Entergy Texas, Inc. & Subsidiaries: Q2 2010 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2010, for Entergy Corporation and its Registrant Subsidiaries, including Entergy Texas, Inc. Entergy operates two primary segments: Utility (regulated electric and natural gas distribution in Arkansas, Louisiana, Mississippi, and Texas) and Non-Utility Nuclear (wholesale power generation). The filing highlights a strategic shift following the rejection of a planned spin-off of the Non-Utility Nuclear business by the New York Public Service Commission (NYPSC) and the Vermont Public Service Board. Consequently, Entergy announced plans to unwind the business infrastructure associated with the proposed spin-off.
Key Financial Metrics (Six Months Ended June 30, 2010)
| Metric | 2010 (YTD) | 2009 (YTD) | Variance |
|---|---|---|---|
| Consolidated Net Income | $539.1 million | $472.1 million | +$67.0 million |
| Net Income Attributable to Entergy Corp | $529.1 million | $462.1 million | +$67.0 million |
| Diluted EPS | $2.77 | $2.35 | +$0.42 |
| Operating Revenues | $5.62 billion | $5.31 billion | +$312.4 million |
| Operating Cash Flow | $1.47 billion | $1.02 billion | +$452 million |
| Capital Expenditures | $918.6 million | $932.1 million | -$13.5 million |
| Debt to Capital Ratio | 56.6% | 57.4% | -0.8% |
Material Changes vs. Prior Period
- Utility Segment Performance: Net income for the Utility segment increased significantly to $373.1 million (YTD 2010) from $267.5 million (YTD 2009). This was driven by a 10% increase in billed electricity usage due to weather patterns (colder Q1, warmer Q2) and retail price increases in Louisiana and Mississippi.
- Non-Utility Nuclear Segment: Net income decreased to $213.7 million (YTD 2010) from $261.1 million (YTD 2009). While volume increased due to fewer refueling outages in 2010 compared to 2009, realized prices per MWh declined. Additionally, the segment incurred significant one-time charges related to the unwinding of the spin-off infrastructure.
- Unwinding Costs: Entergy recorded expenses for the write-off of capitalized costs associated with the abandoned spin-off. This included a $32 million write-off of capital costs (software) and a $39 million write-off of debt financing costs in the Non-Utility Nuclear segment. Management expects approximately $40 million in additional after-tax expenses related to this unwind through the remainder of 2010.
- Storm Cost Recovery: Significant progress was made in financing storm restoration costs. The Louisiana Public Service Commission (LPSC) approved settlements for Hurricane Gustav and Ike costs, leading to the issuance of $713 million in Act 55 bonds in July 2010 (post-period) to fund reserves and restoration for Entergy Gulf States Louisiana and Entergy Louisiana. Entergy Arkansas also received approval for $126.3 million in storm cost recovery bonds.
Guidance, Outlook, and Risks
- Strategic Shift: Entergy has withdrawn its spin-off petitions and is integrating Non-Utility Nuclear and non-nuclear wholesale assets into a new organization, "Entergy Wholesale Commodities."
- Dividends and Buybacks: The Board declared a quarterly dividend of $0.83 per share (up from $0.75) and reaffirmed its commitment to the $750 million share repurchase program authorized in late 2009. Approximately $137.7 million was repurchased in the first six months of 2010.
- Regulatory Risks:
- System Agreement: Ongoing proceedings at the FERC regarding rough production cost equalization rates. Entergy Arkansas is under investigation by the APSC regarding its post-System Agreement operations and potential RTO participation.
- Rate Cases: Entergy Texas filed a rate case in December 2009; a settlement was filed in August 2010 (post-period) proposing a $59 million base rate increase. Entergy Arkansas received a $63.7 million rate increase effective July 2010.
- Healthcare Legislation: The Patient Protection and Affordable Care Act (PPACA) resulted in a $16 million charge to income tax expense in Q1 2010 due to the elimination of tax deductions for prescription drug expenses for Medicare beneficiaries.
- Market Risks: Non-Utility Nuclear has sold forward 91% of its planned energy output for the remainder of 2010 at an average contracted price of $58/MWh. Credit exposure associated with power sales contracts is managed primarily through Entergy Corporation guarantees.
Key Facts for Investor Verification
- Spin-off Unwind Costs: Verify the total impact of the $71 million in write-offs ($32M capital, $39M debt) and the projected $40 million in additional after-tax expenses for the remainder of 2010.
- Storm Cost Financing: Confirm the final terms and timing of the $713 million Act 55 bond issuance for Louisiana subsidiaries and the $126.3 million issuance for Entergy Arkansas, as these significantly impact liquidity and future rate structures.
- Entergy Texas Rate Case: Monitor the final PUCT order on the August 2010 settlement, which proposes a $59 million rate increase, and the status of the competitive generation service tariff.
- Non-Utility Nuclear Pricing: Track the realized price per MWh for the Non-Utility Nuclear segment, which is projected to decrease in 2010 compared to 2009, impacting the segment's contribution to consolidated earnings.
- Capital Structure: Note the company's compliance with its 65% debt-to-capitalization covenant under its revolving credit facility, which currently stands at 56.6% debt-to-capital.