitor in 2017?

Key items include a January 2017 complaint at FERC by the Arkansas and Mississippi commissions seeking to cut System Energy's 10.94% Grand Gulf return on equity to a range of 8.37% to 8.67%; the outcome of the System Agreement bandwidth and opportunity sales proceedings, in which Entergy Arkansas recorded an $87 million liability; the FERC-required Arkansas regional haze plan; the NRC Column 4 status of ANO; and pending approvals for the FitzPatrick and Vermont Yankee sales and for new generation projects.

ETR 10-K FY2016 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 24, 2017. Cited figures are marked; the original filing is the authoritative source.

Entergy Corporation's 2016 Form 10-K reports a consolidated net loss of $564.5 million^a (EPS of -$3.26), driven primarily by $2.84 billion in pre-tax impairment and related charges at its merchant nuclear business, Entergy Wholesale Commodities (EWC).

The charges wrote down Palisades, Indian Point 2, and Indian Point 3 following the company's decision to exit merchant power generation. The Utility segment remained the earnings engine, contributing $1.15 billion^b of net income and generating 83% of revenue, while total revenue declined to $10.85 billion from $11.51 billion. Management is executing a planned exit from merchant generation: FitzPatrick is slated for sale to Exelon in 2017, Vermont Yankee for sale to NorthStar, Palisades is to shut in October 2018 after a $172 million PPA termination payment, Pilgrim is to close in 2019, and a January 2017 settlement with New York State commits to shutting Indian Point 2 and 3 by 2020 and 2021.

Entergy expects cessation of all merchant nuclear generation by 2021. On the Utility side, the company plans roughly $3.4^c-3.8 billion of annual capital spending for 2017-2019, including the St. Charles, Lake Charles, and Montgomery County gas plants, and it acquired the Union Power Station for about $949 million in 2016. Investors should weigh the strong regulated base against balance-sheet pressure: debt-to-capital rose to 64.8% from 59.1%, and operating cash flow fell to $3.0 billion.

Ongoing regulatory items, including a January 2017 FERC complaint seeking a lower System Energy return on equity and open System Agreement proceedings, add uncertainty. The dividend was raised to $0.87^d per quarter.

02—Key points

Key Highlights

Consolidated net loss of $564.5 million (-$3.26 per share) versus a 2015 net loss of $156.7 million, reflecting $2.84 billion in pre-tax impairment charges at Entergy Wholesale Commodities.
Utility segment net income of $1.15 billion, up from $1.11 billion, and 83% of consolidated revenue; net revenue rose $351 million on higher retail pricing.
Total operating revenue fell 5.8% to $10.85 billion, with Entergy Wholesale Commodities revenue declining to $1.85 billion from $2.06 billion.
Exit from merchant nuclear power: FitzPatrick sale to Exelon expected 1H 2017; Vermont Yankee sale to NorthStar expected by end 2018; Palisades, Pilgrim, Indian Point 2 and 3 to shut between 2018 and 2021.
Leverage increased: debt-to-capital rose to 64.8% from 59.1%, and the company's $3.5 billion credit facility covenant caps debt at 65% of capitalization.
Planned capital investments of $3.75 billion in 2017, $3.67 billion in 2018, and $3.41 billion in 2019, including new gas-fired generation at St. Charles, Lake Charles, and Montgomery County.
Board declared a $0.87 quarterly dividend per share in January 2017; cash dividends paid totaled $612 million in 2016.

03—One dollar

04—Financials

Financial Highlights

10-KFY2016filed February 24, 2017

Revenue$10.85B Net Income-$564.50M-5.2% Net Margin EPS (Diluted)$-1.63 Total Assets$45.90B Cash & Equivalents$1.19B Free Cash Flow$3.00B

Financial Statements

FY2016 against FY2015

Line item	FY2016FY2015	FY2015	Change
Revenue	$10.85B—	—	—
Operating Expenses	$11.73B$11.97B	$11.97B	−2.0%
Operating Income	-$815.23M-$299.17M	-$299.17M	−172.5%
Interest Expense	$700.54M$670.10M	$670.10M	+4.5%
Net Income	-$564.50M-$156.73M	-$156.73M	−260.2%
EPS (Basic)	$-1.63$-0.49	$-0.49	−229.3%
EPS (Diluted)	$-1.63$-0.49	$-0.49	−229.3%
Shares Outstanding (Basic)	357.77M358.35M	358.35M	−0.2%
Shares Outstanding (Diluted)	357.77M358.35M	358.35M	−0.2%

05—Questions

Frequently Asked Questions

Why did Entergy report a net loss in 2016?
The loss was driven by $2.84 billion in pre-tax impairment and related charges, or $1.83 billion after tax, primarily writing down the Palisades, Indian Point 2, and Indian Point 3 plants to fair value. These impairments followed management's decision to shut or sell its merchant nuclear fleet because of low wholesale power prices and market design issues. Excluding these charges, the company would have reported earnings of roughly $1.27 billion attributable to common equity.
What is the outlook for the merchant nuclear business?
Entergy plans to exit merchant generation entirely by 2021. FitzPatrick is expected to close to Exelon in 2017, Vermont Yankee is to be sold to NorthStar by end-2018, Palisades will shut October 1, 2018 after a $172 million PPA termination payment from Consumers Energy (subject to regulatory approval), Pilgrim will close by mid-2019, and Indian Point 2 and 3 will shut by April 2020 and April 2021 under a January 2017 settlement with New York State. Remaining decommissioning and spent fuel obligations stay with Entergy.
How stable is the Utility earnings base?
The Utility segment is the core of the business, generating $1.15 billion of net income in 2016. Its rates are largely set through formula rate plans in Arkansas, Louisiana, and Mississippi, which reduce regulatory lag, and fuel costs are generally passed through to customers. Risks include the timing of fuel recovery (which reduced operating cash flow in 2016), pending rate proceedings, and the ongoing System Agreement litigation, which could require payments by Entergy Arkansas. The planned Utility capital program of more than $3.3 billion per year supports rate base growth.
Is Entergy's balance sheet under strain?
Leverage has increased. Debt-to-capital rose to 64.8% in 2016 from 59.1% in 2015, largely due to new long-term debt issuances and lower retained earnings after the impairments. Excluding securitization bonds, the ratio was 63.8%. Operating cash flow declined to $3.0 billion from $3.3 billion, and the company remained in compliance with its 65% covenant. Management indicated that investor-focused ratings and access to capital markets remain key considerations, and a rating downgrade could increase collateral requirements, particularly for Entergy Wholesale Commodities contracts.
What regulatory risks should investors monitor in 2017?
Key items include a January 2017 complaint at FERC by the Arkansas and Mississippi commissions seeking to cut System Energy's 10.94% Grand Gulf return on equity to a range of 8.37% to 8.67%; the outcome of the System Agreement bandwidth and opportunity sales proceedings, in which Entergy Arkansas recorded an $87 million liability; the FERC-required Arkansas regional haze plan; the NRC Column 4 status of ANO; and pending approvals for the FitzPatrick and Vermont Yankee sales and for new generation projects.

06—Continue

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