01—Abstract
Summary
Summary of the 10-K filed February 21, 2020. Cited figures are marked; the original filing is the authoritative source.
Entergy Corporation's FY2019 10-K shows a company in transition: consolidated net income rose to $1.258 billiona (EPS $6.30 diluted) from $863 million in 2018, driven largely by the absence of 2018's $532 million Entergy Wholesale Commodities impairment and by favorable tax items.
The Utility segment, now 88% of revenue and 96% of assets, earned $1.426 billionb, while the merchant nuclear business (Entergy Wholesale Commodities) contributed $149 million, helped by a $156 million tax benefit from an internal restructuring. The company is executing a planned exit from merchant power, with Indian Point 2 and 3 and Palisades to be shut down by 2022 and sold to Holtec, and it recorded a $190 million loss on the August 2019 Pilgrim sale. Investors should weigh a heavy capital program and leverage.
Planned construction spending is about $4.1 billionc in 2020 and declining thereafter, while operating cash flow was $2.8 billion, so the company continues to depend on debt and equity issuance. Debt to capital stood at 65.5% (about 64.6% net of cash, excluding securitization bonds), near the 65% covenant ceiling in the $3.5 billion credit facility. Entergy also faces open regulatory risk, including the FERC return-on-equity proceeding for System Energy and litigation over the Grand Gulf sale-leaseback, with refund claims in the hundreds of millions of dollars.
The filing also flags a $1.5 billiond net unrecognized tax benefit, a $1.7 billion regulatory liability for income taxes that is being returned to customers, and an unusually low 2019 effective tax rate of (15.6%). Earnings quality in 2019 therefore depends partly on tax and restructuring items rather than purely on recurring utility margins.
02—Key points
Key Highlights
- Net income of $1.258 billion ($6.30 diluted EPS) versus $863 million ($4.63) in 2018; Utility segment net income of $1.426 billion.
- Entergy Wholesale Commodities earned $149 million in 2019, including a $156 million income tax reduction from an internal restructuring, after $100 million of nuclear impairments.
- Planned 2020-2022 capital investment of about $4.1 billion, $3.9 billion and $3.6 billion, mainly for Utility generation, transmission and distribution.
- Debt to capital of 65.5% (64.6% net of cash, excluding securitization bonds), against a 65% consolidated debt covenant in the credit facility.
- Merchant nuclear exit: Indian Point 2 (2020), Indian Point 3 (2021) and Palisades (2022) to be shut down and sold to Holtec; Pilgrim sold August 2019 with a $190 million pre-tax loss.
- Dividend of $3.66 per share declared for 2019, with $712 million paid; $350 million remains on the $500 million buyback authorization.
- Open regulatory and FERC proceedings, including System Energy's return-on-equity complaints and the Grand Gulf sale-leaseback challenge with refund claims of roughly $500 million plus interest.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 21, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $10.88B$11.01B | −1.2% |
| Operating Expenses | $9.49B$10.54B | −10.0% |
| Operating Income | $1.39B$469.37M | +196.3% |
| Interest Expense | $807.38M$768.32M | +5.1% |
| Net Income | $1.26B$862.55M | +45.9% |
| EPS (Basic) | $3.18$2.34 | +35.9% |
| EPS (Diluted) | $3.15$2.31 | +36.1% |
| Shares Outstanding (Basic) | 390.39M362.82M | +7.6% |
| Shares Outstanding (Diluted) | 394.00M366.76M | +7.4% |
05—Questions
Frequently Asked Questions
Why did net income increase so sharply in 2019?
Most of the increase reflects the absence of the 2018 Entergy Wholesale Commodities impairments ($532 million pre-tax) and a 2018 charge that was far larger than 2019's $100 million impairment. In 2019 the Utility also benefited from higher retail rates and lower nuclear refueling spending, and Entergy Wholesale Commodities recorded a $156 million tax benefit from restructuring. Part of the earnings improvement is therefore non-recurring.
How exposed is Entergy to its debt covenant and financing needs?
Entergy Corporation's credit facility requires a debt ratio of 65% or less of total capitalization, and the reported debt to capital ratio was 65.5%, although the covenant calculation differs and excludes certain impairments. Entergy expects to remain in compliance, but headroom is limited. With planned capital spending above $4 billion annually, the company will keep relying on capital markets, and it expects to finance up to 10% of Utility capital plans with equity.
What is the status of the merchant nuclear exit?
Entergy plans to shut Indian Point 2 by April 2020, Indian Point 3 by April 2021 and Palisades by May 2022, and has sale agreements with Holtec for each plant that are expected to close after shutdown. Adjusted net investment was $240 million for Indian Point and $60 million for Palisades, so the eventual losses depend on decommissioning trust values and asset retirement obligations at closing. Entergy expects about $75 million of retention and severance costs in 2020 and about $55 million from 2021 to 2022.
What regulatory risks could affect future earnings?
The largest open items are FERC proceedings on System Energy's authorized return on equity (currently 10.94%, with litigants seeking roughly 7.8% to 9.9%) and capital structure, and the LPSC's challenge to the Grand Gulf sale-leaseback, where refund claims include about $512 million plus interest for uncertain tax position liabilities. Rate cases in New Orleans and Mississippi, and the New Orleans Power Station litigation, also carry uncertainty. Outcomes could create material refunds or disallowances.
Why was the 2019 effective tax rate negative?
The 2019 effective income tax rate was (15.6%), as income tax was a benefit of $170 million on pre-tax income of $1.088 billion. The main drivers were amortization of excess accumulated deferred income taxes returned to customers, a $156 million restructuring benefit at Entergy Wholesale Commodities, and recognition of a previously unrecognized net operating loss carryover. These items are not expected to recur at the same scale, so investors should expect a more normal tax rate going forward.
06—Continue