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EA

ENTERGY ARKANSAS, LLC (EAI)·Q2 2016 Earnings Summary

Executive Summary

  • Consolidated EPS of $3.16 as-reported and $3.11 operational; Utility, Parent & Other (U/P&O) adjusted EPS increased 35% year-over-year, driven by tax items, rate actions (including EAI’s rate case), and the Union Power Station acquisition .
  • Entergy updated consolidated operational EPS guidance to $6.60–$7.40 and affirmed U/P&O Adjusted EPS guidance of $4.20–$4.50; benefits were largely from tax items recorded in Q2, offsetting unfavorable weather and the extended Indian Point 2 outage .
  • Utility net revenue rose 2.4% year-over-year to $1.524B, with industrial sales up 7.2% despite milder weather; non-fuel O&M per MWh declined 6.9% .
  • Stock reaction catalysts: guidance update tied to tax items, visible utility execution (EAI forward test year FRP filing), and industrial demand strength vs. caution on H2 industrial taper due to refinery maintenance and macro factors .

What Went Well and What Went Wrong

What Went Well

  • U/P&O adjusted EPS rose to $1.18 (from $0.87), reflecting rate actions and cost discipline; management emphasized “steady, predictable growth at the Utility” and a path toward longer-term targets .
  • Industrial sales growth remained robust (+7.2% yoy), with strength in new/expansion customers and existing petroleum refiners; net revenue benefited from EAI’s 2015 rate case and the Union acquisition .
  • Non-fuel O&M per MWh declined 6.9% yoy, supported by lower pension/OPEB expenses and reduced fossil outage scope; U/P&O adjusted earnings increased 35% yoy, aligning with expectations for core business growth .

What Went Wrong

  • Weather was milder than normal and more negative vs. prior year, reducing EPS by $0.09 in Q2 and weighing on utility net revenue .
  • EWC net revenue and volumes declined due to lower energy/capacity prices and the extended Indian Point 2 refueling outage; EWC EPS gains were largely tax-driven, not operational momentum .
  • Operating cash flow edged down vs. prior year ($719M vs. $727M) and management flagged potential H2 industrial demand taper, especially refiners facing maintenance/outages and macro headwinds .

Financial Results

Consolidated EPS vs Prior Periods and Prior Year

MetricQ2 2015Q1 2016Q2 2016
As-Reported EPS ($)$0.83 $1.28 $3.16
Operational EPS ($)$0.83 $1.35 $3.11
Weather Impact (EPS)$(0.02) $(0.14) $(0.09)
Consolidated As-Reported Earnings ($MM)$148.8 $230.0 $567.3

Utility, Parent & Other EPS vs Prior Periods

MetricQ2 2015Q1 2016Q2 2016
U/P&O As-Reported EPS ($)$0.85 $0.84 $1.77
U/P&O Adjusted EPS ($)$0.87 $0.95 $1.18
Tax Items in U/P&O (EPS)— $0.03 $0.68
Weather Impact in U/P&O (EPS)$(0.02) $(0.14) $(0.09)

Utility Net Revenue and Efficiency

MetricQ2 2015Q1 2016Q2 2016
Utility Net Revenue ($MM)$1,488 $1,375 $1,524
Non-fuel O&M per MWh (As-Reported)$22.35 $20.17 $20.80
Industrial GWh Billed10,737 11,055 11,509
Total Sales (GWh)28,745 29,443 29,555

Segment Breakdown (EPS)

Segment EPS (Per Share)Q2 2015Q2 2016
Utility (As-Reported)$1.11 $2.09
Parent & Other (As-Reported)$(0.26) $(0.32)
EWC (As-Reported)$(0.02) $1.39
EWC (Operational)$(0.02) $1.34

EWC Operational Adjusted EBITDA

MetricQ2 2015Q2 2016
Operational Adjusted EBITDA ($MM)$62 $58

Operating Cash Flow by Business

MetricQ2 2015Q2 2016
Utility OCF ($MM)$762 $690
Parent & Other OCF ($MM)$(43) $(47)
EWC OCF ($MM)$8 $76
Total OCF ($MM)$727 $719

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Consolidated Operational EPSFY 2016Not disclosed in retrieved docs$6.60–$7.40Raised (update largely due to Q2 tax items)
U/P&O Adjusted EPSFY 2016$4.20–$4.50$4.20–$4.50Maintained (midpoint intact)

