Entergy Texas, Inc. & Subsidiaries: Q3 2009 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009, for Entergy Corporation and its Registrant Subsidiaries, including Entergy Texas, Inc. Entergy operates primarily through two segments: Utility (electric and natural gas distribution in Arkansas, Louisiana, Mississippi, and Texas) and Non-Utility Nuclear (wholesale power generation). The filing details the ongoing recovery from Hurricanes Gustav and Ike, the pursuit of a tax-free spin-off of the Non-Utility Nuclear business, and regulatory proceedings regarding storm cost recovery and rate adjustments.
Key Financial Metrics (Nine Months Ended Sept 30, 2009)
| Metric | 2009 (9 Months) | 2008 (9 Months) | Variance |
|---|---|---|---|
| Consolidated Net Income | $932.3 million | $1,065.0 million | ($132.7 million) |
| Net Income Attributable to Entergy Corp | $917.3 million | $1,050.0 million | ($132.7 million) |
| Operating Revenues | $8,247.0 million | $10,092.9 million | ($1,845.9 million) |
| Operating Income | $1,781.3 million | $1,926.4 million | ($145.1 million) |
| Cash Flow from Operations | $2,009.3 million | $2,692.8 million | ($683.5 million) |
| Cash Flow from Investing | ($1,447.7 million) | ($1,942.7 million) | $495.0 million |
| Cash Flow from Financing | ($1,351.2 million) | $550.8 million | ($1,902.0 million) |
| Ending Cash & Equivalents | $1,130.8 million | $2,555.9 million | ($1,425.1 million) |
Note: Revenue decline is largely attributed to lower fuel cost recovery revenues due to decreased natural gas prices and lower purchased power costs.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated operating revenues decreased by approximately 18% year-over-year. The Utility segment saw a decrease driven by lower fuel cost recovery revenues (due to lower gas prices) and decreased industrial sales volume. The Non-Utility Nuclear segment saw a 3% revenue decrease due to higher refueling outage days.
- Net Income Decrease: Consolidated net income declined by 12.5%. This was driven by lower net revenue and higher other-than-temporary impairment charges ($85 million) on equity securities in Non-Utility Nuclear decommissioning trust funds.
- Storm Cost Recovery: Entergy Texas successfully settled its Hurricane Ike and Gustav storm cost recovery case. The Public Utility Commission of Texas (PUCT) approved the recovery of $566.4 million (plus carrying costs) via securitization. In November 2009, Entergy Texas issued $545.9 million in securitization bonds to fund this recovery.
- Capital Structure: Entergy Corporation decreased net borrowings under its $3.5 billion credit facility by $853 million in the first nine months of 2009. The debt-to-capital ratio improved to 56.7% from 59.7% at year-end 2008.
Guidance, Outlook, and Management Commentary
- Non-Utility Nuclear Spin-Off: Entergy is actively pursuing a tax-free spin-off of its Non-Utility Nuclear business. Regulatory approvals are pending from the New York Public Service Commission (NYPSC) and the Vermont Public Service Board (VPSB). Entergy has amended its petition to the NYPSC to address financial strength concerns, proposing a $350 million liquidity reserve and a $1.0 billion reduction in long-term bonds for the new entity (Enexus).
- Capital Expenditures: Entergy anticipates Utility capital investments of $5.9 billion for 2010–2012, including $2.3 billion for maintenance. Non-Utility Nuclear investments are projected at $1.1 billion. Key projects include the Acadia Unit 2 purchase (Entergy Louisiana), White Bluff environmental compliance (Entergy Arkansas), and Grand Gulf uprate (System Energy).
- Rate Regulation:
- Entergy Texas: Implemented interim rates reflecting a settlement in December 2008. A new law in Texas ended the transition to competition, allowing Entergy Texas to withdraw its transition plan.
- Entergy Louisiana & Gulf States: LPSC approved settlements for 2007/2006 test years, allowing rate resets effective November 2009 to achieve target returns on equity (10.25% and 10.65% respectively).
- Entergy Arkansas: Filed a general rate case in September 2009 requesting a $223.2 million increase, effective July 2010, including recovery of 2009 ice storm costs.
- Risks: Key risks include the resolution of pending rate cases, the success of the Non-Utility Nuclear spin-off, volatility in energy commodity prices, and the impact of weather events (hurricanes, ice storms) on restoration costs and recovery mechanisms.
Important Facts for Investor Verification
- Storm Cost Recovery Status: Verify the final approval and issuance of securitization bonds for Entergy Texas ($545.9M) and the status of Act 55 financing filings for Entergy Louisiana and Entergy Gulf States Louisiana.
- Non-Utility Nuclear Spin-Off Timeline: Monitor the NYPSC and VPSB proceedings for the Enexus spin-off, specifically the resolution of financial strength and decommissioning funding issues.
- Decommissioning Trust Fund Impairments: Review the $85 million other-than-temporary impairment charge recorded in Q3 2009 for Non-Utility Nuclear trust funds and its impact on future earnings.
- Regulatory Rate Cases: Track the outcomes of the Entergy Arkansas general rate case (filed Sept 2009) and the Entergy Texas transition to competition withdrawal.
- Capital Expenditure Execution: Verify progress on major capital projects, specifically the Acadia Unit 2 acquisition and the White Bluff environmental compliance project, given the revised cost estimates.