01—Abstract
Summary
Summary of the 10-K filed February 26, 2019. Cited figures are marked; the original filing is the authoritative source.
Entergy Corporation's 2018 combined Form 10-K (filed February 26, 2019) covers the parent and six Registrant Subsidiaries.
Consolidated net income attributable to Entergy rose to $848.7 milliona (diluted EPS $4.63) from $411.6 million (EPS $2.28) in 2017, but the increase was flattered by large one-time items: a 2017 tax-reform charge and a 2018 income tax benefit of roughly $1.0 billion, which produced a negative effective tax rate of 595% for the year. Operating income fell to $469 million from $1.36 billion in 2017, largely because of $532 million of impairment charges tied to the planned exit from merchant nuclear generation. The strategic story is the wind-down of Entergy Wholesale Commodities.
Vermont Yankee was sold to NorthStar in January 2019, Pilgrim is set to shut down May 31, 2019 (with a pending sale to Holtec and an expected roughly $120 millionb loss), Indian Point 2 and 3 are slated to close in 2020 and 2021, and Palisades in 2022. Entergy has already sold 98% of 2019 planned nuclear output forward, but forward coverage declines sharply in later years, so merchant exposure is shrinking and so is that segment's revenue (down to $1.47 billion from $1.66 billion). The Utility segment, which provides roughly 87% of revenue and 93% of assets, carries the growth plan: 2019-2021 planned capital spending of about $4.6 billion, $3.5 billion, and $3.8 billion, including new gas plants (St. Charles, Lake Charles, Montgomery County) and the Choctaw acquisition.
Balance-sheet and cash-flow pressure is the key investor watch item. Operating cash flow fell to $2.39 billionc from $2.62 billion, mainly because of returns of excess deferred taxes to customers, while investing outflows were $4.1 billion. Debt to capital is about 66.7%, and the parent's credit facility includes a 65% consolidated debt covenant.
Management says it is in compliance. Common dividends were $3.58d per share, and remaining forward equity sales (8.45 million shares) are due by June 2019.
02—Key points
Key Highlights
- Net income attributable to Entergy of $848.7M ($4.63 diluted EPS) versus $411.6M ($2.28) in 2017, but 2018 results include a roughly $1.0B income tax benefit that drove a 595% effective tax rate.
- Operating income fell to $469M from $1.36B, reflecting $532M of Entergy Wholesale Commodities impairment charges and a $301M other regulatory charge.
- Merchant nuclear exit accelerating: Vermont Yankee sold January 2019; Pilgrim to close May 2019; Indian Point 2 and 3 by 2020 and 2021; Palisades by 2022; $120M expected loss on Pilgrim sale and about $80M expected gain on Palisades sale.
- Utility is the core growth engine (87% of revenue, 93% of assets) with planned 2019 capital spending of $4.64B across generation, transmission and distribution.
- Operating cash flow declined to $2.39B from $2.62B, pressured by returning unprotected excess deferred taxes to customers; investing outflows were $4.1B and financing inflows $1.4B.
- Leverage remains high: debt to capital of 66.7% (66.2% ex-securitization), and the credit facility covenant caps consolidated debt at 65% of capitalization; management reports compliance.
- Dividend of $3.58 per share in 2018 with $0.91 quarterly dividend declared for January 2019; $350M remains under the $500M buyback authorization, with no repurchases in Q4 2018.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 26, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $11.01B$11.07B | −0.6% |
| Operating Expenses | $10.54B$9.83B | +7.2% |
| Operating Income | $469.37M$1.36B | −65.5% |
| Interest Expense | $768.32M$707.21M | +8.6% |
| Net Income | $862.55M$425.35M | +102.8% |
| EPS (Basic) | $2.34$1.15 | +104.4% |
| EPS (Diluted) | $2.31$1.14 | +103.1% |
| Shares Outstanding (Basic) | 362.82M359.34M | +1.0% |
| Shares Outstanding (Diluted) | 366.76M361.07M | +1.6% |
05—Questions
Frequently Asked Questions
Why did Entergy's net income more than double in 2018 while operating income fell?
Net income rose mainly because of a $1.04 billion income tax benefit in 2018, which was largely driven by the amortization of excess accumulated deferred income taxes, a Utility restructuring benefit, a Louisiana IRS settlement, and a reduction in income tax tied to a decommissioning trust restructuring. Operating income fell from $1.36B to $469M because of $532M in Entergy Wholesale Commodities impairments and higher other regulatory charges. Investors should treat the tax benefit as largely non-recurring when judging underlying earnings power.
What is the financial exposure from exiting the merchant nuclear business?
Entergy has announced planned shutdowns of its remaining merchant plants by 2022 and has already recognized substantial impairments ($538M in 2017 and $532M in 2018, plus $173M for Vermont Yankee in Q4 2018). Expected additional costs include about $120M of employee retention and severance in 2019 and roughly $110M from 2020 to 2022. The Pilgrim sale is expected to produce an approximately $120M loss and the Palisades sale an approximately $80M gain, both depending on decommissioning trust values and asset retirement obligations at closing.
Is Entergy's leverage a concern, and how close is it to covenant limits?
Debt to capital was 66.7% at year-end 2018, down slightly from 67.1%, and the net debt to net capital ratio excluding securitization bonds was 65.6%. The parent's $3.5B credit facility requires consolidated debt of 65% or less of total capitalization, calculated under a definition that excludes certain merchant impairments. Management states it is in compliance and expects to remain so, but headroom is limited, making the $3.1B of planned 2019-2021 Utility capital spending and the remaining 8.45 million forward equity shares (due by June 2019) important to monitor.
How is the rate environment affecting Entergy's utility earnings?
The Tax Cuts and Jobs Act lowered federal tax rates, creating roughly $3.7B of excess deferred taxes that are being returned to customers through rate reductions and riders. Utility net revenue fell about $693M in 2018 as a result, though the effect on net income is offset by lower income tax expense. Regulatory risk remains significant: several rate cases (New Orleans electric and gas, Entergy Texas settlements), FERC return-on-equity complaints against System Energy's Grand Gulf contract, and the outcome of System Agreement litigation could all change earnings or cash flows.
What are the main near-term catalysts for investors?
Key near-term events include the Pilgrim shutdown on May 31, 2019 and closing of the Holtec sale by year-end 2019; the June 7, 2019 deadline to settle the remaining 8.45 million forward equity shares; the New Orleans base rate case decision expected later in 2019; the Choctaw Generating Station acquisition closing by year-end 2019; and the 2019 formula rate plan filings in Arkansas, Louisiana and Mississippi. Completion of St. Charles (mid-2019) and Lake Charles (mid-2020) would also add rate base.
06—Continue