Entergy Texas, Inc. — Q2 2013 Form 10-Q Summary
Business context and reporting period
Entergy Texas, Inc. (ETI) is an electric utility serving customers in Texas. This summary focuses on ETI’s results for the three and six months ended June 30, 2013, compared with the same periods in 2012. The filing is a combined Entergy report; the parent-company results are not ETI’s standalone results.
Financial and operating metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $455.1 million | $358.1 million | $761.3 million | $685.0 million |
| Operating income | $38.4 million | $49.0 million | $64.6 million | $74.0 million |
| Net income | $11.0 million | $16.2 million | $11.9 million | $17.9 million |
| Net cash from operating activities | Not presented separately | Not presented separately | $93.5 million | $95.4 million |
- ETI’s net revenue, defined as operating revenue less fuel, purchased power, and other regulatory charges, was $144.3 million for Q2, up from $142.5 million; for the first half it was $265.1 million, versus $259.9 million.
- For the first half, cash used in investing activities was $101.9 million, including $92.1 million of construction expenditures. Financing activities used $33.3 million. Cash and cash equivalents were $18.6 million at June 30, 2013, down from $60.2 million at year-end 2012.
- At June 30, total assets were $3.95 billion and long-term debt was $1.58 billion, including $657.2 million of securitization bonds. Debt-to-capital was 64.7%; excluding non-recourse securitization bonds it was 51.7%, and net debt-to-net capital excluding those bonds was 51.2%.
- ETI had a $150 million credit facility with no borrowings outstanding at June 30. Its FERC-authorized short-term borrowing limit was $200 million through October 2013.
- Billed electricity sales were down 3% in Q2 and 1% for the first half. Retail sales were down 3% in both periods; Q2’s decline included milder weather.
Changes versus the prior comparable period
- Revenue rose 27% in Q2 and 11% in the first half. Management attributed the increase mainly to higher wholesale sales to affiliated customers and prices, plus the $28 million annual base-rate increase effective July 2012.
- Despite higher net revenue, net income fell by $5.3 million in Q2 and $6.1 million for the first half. Higher operation and maintenance and depreciation expenses were the principal pressures.
- Purchased-power capacity costs reduced net revenue by $4.0 million in Q2 and $8.4 million for the first half, reflecting additional capacity purchases and higher prices. Fuel and purchased-power expenses also increased with market prices and demand.
- Operating cash flow was nearly flat year over year. Cash used in investing increased, primarily due to money-pool activity and higher transmission construction spending; financing cash use decreased mainly because ETI paid no common-stock dividend in the first half of 2013, compared with $45 million in 2012.
Outlook, commentary, risks and unusual items
- Rates and recovery: ETI’s July 2012 base-rate increase followed a PUCT rate order. A new PUCT rule adopted in May 2013 permits a purchased-power capacity rider, subject to an adjustment for load growth, or ETI may seek recovery through a full base-rate case. ETI withdrew its earlier special-circumstances capacity-cost case without prejudice.
- Transmission transaction and MISO: Entergy’s proposed transmission-business spin-off and merger with ITC remained subject to approvals and conditions. Texas customers were offered $67.0 million in wholesale discounts and retail bill credits over an initial five-year period, plus $13.1 million in additional bill credits related to a forward test year. On July 8, 2013, PUCT administrative law judges recommended denial of the joint application, while also recommending conditions if it were approved. The PUCT’s final decision was pending at the filing date. ETI’s participation in the System Agreement and potential early exit were also under review.
- Customer litigation: A Texas power-price lawsuit involving a purported class of former Entergy Gulf States, Inc. retail customers remained on appeal. The district-court proceedings were stayed pending the appellate decision; the filing does not state a clear estimate of potential exposure.
- Market, operating and regulatory risks: The filing identifies uncertainty around rate recovery, purchased-power and fuel prices, weather and storms, regulation, and the proposed transmission transaction. Entergy states interim results are seasonal, with peak periods in the third quarter, and should not be used alone to estimate full-year results. No specific ETI full-year earnings guidance is provided in the supplied filing text.
Most important facts for investors to verify
- The PUCT’s final decision on the transmission spin-off/ITC merger, associated customer protections, and the effect on ETI’s transmission costs and MISO plans.
- Whether ETI can obtain timely recovery of purchased-power capacity costs under the new rider or a future rate case, and the resulting customer-rate and earnings effects.
- Whether higher operation, maintenance, depreciation, and purchased-power costs continue to outpace growth in net revenue.
- ETI’s liquidity and financing needs given its $18.6 million cash balance, debt profile, and planned construction spending.
- The status and potential financial exposure of the Texas power-price class-action appeal; the filing text does not provide a clear quantified liability.