Business context and reporting period
Entergy Texas, Inc. and subsidiaries filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company is a regulated electric utility serving customers in Texas. Figures below are for Entergy Texas unless identified otherwise.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $482.9 million | $455.1 million | $923.2 million | $761.3 million |
| Operating income | $53.2 million | $38.4 million | $96.2 million | $64.6 million |
| Net income | $18.6 million | $11.0 million | $31.8 million | $11.9 million |
| Operating margin | 11.0% | 8.4% | 10.4% | 8.5% |
| Net margin | 3.8% | 2.4% | 3.4% | 1.6% |
Margins are calculated as operating income or net income divided by operating revenue. For the six months, operating cash flow was $128.3 million, capital expenditures were $82.4 million, and financing used $89.6 million, including $40 million of common-stock dividends. Cash declined to $12.3 million from $46.5 million at year-end 2013.
At June 30, 2014, total long-term debt was $1.508 billion, including $200 million classified as currently maturing; long-term debt excluding current maturities was $1.308 billion. Debt to capital was 63.2%, or 51.0% excluding non-recourse securitization bonds; net debt to net capital excluding those bonds was 50.6%. A $150 million credit facility had no cash borrowings and $23.3 million of letters of credit outstanding. Current assets of $447.0 million were below current liabilities of $563.3 million.
Material changes versus prior comparable periods
- Six-month net income rose to $31.8 million from $11.9 million; operating income increased to $96.2 million from $64.6 million.
- Six-month billed retail electricity sales increased 13% to 8,515 GWh, led by industrial sales, which rose 22%; management cited favorable weather and increased petroleum-industry usage.
- Net revenue increased to $289.5 million from $265.1 million for the six months. Drivers included higher usage, the rate increase, and reduced purchased-power capacity expense following contract changes; offsets included lower transmission revenue, higher reserve-equalization expense, and weaker wholesale revenue.
- Higher fuel and purchased-power market prices and a shift from purchased power to higher-priced gas generation increased costs. Lower operation and maintenance expense partly offset this pressure.
- Debt financing included a May issuance of $135 million of 5.625% first-mortgage bonds due 2064, used partly to repay $150 million of 7.875% bonds due 2039.
Outlook, risks, and unusual items
- The PUCT approved a rate-case stipulation providing an $18.5 million annual base-rate increase effective April 1, 2014, with a 9.8% return on common equity. The filing reports no material fuel-cost disallowance in the reconciliation; special-circumstances recovery of purchased-power capacity costs was not allowed.
- Planned construction and capital investments are $215 million in 2014, $270 million in 2015, and $290 million in 2016, including transmission and distribution investment and potential generation needs.
- Entergy Texas received $48.6 million in System Agreement bandwidth-remedy payments during the first half of 2014. Related regulatory proceedings, potential recalculations, and the planned termination of System Agreement participation remain uncertainties.
- The company completed integration into the MISO regional transmission organization in December 2013. Market rules, transmission charges, and related regulatory outcomes could affect future costs and revenues.
- Management cited the usual utility risks, including fuel and power prices, weather and storms, regulation and cost recovery, capital-project execution, and environmental requirements. The filing states there were no material changes to the risk factors in the 2013 Form 10-K.
- Management concluded disclosure controls were effective and reported no quarterly change in internal control over financial reporting that materially affected, or was reasonably likely to materially affect, those controls.
Important facts for investors to verify
- Whether the $18.5 million rate increase and subsequent revenue recovery translate into sustained earnings and cash flow.
- How industrial sales growth, particularly petroleum-related usage, develops and how much reflects weather or other temporary factors.
- Debt maturities, refinancing needs, and the company’s limited cash balance relative to current liabilities.
- Outcomes and timing of MISO and System Agreement proceedings, including any further payments, refunds, or cost changes.
- Execution and funding of the 2014–2016 capital plan and the effect of fuel, purchased-power, and generation mix costs.