Entergy Texas, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Entergy Texas is a regulated electric utility serving customers in Texas. This summary focuses on Entergy Texas, Inc. and subsidiaries, not the other registrants included in the combined filing. The unaudited quarter and nine-month periods ended September 30, 2016 are compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $442.1 million | $498.2 million | $1,233.3 million | $1,312.4 million |
| Operating income | $108.0 million | $86.6 million | $207.3 million | $174.7 million |
| Net income | $56.1 million | $43.3 million | $94.8 million | $74.8 million |
| Operating cash flow | Not separately reported for the quarter | $196.7 million | $185.7 million |
- Revenue and net revenue: Operating revenue declined about 11% in Q3 and 6% year to date. Net revenue, which excludes fuel, purchased power and certain regulatory charges, rose to $203.4 million in Q3 from $196.3 million and to $498.6 million year to date from $493.5 million.
- Profit and operating performance: Net income increased approximately 30% in Q3 and 27% year to date. Management attributed the increases primarily to lower operation and maintenance costs and higher net revenue. Operating income also increased in both comparisons.
- Cash flow and investment: Nine-month operating cash flow was $196.7 million. Investing activities used $251.4 million, including $264.4 million of construction expenditures. Financing activities provided $53.8 million. Cash declined to $1.3 million at September 30, 2016 from $2.2 million at year-end 2015.
- Debt and capitalization: Long-term debt was $1.521 billion, including $441.7 million of securitization bonds, versus $1.452 billion at December 31, 2015. Debt to capital excluding non-recourse securitization bonds was 50.5%, up from 49.8%; the reported total debt-to-capital ratio was 59.0%, down from 60.2%.
- Liquidity: Entergy Texas had a $150 million credit facility expiring in August 2021, with no cash borrowings and $4.7 million of letters of credit outstanding. It also had $16.0 million of letters of credit under an uncommitted facility. Short-term cash was limited; operating cash generation and access to financing are important to funding plans.
Material changes versus the prior comparable period
- Despite lower reported revenue, net revenue increased modestly. The filing attributes this to lower purchased-power capacity costs following termination of the Entergy Louisiana–Entergy Texas purchased power agreements in August 2016, lower reserve equalization expense after System Agreement changes, and higher MISO transmission revenue. Lower wholesale capacity revenue partly offset these effects.
- Retail billed electricity sales increased 1% in Q3 and 2% year to date. For the nine months, industrial sales rose 8%, while residential sales fell 4%; management cited less favorable weather for residential demand.
- System Agreement termination in August 2016 and related power-purchase agreement terminations changed cost and revenue allocations. The effects are reflected in the reported period comparisons.
Outlook, commentary, risks and contingencies
- Capital plan: Entergy Texas anticipated approximately $1.6 billion of capital investments in 2017–2019, subject to revision based on regulatory approvals, project plans, costs, market conditions and access to capital.
- Proposed generation project: In October 2016, Entergy Texas applied to the PUCT for approval to build the 993-MW Montgomery County Power Station, estimated to cost $937 million. A PUCT decision was expected by October 2017; commercial operation was projected for mid-2021 if approvals and permits are obtained.
- Rates and customer refunds: The PUCT authorized a transmission cost recovery factor of approximately $10.5 million annually, effective with September 2016 bills. Entergy Texas requested an amended rider designed to collect approximately $29.5 million annually; the PUCT suspended the tariff change to March 2017, with possible further extension. Separately, an interim $68 million fuel and bandwidth-related customer refund was approved for payment over four months beginning with July 2016 bills.
- Regulatory and legal uncertainty: Appeals of the PUCT’s 2011 rate-case decision remained pending, including Entergy Texas’s petition to the Texas Supreme Court. A federal appeal concerning a $10.9 million bandwidth-remedy refund was also pending. The fuel-cost reconciliation for April 2013–March 2016 covered approximately $1.77 billion of eligible expenses; the company reported an estimated $19.3 million over-recovery, already being refunded as part of the interim refund.
- Management’s risk disclosures: The filing identifies regulatory rate recovery, fuel and purchased-power cost recovery, MISO market and transmission matters, weather and storms, capital project execution, environmental requirements, financing access and interest rates as risks. The company reported no material change to the risk factors in its 2015 Form 10-K.
- Guidance: No specific Entergy Texas earnings guidance is provided in the supplied filing text. Capital plans and project timing are estimates, not firm commitments.
Important facts for investors to verify
- Whether the PUCT approves the amended transmission cost recovery rider and the final fuel-cost reconciliation, and whether refund or disallowance amounts change.
- Progress and final cost, regulatory approval and schedule for the Montgomery County Power Station.
- Whether higher net income persists as System Agreement changes take effect and retail demand, especially residential usage, evolves.
- Funding needs and financing costs for the 2017–2019 capital plan, given the low cash balance and debt-to-capital measures.
- Final outcomes of the pending rate-case and bandwidth-remedy appeals and their potential impact on customer rates and recoveries.