Entergy Texas, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing is a combined Entergy report; the figures below are for Entergy Texas, Inc. and its subsidiaries unless stated otherwise. Financial statements are unaudited.
Business context and financial results
Entergy Texas is a regulated electric utility. Its results reflect retail and wholesale electricity sales, regulatory cost-recovery mechanisms, and ongoing investment in utility infrastructure, including the Montgomery County Power Station.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $372.2 million | $363.6 million | $711.5 million | $704.1 million |
| Operating income | $56.4 million | $36.0 million | $92.5 million | $52.8 million |
| Net income | $46.9 million | $38.9 million | $79.6 million | $60.3 million |
| Earnings applicable to common stock | $46.4 million | $38.9 million | $78.6 million | $60.3 million |
| Operating margin | 15.2% | 9.9% | 13.0% | 7.5% |
Operating margin is calculated as operating income divided by operating revenue. The filing does not provide a separate net-margin measure.
Cash flow, debt and liquidity
- Six-month cash flow: Operating cash flow was $170.5 million, up from $106.9 million. Investing cash outflow was $464.8 million versus $402.7 million, including $495.6 million of construction expenditures. Financing cash inflow was $323.6 million, compared with $297.6 million.
- Capital funding: Entergy Texas received a $175 million parent capital contribution in March 2020 and issued $175 million of 3.55% mortgage bonds. Cash and cash equivalents at June 30 were $42.2 million, versus $12.9 million at year-end 2019.
- Debt and leverage: Long-term debt was $2.071 billion, including $125 million currently maturing and $162 million of securitization bonds. Debt-to-capital was 50.3%, or 48.2% excluding securitization bonds; net debt-to-net capital excluding those bonds was 47.7%, down from 48.7% at year-end.
- Available facilities: The $150 million credit facility, expiring September 2024, had no cash borrowings and $1.3 million of letters of credit outstanding. A separate uncommitted facility had $10.2 million of letters of credit posted with MISO.
Changes versus prior periods
- Q2 revenue rose 2.4%; six-month revenue rose 1.1%. Retail electric revenue increased $15 million in the first half, while total billed retail energy sales were essentially flat at 8,780 GWh versus 8,741 GWh.
- Q2 net income increased $7.9 million; six-month net income increased $19.3 million. Management attributed the gains primarily to higher retail electric prices and other income, with the six-month increase also benefiting from a lower effective tax rate and higher volume/weather.
- The PUCT-approved transmission cost recovery factor implemented in January 2020 supports an approximately $19.4 million annual revenue requirement. Higher construction work in progress, including the Montgomery County project, increased allowance for equity funds used during construction.
- Higher depreciation from plant additions partially offset earnings improvements. In the first half, the effective income tax rate was negative 2.1%, compared with negative 98.3% in the prior-year period; tax-rate comparisons were affected by deferred-tax amortization and other book-tax differences.
Outlook, risks and contingencies
- Management expects COVID-19 to reduce 2020 sales, particularly in commercial and industrial classes, and to continue affecting customer payment patterns and operating cash flow. Residential usage and petrochemical-related industrial expansion partly offset weaker commercial demand.
- The allowance for doubtful accounts increased to $5.8 million from $0.5 million at December 31, 2019. Entergy Texas recorded a $4.1 million regulatory asset for COVID-related costs, but recovery remains subject to future PUCT review. The PUCT reinstated a residential disconnection moratorium through August 31, 2020, after quarter-end.
- A proposed distribution cost recovery factor would collect about $23.6 million annually, including $20.4 million incremental to the existing rider. Intervenors recommended $0.3 million to $4.1 million in disallowances; the parties had briefed contested issues and were awaiting a proposed decision.
- A fuel-cost reconciliation settlement was pending before the PUCT and included a $1.2 million disallowance. Separately, the PUCT approved a $25.5 million interim fuel refund in July 2020, to be implemented after quarter-end.
- The filing identifies uncertainty around pandemic duration, sales and collections, bad-debt expense, cost recovery, capital-market access, and project execution. Management reported no material COVID-related effect on major projects or capital plans across Entergy to that point.
Key investor verification points
- Track commercial and industrial demand, customer collections, and whether the elevated doubtful-account allowance proves sufficient.
- Verify PUCT decisions on the distribution cost recovery factor and fuel reconciliation, and confirm execution and customer impact of the $25.5 million refund.
- Monitor Montgomery County Power Station construction spending, timing, and financing needs.
- Assess whether operating cash flow and available credit remain adequate as capital expenditures and debt maturities continue.
- Review the basis and sustainability of the unusually low first-half effective tax rate and the recovery of COVID-related regulatory assets.