Entergy Texas, Inc. — 2012 Second-Quarter Form 10-Q
Business context and reporting period
This summary focuses on Entergy Texas, Inc. and its subsidiaries (Entergy Texas), a regulated electric utility. The combined Entergy filing reports the quarter and six months ended June 30, 2012; financial statements are unaudited. Comparisons are with the corresponding 2011 periods. The filing cautions that utility results are seasonal, with peak periods in the third quarter, so interim results should not be treated as a full-year estimate.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Electric operating revenue | $358.1 million | $444.4 million | $685.0 million | $793.3 million |
| Net revenue | $142.5 million | $142.1 million | $259.9 million | $269.3 million |
| Operating income | $49.0 million | $57.7 million | $74.0 million | $103.3 million |
| Net income | $16.2 million | $23.1 million | $17.9 million | $38.8 million |
- Net income fell $6.9 million in Q2 and $20.9 million in the first half. Management cited higher operation and maintenance and depreciation expenses for the quarter; for the first half, lower net revenue also contributed.
- First-half operating cash flow was $95.4 million, versus $25.9 million in 2011; investing used $60.0 million, versus $50.8 million; financing used $78.0 million, versus $10.1 million. Cash and cash equivalents were $22.7 million at June 30, down from $65.3 million at year-end 2011.
- At June 30, total assets were $3.97 billion. Long-term debt was $1.65 billion, including $717.4 million of securitization bonds. Debt-to-capital was 65.3%; excluding non-recourse securitization bonds, debt-to-capital was 51.5% and net debt-to-net capital was 50.9%, compared with 48.9% at year-end.
- Entergy Texas had an undrawn $150 million credit facility expiring in March 2017. The reported balance sheet includes $680.9 million of securitization property within other regulatory assets.
Material changes and drivers
- Electric revenue declined 19% in Q2 and 14% in the first half. Lower fuel-cost recovery revenue, lower usage and reduced wholesale sales contributed; lower fuel and purchased-power costs largely pass through customer recovery mechanisms. Accordingly, reported revenue fell much more than net revenue, which was nearly flat in Q2 and down about $9.4 million for the half.
- First-half billed electricity sales declined 5% overall, including a 5% decline in retail sales. Management attributed the usage variance mainly to milder weather; industrial sales also declined.
- Purchased-power capacity costs reduced net revenue by $7.5 million in Q2 and $13.0 million in the first half, reflecting price increases and additional capacity purchases. Higher capacity revenue under agreements with Entergy Gulf States Louisiana partly offset the first-half decline.
- Operating costs rose, including higher fossil-generation outage expenses, compensation and benefits, transmission costs, and costs associated with the proposed transmission-business spin-off. Depreciation also increased with additions to plant.
Outlook, regulation and risks
- Texas rate case: Entergy Texas initially requested a $112 million base-rate increase, later revised to $105 million. The administrative law judges’ July 2012 proposal recommended a $16 million increase, although supporting workpapers indicated $28.3 million. Recommendations included a 9.80% return on equity and limits on certain purchased-power and other cost recovery. Entergy Texas filed exceptions; the PUCT was scheduled to consider the proposal on August 17, 2012. The final outcome was unresolved in this filing.
- Fuel refunds: A PUCT-approved settlement requires $67 million, including interest and additional over-collections through December 2011, to be refunded to customers over three months, with interim rates effective beginning in March 2012.
- MISO participation: Entergy Texas sought regulatory approval to join MISO. A settlement in principle among several parties supported membership subject to conditions; a non-unanimous stipulation was filed August 6, 2012, with further PUCT consideration pending. Approval, conditions, transition costs and cost recovery remained uncertain.
- First-half operating cash flow included $43 million of System Agreement bandwidth-remedy receipts. The filing also identifies fuel refunds, weather and usage, capacity costs, rate-case outcomes, and regulatory cost recovery as factors affecting results and cash flows.
- Management disclosed no material change to the risk factors in the 2011 Form 10-K. Forward-looking statements are subject to regulatory, operating, weather, financing and other risks; the filing gives no specific Entergy Texas earnings guidance.
Important facts for investors to verify
- PUCT’s final rate-case decision and the authorized return and recoverable costs, including purchased-power capacity and MISO-transition expenses.
- The timing and cash-flow effect of the $67 million fuel refund, and any further changes in fuel-recovery balances.
- Whether MISO membership is approved, the conditions imposed, and the resulting transition and transmission-cost allocation.
- Debt and liquidity trends, including the increase in net debt-to-net capital excluding securitization bonds and the use of cash for dividends and financing.
- Whether reduced sales, weather effects, outage costs and higher operating expenses persist beyond the reported interim periods.