Entergy Texas, Inc. — Q2 2019 Form 10-Q Summary
Business context and period. Entergy Texas is a regulated electric utility serving customers in Texas. This summary focuses on its results for the three and six months ended June 30, 2019, compared with the same periods in 2018. The filing is a combined report for Entergy and several subsidiaries; figures below are for Entergy Texas unless otherwise noted.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $363.6 million | $403.5 million | $704.1 million | $752.4 million |
| Operating income | $36.0 million | $58.6 million | $52.8 million | $99.7 million |
| Net income | $38.9 million | $30.8 million | $60.3 million | $48.1 million |
| Operating margin | 9.9% | 14.5% | 7.5% | 13.3% |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $106.9 million | $90.5 million |
Net income rose despite lower operating income, reflecting higher other income, lower interest expense, and tax effects. The effective income tax rates were unusually negative: (43.5%) for Q2 and (98.3%) for the first six months of 2019. The filing attributes the variance from the 21% federal statutory rate primarily to amortization of excess deferred income taxes and book-tax differences involving utility plant and construction financing.
- Sales and revenue: Six-month billed retail electricity sales declined 3% to 8,741 GWh. Revenue fell 6% year over year, partly because fuel and other rider revenues generally offset related costs and because excess deferred income taxes were returned to customers. Those tax-related revenue reductions were offset by lower income tax expense and did not affect net income.
- Cash, investment, and financing: Cash was $1.8 million at June 30, 2019, versus $56,000 at December 31, 2018. Operating cash flow was $106.9 million; construction expenditures were $424.2 million, resulting in substantial investment cash needs. Financing included $691.8 million of long-term debt proceeds, $541.4 million of debt repayments, and a $146.3 million increase in the amount payable to the Entergy money pool.
- Debt and liquidity: Long-term debt was $1.665 billion at June 30, 2019, up from $1.014 billion at year-end 2018; the $500 million current debt maturity shown at year-end was no longer current. Debt to capital was 53.0%, or 49.1% excluding non-recourse securitization bonds; net debt to net capital excluding those bonds was 49.0%. Entergy Texas had a $150 million credit facility with no borrowings and $1.3 million of letters of credit outstanding, plus $29.5 million of letters of credit under an uncommitted MISO facility.
Material changes and developments
- Q2 net income increased $8.1 million and six-month net income increased $12.1 million year over year. Management cited higher retail electric prices, higher other income, and lower interest expense; the six-month comparison also benefited from a lower effective tax rate.
- Operating income declined in both comparisons. Depreciation and amortization increased, partly due to new rates from the 2018 base-rate settlement and additions to plant. Six-month other operation and maintenance costs also rose.
- Entergy Texas issued $300 million of 4.0% mortgage bonds and $400 million of 4.5% mortgage bonds in January 2019, and repaid $500 million of 7.125% bonds at maturity in February. The company reported a net $200 million increase in mortgage bonds during 2019.
- Construction outlays rose sharply, principally for the Montgomery County Power Station and transmission work. Updated planned capital investment is $945 million in 2019, $675 million in 2020, and $655 million in 2021.
Outlook, regulation, and risks
- Rates: A distribution cost recovery factor rider was approved at interim rates effective June 2019, designed to collect approximately $3.2 million annually. In July 2019, the PUCT approved a transmission cost recovery factor request designed to collect approximately $2.7 million annually; the prudence of the investments remains subject to review in the next rate case.
- Rate-case costs: Entergy Texas sought $7.2 million for expenses related to its 2018 base-rate case. Other parties recommended disallowing $3.2 million to $4.2 million; a hearing was scheduled for September 2019.
- Investment and execution: The capital program includes the Montgomery County Power Station and reliability, transmission, distribution, metering, software, and security projects. The filing provides capital plans but no specific earnings guidance for Entergy Texas.
- Key risks: Results remain exposed to regulatory decisions and cost-recovery outcomes, customer usage and weather, construction costs and schedules, financing needs, and broader utility risks including severe weather and environmental regulation. The filing states that no material changes were made to the risk factors in the 2018 Form 10-K.
Most important facts for investors to verify
- Whether the PUCT’s interim distribution rider and approved transmission rider become permanent, and how the next rate case addresses investment prudence and rate recovery.
- The final treatment of the $7.2 million rate-case expense request and any disallowances.
- Progress, remaining costs, and expected timing for the Montgomery County Power Station and the broader 2019–2021 capital plan.
- How Entergy Texas funds construction needs given very low reported cash, increased long-term debt, and its reliance on money-pool financing and available credit facilities.
- Whether lower electricity usage, tax-related regulatory adjustments, or unusual effective tax rates materially affect future reported revenue and earnings.