Business context and reporting period
Entergy Texas, Inc. (ETI) is a regulated electric utility serving parts of eastern Texas. This summary covers the fiscal year ended December 31, 2010; the 10-K is a combined filing for Entergy and its subsidiaries, so figures below are ETI-specific unless noted. The filing also presents selected fourth-quarter results.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $1,690.4 million | $1,563.8 million |
| Operating income | $190.6 million | $151.1 million |
| Net income | $66.2 million | $63.8 million |
| Operating cash flow | $43.1 million | $287.5 million |
| Capital expenditures | $162.8 million | $188.3 million |
| Cash and cash equivalents at year-end | $35.3 million | $200.7 million |
| Total assets | $3,783.9 million | $3,920.1 million |
Revenue increased about 8.1% and operating income about 26.1%; net income rose about 3.7%. Calculated operating margin increased to approximately 11.3% from 9.7%, while net margin edged down to approximately 3.9% from 4.1%.
At December 31, 2010, ETI reported $1,659.2 million of long-term debt, including approximately $807.1 million of securitization bonds, and $824.3 million of common equity. Debt to capital was 66.8%, or 50.8% excluding non-recourse securitization bonds; net debt to net capital excluding those bonds was 49.8%. Current assets were $376.7 million and current liabilities $323.8 million. ETI had an undrawn $100 million credit facility expiring in August 2012.
Fourth-quarter 2010 operating revenue was $368.3 million and net income was $0.3 million, versus $373.5 million and $14.2 million, respectively, in fourth-quarter 2009. Fourth-quarter operating income was $22.4 million, down from $39.9 million.
Material changes versus the prior comparable period
- Retail electricity usage increased 5% (777 GWh), reflecting 1.5% customer growth and more favorable weather; wholesale revenue also rose with new municipal and cooperative customer contracts.
- Operating cash flow fell sharply, primarily due to customer fuel refunds, timing of receivables and tax payments, and higher pension contributions. ETI made $87.8 million and $77 million in fuel refunds during 2010; a further approximately $72.7 million refund was scheduled to begin in February 2011.
- ETI completed repayment of the debt it had assumed in the 2007 jurisdictional separation by June 2010. The debt assumption agreement was terminated.
- The 2009 rate case settlement produced a $59 million base-rate increase effective August 15, 2010, and a further $9 million increase for bills beginning May 2, 2011. The settlement authorized a 10.125% return on equity.
Outlook, commentary, risks and unusual items
- Management planned capital investment of $188 million in 2011 and $448 million in 2012–2013. These are plans, not earnings guidance. The filing does not provide a clear ETI-specific earnings forecast.
- Management attributed the year’s higher earnings mainly to improved net revenue and lower interest expense. ETI’s operating cash flow was below capital spending in 2010, and year-end cash declined substantially.
- Storm restoration costs from Hurricanes Ike and Gustav were financed through $545.9 million of securitization bonds issued in 2009. The bonds are serviced through customer transition charges and are non-recourse to ETI, but are consolidated on its balance sheet.
- Regulatory exposure includes fuel-cost recovery and reconciliation, the pending final action on the additional 2010 fuel refund, and system-agreement cost allocation disputes. The PUCT’s additional $18.6 million allocation to Texas retail customers was recorded in 2009 and left costs unrecoverable between Texas and Louisiana jurisdictions.
- Entergy disclosed an ongoing U.S. Department of Justice civil investigation concerning certain generation procurement, dispatch and transmission practices, and potential reliability-standard violations under review with SERC. These matters concern Entergy system practices; the filing does not quantify a specific ETI loss.
- Environmental compliance costs, severe weather, fuel and purchased-power prices, pension funding, and access to capital are material risks. The 2010 filing also restated certain 2009 deferred-tax and regulatory balance-sheet amounts; it reported no effect on earnings or cash flows.
- Independent auditors issued unqualified opinions on ETI’s financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether the expected additional $9 million rate increase and fuel-cost refunds were implemented as scheduled, and the final outcome of fuel-cost reconciliation.
- Why operating cash flow fell to $43.1 million while capital spending was $162.8 million, and whether working-capital and tax-payment timing effects reverse.
- ETI’s debt and liquidity trajectory, including securitization-bond obligations, planned capital investment, and remaining financing needs.
- Whether the DOJ investigation, reliability review, or system-agreement proceedings lead to material costs, penalties, refunds, or operating changes.
- Whether reported fourth-quarter net income of $0.3 million reflects recurring operating trends or period-specific items.