Management clarified that absent Q2 tax items, consolidated results would trend toward the low end of prior guidance due to unfavorable weather, IP2 outage, and lower market prices .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2016)Current Period (Q2 2016)Trend
Advanced metering & grid modernizationDiscussed strategy; regulatory filings anticipated; vendor selection underway Design phase initiated; filings expected starting September; foundational tech for integrated network Progressing execution
Industrial demand/refinersStrong growth with note on IP2 impact and broader macro; EAI rate case conservatism clarified +6.7% H1 industrial growth; expect H2 taper due to refinery maintenance and macro factors; fixed demand charges mitigate revenue volatility Near-term caution after strong H1
Regulatory actions (FRPs, ALJ)EAI finalized 2015 rate case; FRP filings noted; Louisiana docket scope addressed ALJ favorable recommendation for St. Charles Power Station; EAI filed first forward test year FRP; ETI TCRF approved Positive momentum
Nuclear fleet/IP2 outageQ2 impact discussed; outage expenses amortization explained Extended IP2 outage weighed on EWC net revenue; bolt replacements underway with NRC coordination Operational headwind being mitigated
Renewables/RFP participationQuestions on renewable RFP; openness to non-gas generation Multiple solar initiatives online; Arkansas/Louisiana/New Orleans RFPs underway; proposals due in Aug/Oct Expanding portfolio

Management Commentary

  • “By any measure, this was a solid quarter… steady predictable growth at the Utility while reducing our EWC footprint… U/P&O adjusted earnings increased 35% versus last year and are in line with our growth expectations for our core business.” — Leo Denault, Chairman & CEO .
  • “Consolidated operational earnings were $3.11 per share… most significant was income taxes, which increased earnings about $2 per share net of customer sharing… our full-year view of U/P&O adjusted earnings remains on target with our original guidance.” — Andrew Marsh, CFO .
  • “We are also updating our consolidated Entergy operational guidance range of $6.60 to $7.40… due largely to the income tax items recorded in the second quarter… we do not expect additional significant income taxes for the remainder of this year.” — Andrew Marsh .
  • “Entergy Arkansas made its first forward test year formula rate plan filing… we saw over 7% industrial growth versus last year.” — Leo Denault .

Q&A Highlights

  • IP2 outage impact: bulk of the ~$0.20 EPS effect in Q2 via net revenue; refueling outage expenses amortized over a shorter fuel cycle (20 months) with minor effects in subsequent years .
  • Arkansas rate case conservatism: timing and cost deferral elements clarified; no extra opportunity beyond planned collection run-rate in remaining 2016 quarters .
  • Renewable RFP participation: management open to non-gas generation opportunities while maintaining focus on cost and reliability; multiple solar initiatives highlighted .
  • Louisiana commission docket: expectations to narrow scope addressed at the commission meeting; management reiterated perspective and engagement .
  • IP2 repairs: bolt replacement underway with NRC concurrence processes active; equipment onsite and work ongoing .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 2016 EPS and revenue was unavailable due to SPGI request-limit errors. As a result, comparisons vs. consensus cannot be provided for this quarter [SPGI request-limit error from GetEstimates].
  • Implication: Without consensus numbers, we anchor assessment to yoy and sequential performance; guidance updates and tax-driven benefits are the key narrative drivers .

Key Takeaways for Investors

  • Utility engine performing: U/P&O adjusted EPS +35% yoy; rate actions (including EAI’s FRP and prior rate case) and cost discipline underpin sustainable growth despite weather headwinds .
  • Tax items were a major driver: ~+$2.01 consolidated EPS effect net of sharing; investors should normalize for non-recurring tax benefits when assessing run-rate .
  • EWC headwinds persist: lower power prices and IP2 outage pressure operating metrics; EBITDA slightly down yoy; strategic footprint reduction continues .
  • Guidance intact/updated: U/P&O Adjusted EPS reaffirmed ($4.20–$4.50), consolidated operational EPS raised ($6.60–$7.40); near-term catalysts include regulatory approvals (St. Charles, FRPs) and execution of grid modernization .
  • Watch H2 industrial demand: management expects taper (refinery maintenance, macro); fixed demand charges (~50% of industrial revenue) mitigate volatility .
  • Trading view: tax-driven upside is in prints; incremental stock moves likely tied to regulatory decisions, IP2 return-to-service milestones, and confirmations on industrial demand trajectory .
  • Medium-term thesis: continued utility capital deployment with improving regulatory constructs (forward test year FRPs), technology investments (advanced metering), and disciplined O&M to support steady EPS growth, while EWC exposure declines .