Business context and reporting period
Entergy Texas, Inc. (ETI) filed as part of Entergy Corporation’s combined Form 10-K. ETI is a regulated electric utility serving parts of Texas. This filing covers the fiscal year ended December 31, 2011—not a standalone fourth-quarter report. Financial amounts below are for ETI unless otherwise noted.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $1.757 billion | $1.690 billion |
| Operating income | $215.0 million | $190.6 million |
| Net income | $80.8 million | $66.2 million |
| Operating margin | 12.2% | 11.3% |
| Operating cash flow | $238.8 million | $43.1 million |
| Cash and cash equivalents at year-end | $65.3 million | $35.3 million |
| Total assets | $4.059 billion | $3.784 billion |
| Long-term debt | $1.677 billion | $1.659 billion |
ETI’s debt-to-capital ratio was 65.1%, or 50.8% excluding non-recourse securitization bonds; net debt to net capital excluding those bonds was 48.9%. Long-term debt included $749.7 million of securitization bonds. The company reported $65.3 million of cash and an undrawn $100 million credit facility expiring in August 2012. Its FERC-authorized short-term borrowing limit was $200 million.
Material changes versus the prior period
- Revenue increased 4.0%; net income rose $14.6 million, or about 22%, and operating income increased $24.4 million.
- Net revenue increased $37.6 million to $577.8 million, principally from rate increases and higher billed usage. Retail billed electricity sales increased 4.5% to 16,863 GWh.
- Operating cash flow rose substantially from 2010, when it was affected by fuel refunds and working-capital timing. In 2011, cash flow also benefited from changes in receivables and other working-capital items; the filing does not identify one single driver for the full increase.
- Capital spending and other investing outflows increased: construction expenditures were $173.5 million, and net cash used in investing activities was $219.8 million, compared with $121.4 million used in 2010.
Outlook, commentary, risks and unusual items
- Rates and cost recovery: ETI filed a rate case in November 2011 seeking a $112 million base-rate increase and a 10.6% return on equity. A final decision was scheduled for July 30, 2012, with proposed rates relating back to June 30, 2012. In January 2012, the PUCT declined to address the proposed purchased-power recovery rider in that case, while establishing a baseline for a possible separate proceeding.
- Fuel refunds: ETI and other parties agreed that ETI would refund $67 million, including interest, over three months beginning with the March 2012 billing period. ETI also sought PUCT reconciliation of $1.3 billion of fuel and purchased-power costs for July 2009 through June 2011.
- Transmission and regulation: The planned MISO RTO transition faced pending approvals and operational and cost uncertainty; ETI expected to file its application in 2012, with a target transition date of December 2013. Entergy’s proposed transmission-business spin-off and merger with ITC was also subject to regulatory and other closing conditions, with completion planned for 2013.
- Storm-related financing: ETI’s balance sheet included $749.7 million of securitization bonds for hurricane restoration costs. These bonds are serviced through customer charges and are non-recourse to ETI beyond remitting collections.
- Unusual accounting item: A fourth-quarter correction to the allocation of shared transmission costs under the System Agreement reduced ETI’s 2011 pretax income by $3.1 million. The filing states the error was immaterial to ETI’s prior-period financial statements.
- Capital plans: ETI’s planned construction and capital investment was approximately $202 million for 2012 and $462 million for 2013–2014. These estimates may change with regulatory requirements, project plans, market conditions and access to capital.
- Other exposures: Management highlighted regulatory cost-recovery risk, severe-weather impacts, environmental compliance costs, commodity and counterparty risks, and pension funding sensitivity. Deloitte issued unqualified opinions on ETI’s financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track the PUCT outcome of the $112 million rate request, including the return on equity, effective date and any cost-recovery conditions.
- Confirm the timing and implementation of the $67 million fuel refund and the outcome of the fuel-cost reconciliation proceeding.
- Monitor ETI’s credit-facility renewal and refinancing needs as its $100 million facility approaches its August 2012 expiration.
- Assess progress, costs and regulatory approvals for MISO integration and the proposed transmission-business transaction.
- Review whether operating cash flow remains strong after excluding working-capital timing effects, and compare it with planned capital spending and debt service.