Entergy Texas, Inc. — Q2 2011 Form 10-Q
Business context and period. Entergy Texas is a regulated electric utility serving customers in Texas. This summary focuses on Entergy Texas, Inc. and its subsidiaries within a combined Entergy filing. The unaudited quarter and six-month periods ended June 30, 2011; comparisons are with the same 2010 periods.
Financial performance and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | 444.4 | 471.2 | 793.3 | 807.4 |
| Operating income | 57.7 | 53.6 | 103.3 | 95.7 |
| Net income | 23.1 | 22.3 | 38.8 | 34.8 |
| Operating margin | 13.0% | 11.4% | 13.0% | 11.9% |
| Net margin | 5.2% | 4.7% | 4.9% | 4.3% |
- Cash flow, six months: operating cash flow was $25.9 million versus $4.7 million; investing cash use was $50.8 million versus $61.0 million; financing cash use was $10.1 million versus $42.7 million. Cash fell to $0.3 million from $35.3 million at year-end 2010.
- Debt and capital: long-term debt was $1.628 billion, including $776 million of securitization bonds. Debt-to-capital was 65.4%, or 49.7% excluding non-recourse securitization bonds; net debt-to-net capital excluding those bonds was 49.7%, compared with 49.8% at year-end.
- Liquidity: a $100 million credit facility was undrawn at June 30 and expires in August 2012. The filing reports $21 million of short-term borrowings against a $200 million FERC-authorized limit. Total assets were $3.761 billion and common equity was $863.1 million.
Material changes versus prior periods
- Q2 net income rose $0.8 million; first-half net income increased $4.1 million. Higher net revenue and, for the first half, lower interest expense supported results.
- Net revenue rose to $142.1 million in Q2 from $139.7 million and to $269.3 million for the first half from $260.8 million. Base-rate increases contributed: a $59 million annual increase effective August 2010 and an additional $9 million increase effective May 2011.
- First-half billed retail electricity usage rose 5% (377 GWh), with industrial usage up 13%, principally in chemicals and refining. Q2 retail usage rose 9% (339 GWh), reflecting higher residential, commercial, and industrial sales.
- Lower wholesale sales to affiliated customers, lower fuel-recovery revenue and higher purchased-power capacity costs partly offset the net-revenue gains. The company also refunded approximately $73 million of fuel-cost overcollections through November 2010, with most customer refunds made over three billing cycles beginning February 2011.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific Entergy Texas earnings or revenue guidance. Management cautions that utility results are seasonal and interim results should not be treated as a full-year estimate.
- Rate recovery and regulatory outcomes remain important, including fuel-cost recovery, System Agreement matters, and the proposed transition of the utility companies to MISO. The combined filing estimates transition and implementation costs of approximately $105 million if all utility companies join, with additional costs possible; these are system-wide estimates, not Entergy Texas-only costs.
- Key operating and financial risks include weather, fuel and purchased-power prices, generation and transmission performance, regulatory decisions, environmental requirements, and access to capital. The filing reported no material change to the risk factors in the 2010 Form 10-K.
- A Texas power-price lawsuit involving a purported class of Texas retail customers was pending, with a class-certification hearing scheduled for August 2011. Entergy entities also identified potential responsible-party status at the SESCO contaminated site; Entergy’s total estimated share of remediation costs was preliminarily expected to be below $1 million.
- Entergy Texas reported effective income-tax rates of 38.1% for Q2 and 38.0% for the first half, compared with 38.2% and 40.0% in 2010. The filing attributes the rates primarily to state taxes and utility-plant book-tax differences.
Important facts for investors to verify
- Whether rate increases and fuel-cost recovery continue to support utility net revenue after the customer refunds.
- Cash generation and available liquidity, given cash of only $0.3 million at quarter-end, and the availability and terms of the credit facility and money-pool funding.
- Debt metrics both including and excluding securitization bonds, which are non-recourse to Entergy Texas.
- Developments in the Texas power-price class action, fuel-cost recovery proceedings, and MISO transition decisions and costs.
- Whether higher electricity usage, especially industrial demand, is sustained and whether purchased-power capacity costs or lower affiliated wholesale sales offset the benefit.