Entergy Texas, Inc. — Q2 2016 Form 10-Q
Business context and period. Entergy Texas is a regulated electric utility serving customers in Texas. This summary focuses on Entergy Texas and its subsidiaries, rather than Entergy Corporation’s consolidated results. The filing covers the unaudited three and six months ended June 30, 2016, compared with the same periods in 2015.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $412.9 million | $402.9 million | $791.2 million | $814.1 million |
| Operating income | $58.0 million | $44.1 million | $99.3 million | $88.1 million |
| Net income | $24.1 million | $14.9 million | $38.6 million | $31.5 million |
| Operating margin | 14.1% | 10.9% | 12.6% | 10.8% |
| Operating cash flow | Not separately provided | Not separately provided | $172.2 million | $131.8 million |
Operating margins are approximate calculations from reported revenue and operating income. No separate gross margin measure is provided.
- Revenue and earnings: Second-quarter revenue rose about 2.5%, and net income increased about $9.2 million. For the first six months, revenue declined about 2.8%, while net income increased about $7.1 million.
- Drivers: Q2 net revenue rose $3.5 million to $157.0 million, mainly from higher billed usage and lower reserve-equalization expense. First-half net revenue decreased $1.9 million to $295.2 million, with weather-related effects partly offset by lower reserve-equalization expense. First-half retail electricity volume increased 2%; industrial usage rose 13%, while residential and commercial usage declined.
- Expenses: Lower fossil-generation and other operating and maintenance costs supported earnings. First-half fuel expense increased, while purchased-power expense decreased.
- Cash and investment: First-half investing cash outflow was $179.5 million, including $185.9 million of construction expenditures. Cash increased to $55.9 million from $2.2 million at year-end 2015.
- Liquidity and debt: At June 30, current assets were $371.9 million and current liabilities were $389.0 million. Long-term debt was $1.540 billion, including $460.7 million of securitization bonds. Debt to capital was 60.6%; excluding non-recourse securitization bonds, it was 51.9%, and net debt to net capital on that basis was 50.6%. The company had a $150 million credit facility with no cash borrowings and $1.3 million of letters of credit outstanding.
Material changes, outlook, and risks
- Entergy Texas issued $125 million of 2.55% first mortgage bonds due 2021 in March 2016. The filing’s planned construction and capital investment totals are $305 million for 2016, $345 million for 2017, and $565 million for 2018; these are plans, not earnings guidance.
- In July 2016, the PUCT approved an interim customer refund of approximately $68 million, to be paid to most customers over four months beginning with July bills. The refund includes fuel-cost overcollections and disputed bandwidth-remedy payments. The company also filed to reconcile approximately $1.77 billion of eligible fuel and purchased-power costs for April 2013–March 2016; it estimated a $19.3 million over-recovery, which is being refunded as part of the interim refund. Final reconciliation remained pending.
- The PUCT’s July 2016 order on the transmission cost recovery factor resulted in an annual allowance of approximately $10.5 million. The regulator also required tracking of spare transmission autotransformer transfers for review in a future rate case.
- Entergy Texas is appealing the PUCT’s decision requiring a $10.9 million refund of certain bandwidth-remedy payments; the appeals were pending and did not stay the order. The filing also identifies regulatory-rate and cost-recovery proceedings, fuel-cost reconciliation, MISO-related matters, and the scheduled termination of the System Agreement on August 31, 2016 as matters to monitor.
- Management cited weather and usage variability, recovery of fuel and purchased-power costs, regulatory outcomes, construction spending, and access to financing among relevant uncertainties. No specific Entergy Texas earnings forecast is provided.
Important facts for investors to verify
- Whether the $68 million customer refund and the later fuel-cost reconciliation receive final regulatory treatment as expected.
- The outcome of the pending appeals concerning bandwidth-remedy refunds and any resulting payment or rate effects.
- Whether planned capital spending, including the Lewis Creek self-build option, receives required approvals and remains on schedule and budget.
- How the System Agreement termination and MISO-related costs affect future purchased-power costs, rates, and operating results.
- Whether cash generation and financing remain adequate as capital expenditures and debt levels rise.