Business context and reporting period
Entergy Texas, Inc. is a regulated electric utility serving customers in Texas. This summary focuses on Entergy Texas, not the other companies included in Entergy’s combined Form 10-Q. The filing reports unaudited results for the quarter and nine months ended September 30, 2010, compared with the same 2009 periods; balance-sheet comparisons are to December 31, 2009.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $514.8 million | $399.5 million | $1,322.1 million | $1,190.3 million |
| Net revenue | $162.9 million | $153.2 million | $423.7 million | $360.9 million |
| Operating income | $72.5 million | $74.3 million | $168.2 million | $111.2 million |
| Net income | $31.1 million | $38.2 million | $65.9 million | $49.7 million |
| Operating margin, approximately | 14.1% | 18.6% | 12.7% | 9.3% |
Margins are calculated from reported operating income and operating revenue. Net revenue, defined by the company after fuel, purchased-power and regulatory items, is also useful for assessing utility performance.
- Q3 net income declined about 18%; higher net revenue and lower interest expense were outweighed by higher operating and maintenance expense and lower other income. Nine-month net income rose about 33%, primarily on higher net revenue and lower interest expense.
- Q3 net revenue increased $9.7 million. Rate actions and higher usage/weather contributed, along with new wholesale contracts and securitization transition charges; these were partly offset by $14.4 million of higher purchased-power capacity costs. Nine-month net revenue increased $62.8 million, including higher usage, wholesale sales and an $18.6 million production-cost-equalization item recorded in 2009.
- Cash from operations was negative $0.3 million for the first nine months, versus positive $46.3 million in 2009. Investing used $76.8 million and financing used $77.9 million. Cash fell to $45.7 million from $200.7 million at year-end 2009. The filing attributes operating cash-flow weakness principally to customer-receivable timing and an $87.8 million fuel-cost refund paid in Q1.
- At September 30, cash and current investments were $45.7 million; current assets were $398.8 million and current liabilities $348.1 million. The derived current ratio was approximately 1.15.
- Long-term debt was $1.668 billion, including $816.1 million of securitization bonds. Debt-to-capital was 66.9%, or 50.8% excluding non-recourse securitization bonds; net debt-to-net-capital excluding those bonds was 49.5%, up from 42.3% at year-end 2009. The $100 million revolving credit facility was undrawn.
Material changes, outlook and risks
- Entergy Texas’s rate-case settlement provides a $59 million annual base-rate increase for usage beginning August 15, 2010, and a further $9 million increase for bills beginning May 2, 2011. It sets an authorized return on equity of 10.125%. As of the filing, PUCT consideration was pending; the ALJ had forwarded the settlement and recommended rejecting the proposed competitive-generation tariff.
- The settlement excludes proposed cost-of-service adjustment and purchased-power recovery riders from that case. A separate transmission-cost-recovery filing is contemplated. The settlement also provides for a $18.6 million customer credit related to 2007 production-cost-equalization receipts, subject to PUCT approval.
- The PUCT ordered a $77 million refund of fuel-cost over-collections through June 2010, generally over three billing cycles beginning in September. This follows Entergy Texas’s request for a roughly $66 million refund through May.
- Management anticipated $641 million of Entergy Texas capital investment for 2011–2013, including approximately $328 million for maintenance. No Entergy Texas full-year earnings guidance is stated in the provided filing text. Management cautions that interim results are seasonal and should not be used as a full-year estimate.
- Key exposures include regulatory decisions on rates, fuel and purchased-power recovery, customer refunds and the production-cost allocation; higher purchased-power capacity costs; and cash-flow variability from collections and refunds. The filing also reports a potential additional sales-and-use-tax provision, without specifying its amount.
- Company-wide regulatory matters disclosed in the combined filing include FERC System Agreement proceedings and a civil DOJ investigation of utility generation procurement, dispatch and transmission practices. Their specific financial effect on Entergy Texas is not quantified. Management states that no material changes occurred to the Form 10-K risk factors.
Important facts for investors to verify
- Whether the PUCT approved the rate-case settlement, including the $9 million later increase, customer credit and treatment of the proposed competitive-generation tariff.
- The final amount, timing and cash-flow effect of the $77 million fuel refund and any subsequent fuel-cost recovery.
- Whether operating cash flow and cash balances recover after the 2010 refund and collection timing effects, and how planned capital spending will be funded.
- Debt and leverage trends, particularly excluding securitization bonds, and the extent to which purchased-power capacity costs can be recovered from customers.
- The size and resolution of the potential sales-and-use-tax exposure and any material impact on Entergy Texas from the broader FERC or DOJ proceedings.