Business context and reporting period
Entergy Texas, Inc. (ETI), a wholly owned Entergy subsidiary, filed this report within Entergy’s combined Form 10-K. ETI provides regulated electric generation, transmission, and distribution service in parts of Texas. Figures below are for ETI and its subsidiaries—not Entergy Corporation on a consolidated basis. The fiscal year ended December 31, 2018; quarterly figures are unaudited.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $1.606 billion | $1.545 billion |
| Operating income | $206.4 million | $199.6 million |
| Operating margin | 12.9% | 12.9% |
| Income before income taxes | $136.0 million | $124.7 million |
| Income tax expense/(benefit) | ($26.2 million) | $48.5 million |
| Net income | $162.2 million | $76.2 million |
| Net margin | 10.1% | 4.9% |
| Operating cash flow | $331.8 million | $301.4 million |
| Capital expenditures | $452.0 million | $348.0 million |
| Cash and cash equivalents, year-end | $0.1 million | $115.5 million |
| Total assets, year-end | $4.400 billion | $4.280 billion |
| Total debt including current maturities | About $1.514 billion | About $1.587 billion |
| Debt-to-capital, excluding non-recourse securitization bonds | 46.4% | 49.4% |
Fourth-quarter 2018 revenue was $376.2 million and net income was $48.3 million, compared with $369.6 million and $4.6 million, respectively, in fourth-quarter 2017. The 2018 effective tax rate was negative 19.3%, versus 38.9% in 2017; the tax benefit substantially boosted reported earnings.
Material changes versus the prior period
- Full-year revenue increased about 4%, while operating income rose modestly and operating margin was essentially flat. Billed electricity usage increased 6% (1,162 GWh), supported by favorable weather and increased industrial usage.
- Net income more than doubled, primarily reflecting the change from income tax expense to an income tax benefit, including effects from the Tax Cuts and Jobs Act and amortization of excess deferred taxes. This makes the earnings increase less indicative of underlying operating growth.
- Operating cash flow increased, but capital expenditures also rose. Investing cash outflow exceeded operating cash flow, and year-end cash fell sharply to approximately $56,000.
- ETI’s reported total debt-to-capital ratio declined, although $500 million of first-mortgage bonds was due in February 2019. ETI refinanced that maturity after year-end with new bond issues.
Outlook, commentary, risks and unusual items
- Rates and tax refunds: The PUCT approved ETI’s 2018 base-rate settlement in December. It provides a $53.2 million base-rate increase, net of costs shifted from riders, and customer refunds/credits related to tax reform, including $242.5 million of protected and $185.2 million of unprotected excess deferred income taxes. Refund periods vary by customer group.
- Capital spending: Planned construction and capital investment is $945 million in 2019, $660 million in 2020, and $495 million in 2021. The largest cited generation project is the Montgomery County Power Station, estimated at $937 million including related transmission costs, with commercial operation targeted for mid-2021. Generation construction cost recovery is generally capped at $831 million, subject to stated exclusions.
- Financing: In January 2019, ETI issued $300 million of 4.00% bonds due 2029 and $400 million of 4.50% bonds due 2039. Proceeds were used to repay the $500 million 7.125% bonds due in February 2019 and for general corporate purposes. The company reported no cash borrowings under its $150 million credit facility at year-end.
- Additional projects and recovery: ETI’s AMI deployment has estimated costs of $132 million; the surcharge began in January 2018 and meter deployment was expected to begin in March 2019. The 2018 rate settlement also permits recovery over time of $24.5 million in remaining book value for retired Neches and Sabine 2 plants and $20.5 million of Hurricane Harvey costs.
- Regulatory and operating exposure: Fuel and purchased-power recovery remains subject to PUCT review and prudence audits. Weather and storms can affect demand, restoration spending, and liquidity; participation in MISO, environmental requirements, and nuclear-related supply arrangements also present risks. A prior fuel reconciliation resulted in a $6 million disallowance and customer refunds; further recovery matters remain subject to regulatory processes.
- Audits and controls: Deloitte & Touche issued an unqualified opinion on ETI’s 2018 financial statements. ETI management reported effective internal control over financial reporting; the auditor did not provide an internal-control attestation for ETI because it is a non-accelerated filer.
Important facts for investors to verify
- How much of 2018’s net-income increase reflects recurring operations versus tax benefits, deferred-tax amortization, and regulatory adjustments.
- Whether ETI sustains adequate liquidity after year-end cash declined to nearly zero, given planned capital spending and customer tax-credit flows.
- Actual final project costs, regulatory recovery, and schedule for Montgomery County, including the treatment of costs outside the stated cap.
- Progress and cost recovery for AMI, Hurricane Harvey deferrals, and retired-plant balances.
- Future PUCT decisions on fuel-cost recovery, the new transmission cost recovery factor, and other pending or periodic reviews.