Business context and reporting period
Entergy Texas, Inc. (ETI) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. ETI is a regulated electric utility serving customers in Texas. The combined filing covers Entergy and several subsidiaries; figures below are ETI-specific unless identified otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $494.9 million | $442.9 million | $1,206.5 million | $1,146.9 million |
| Operating income | $108.3 million | $69.5 million | $200.8 million | $122.3 million |
| Net income | $92.2 million | $73.2 million | $171.7 million | $133.5 million |
| Earnings applicable to common stock | $91.7 million | $73.1 million | $170.3 million | $133.4 million |
| Operating margin | 21.9% | 15.7% | 16.6% | 10.7% |
Revenue rose 12% in the quarter and 5% year to date; net income increased approximately 26% and 29%, respectively. Higher retail electric prices and other income, lower operating and property-tax expenses, and favorable income-tax effects supported earnings. Quarter and year-to-date retail billed electric sales volumes declined 3% and 1%, respectively. Revenue also reflects fuel and rider items that generally have offsetting expenses and do not significantly affect net income.
- Cash flow: Nine-month operating cash flow was $294.3 million, versus $174.9 million in 2019. Construction expenditures were $703.7 million; operating cash flow less construction expenditures was approximately negative $409.4 million.
- Liquidity: Cash and cash equivalents were $34,000 at September 30, 2020, versus $12.9 million at year-end 2019. Current assets were $349.4 million and current liabilities $835.7 million, a current ratio of approximately 0.42. ETI had a $150 million revolving credit facility with no cash borrowings and $1.3 million of letters of credit outstanding; separate MISO letters of credit totaled $27.2 million.
- Debt: Long-term debt was $1.85 billion, with $200 million of current maturities. Debt to capital was 48.9%, or 47.2% excluding non-recourse securitization bonds; net debt to net capital excluding those bonds was also 47.2%. ETI reported $54 million of short-term borrowings in the filing’s summary of subsidiary borrowings.
- Assets and equity: Total assets were $5.77 billion and total equity was $2.14 billion at September 30, 2020.
Material changes versus the prior comparable period
- Q3 revenue increased $52.0 million, while net income increased $18.9 million. Nine-month revenue increased $59.5 million and net income increased $38.2 million.
- Higher retail electric prices, including the transmission cost recovery factor rider effective January 2020, contributed to revenue and earnings. Lower operating and property-tax expenses and higher allowance for equity funds used during construction also supported results.
- Commercial and industrial demand remained pressured by COVID-19. In the third quarter, ETI retail billed volumes fell 3%; industrial and commercial volumes declined 7% and 7%, respectively. Residential volume increased 4% in the quarter.
- Depreciation increased with additions to plant in service. Interest expense was slightly higher for the quarter and broadly flat year to date. The reported effective income tax rates were 10.9% for Q3 2020 and 5.3% for the first nine months of 2020; the comparable 2019 rates were negative, partly reflecting tax and construction-related items.
Outlook, commentary, risks, contingencies, and unusual items
- COVID-19: Management expected 2020 sales declines, particularly among commercial and industrial customers, and continued adverse effects on payment patterns and operating cash flow. ETI recorded an $8.7 million regulatory asset for COVID-related costs, subject to future regulatory review and recovery approval. ETI had not resumed customer disconnections as of the filing discussion.
- Hurricane Laura: ETI estimated restoration costs at $230 million to $260 million. At September 30, it had recorded approximately $40 million of regulatory assets and $190 million of construction work in progress for incurred restoration work. Cost recovery and its timing remain uncertain and subject to regulatory review.
- Hurricane Delta, after quarter-end: October restoration costs for ETI were estimated at $40 million to $50 million; recovery or financing is subject to regulatory review. The filing also discusses Hurricane Zeta’s impacts elsewhere in Entergy’s service area.
- Rates and cost recovery: In October 2020, the PUCT approved a $16.3 million incremental annual distribution cost recovery factor increase. ETI filed for further distribution and transmission rider increases in October. It also filed to establish a generation cost recovery rider for Montgomery County Power Station; the filing anticipated administrative approval in December if unopposed. A $25.5 million interim fuel refund was approved and began in August 2020.
- Capital investment: ETI preliminarily expected approximately $2.2 billion of capital investments in 2021–2023, including the Montgomery County Power Station, the proposed Liberty County Solar Facility, and transmission and distribution system investments. Estimates may change with regulatory requirements, project plans, market conditions, and access to capital.
- Subsequent financing: In October 2020, ETI issued $600 million of 1.75% mortgage bonds due 2031, partly to refinance existing debt and for general corporate purposes.
- Other risks: ETI remains exposed to regulatory decisions on rates and storm recovery, customer collections and bad debt, weather events, construction execution, and capital-market access. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether regulators authorize recovery of Hurricane Laura and Delta costs, and the amount and timing of any recovery or securitization.
- Whether COVID-related deferred costs and increased customer credit losses are ultimately recoverable, and how collections and sales volumes develop.
- How the approved and proposed PUCT riders affect future revenue and customer bills, and the status of the Montgomery County generation rider and Liberty County Solar application.
- How ETI funds its 2021–2023 capital plan while maintaining liquidity and its debt-to-capital position, including the use of proceeds from the October bond issuance.
- Whether reported earnings growth is sustained after considering tax effects, rider and fuel-recovery items, and weather- and pandemic-related demand changes.