Business context and reporting period
This is Entergy Texas, Inc. and Subsidiaries’ portion of Entergy Corporation’s combined Form 10-K, covering the fiscal year ended December 31, 2012. Entergy Texas is a regulated electric utility serving parts of eastern Texas; the filing reports about 417,000 electric customers. The “2012 Q4” label should not be read as quarterly-only results: the financial figures below are for the full year unless stated otherwise.
Financial results and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenue | $1,581.5 million | $1,757.2 million | Down 10.0% |
| Operating income | $169.8 million | $215.0 million | Down 21.0% |
| Net income | $42.0 million | $80.8 million | Down 48.1% |
| Operating margin | 10.7% | 12.2% | Lower |
| Net margin | 2.7% | 4.6% | Lower |
| Net cash from operating activities | $271.1 million | $238.8 million | Up $32.2 million |
| Net cash used in investing activities | $128.9 million | $219.8 million | Use decreased |
| Net cash from (used in) financing activities | $(147.2) million | $10.9 million | Lower |
| Cash and cash equivalents at year-end | $60.2 million | $65.3 million | Down $5.1 million |
| Total assets at year-end | $4,025.8 million | $4,059.0 million | Down $33.2 million |
At December 31, 2012, current assets were $480.1 million and current liabilities were $331.0 million, a current ratio of approximately 1.45. Long-term debt was $1,617.8 million, including $690.6 million of securitization bonds. Debt to capital was 65.4%, or 52.1% excluding non-recourse securitization bonds; net debt to net capital excluding those bonds was 50.4%.
Electric sales to retail customers were 16,344 GWh, down 3.1% from 2011. The filing attributes weaker usage in part to milder weather. The 2012 effective income tax rate was 44.1%, compared with 38.0% in 2011.
Material changes versus the prior period
- Lower revenue and net income reflected reduced fuel cost recovery revenues, lower usage, and higher purchased-power capacity costs. Rate increases partially offset these pressures.
- The PUCT’s September 2012 rate-case order approved a $28 million annual base-rate increase effective July 2012, below Entergy Texas’s revised $105 million request. The order set a 9.80% authorized return on common equity.
- Entergy Texas recorded an approximately $24 million charge in the third quarter after the PUCT order made recovery of certain Hurricane Rita-related assets, financially based incentive compensation, and fuel-reconciliation amounts no longer probable under its accounting assessment.
- Operating cash flow improved year over year, while financing cash flow turned negative, including $87.2 million of common dividends paid.
Outlook, risks, contingencies and unusual items
- Rates and customer refunds: In January 2013, the PUCT approved an $84 million fuel-cost refund, including interest and additional over-recoveries, to most customers over three months beginning January 2013. The PUCT also approved customer credits tied to a System Agreement proceeding; credits began in October 2012. Entergy Texas appealed parts of the 2012 rate order, as did other parties; the substantive rehearing requests were denied and appeals were pending.
- Transmission and MISO: The PUCT approved transfer of transmission operational control to MISO, subject to conditions. Entergy targeted MISO integration in December 2013. In February 2013, Entergy Texas sought a transmission cost recovery rider for anticipated 2014 ITC transmission charges and MISO administrative costs. The parent’s proposed transmission spin-off and merger with ITC remained subject to regulatory and other closing conditions.
- Investment plans: Entergy Texas projected $201 million of construction and capital investment in 2013 and $434 million for 2014–2015. The filing says these estimates may change and do not reflect potential reductions if the ITC transaction closes.
- Litigation: A Texas power-pricing class action alleges at least $57 million in customer overcharges; plaintiffs’ experts estimated damages of $153 million to $972 million under different scenarios. Class certification was appealed, and trial-court proceedings were stayed pending the appeal. Entergy disputes the claims.
- Other risks: Results remain exposed to regulatory cost recovery, weather and storm restoration, fuel and purchased-power prices, MISO integration, environmental compliance, nuclear-related costs, pension funding, and access to capital. The filing does not provide a clear estimate of future costs for NRC post-Fukushima requirements.
Important facts for investors to verify
- Whether the PUCT rate-order appeal changes the $24 million charge or future cost recovery.
- Whether MISO integration and the ITC transmission transaction proceed on schedule, and how resulting transmission costs affect Entergy Texas rates and capital spending.
- The timing and customer-bill impact of the $84 million fuel refund and other approved credits.
- The status and potential exposure of the Texas power-pricing class action, including any updated damages estimates.
- Whether operating cash flow and liquidity remain adequate alongside projected capital investment, debt service, and dividends.
Deloitte & Touche issued an unqualified audit opinion on the financial statements and internal control over financial reporting as of December 31, 2012.