ENTERGY TEXAS, INC. quarterly report, Q2 FY2015

Business context and reporting period

Entergy Texas, Inc. is a regulated electric utility serving customers in Texas. This summary covers the unaudited quarter and six months ended June 30, 2015, compared with the same 2014 periods. The filing is a combined Entergy report; the figures below are specific to Entergy Texas unless noted otherwise.

Financial performance and liquidity

• Quarterly revenue fell about 17% and net income about 20%; six-month revenue declined about 12%, while net income was nearly flat.
• For the six months, operating cash flow was $131.8 million, up from $128.3 million. Investing used $138.0 million, including $133.3 million of construction expenditures; financing provided $10.4 million. Cash ended at $34.7 million, versus $30.4 million at year-end 2014. The filing does not provide a standalone quarterly cash-flow statement.
• At June 30, total assets were $3.94 billion, long-term debt $1.49 billion (including $530.4 million of securitization bonds), and common equity $923.3 million. No current portion of long-term debt was reported, versus $200 million at year-end 2014.
• Debt to capital was 61.8%, or 51.1% excluding non-recourse securitization bonds; net debt to net capital excluding those bonds was 50.1%, compared with 49.7% at year-end. A $150 million credit facility had no cash borrowings; $1.3 million of letters of credit was outstanding under it. A further $14.5 million of letters of credit was outstanding under an uncommitted facility.

Material changes versus the prior comparable period

• Quarterly net revenue was slightly lower, as a $4.1 million fuel-recovery decrease and $3.2 million increase in purchased-power capacity costs offset favorable volume/weather and transmission revenue. For the six months, net revenue increased $7.6 million, supported by volume/weather, prior-year base-rate increases and transmission revenue, partly offset by higher purchased-power capacity costs.
• Retail billed electricity sales fell 1% in Q2 and 3% for the six months. Six-month industrial sales decreased 7%, which management attributed primarily to extended outages at large refinery customers, partly offset by new transportation-sector customers.
• Other operating and maintenance expense rose, including higher fossil-generation costs associated with Lewis Creek dam repairs and plant outage work, and higher MISO-allocated transmission costs. Six-month taxes other than income taxes also increased.
• Six-month construction spending increased to $133.3 million from $82.4 million. The increase reflected broader transmission and generation project work, including Lewis Creek repairs.

Outlook, commentary, risks and unusual items

• The filing gives no Entergy Texas-specific earnings or revenue guidance. Management cautions that utility results are seasonal and interim results should not be used as a full-year estimate.
• Entergy Texas issued $250 million of 5.15% first-mortgage bonds due 2045 in May; proceeds repaid $200 million of 3.60% bonds due June 2015 and funded general corporate purposes.
• Entergy Texas withdrew its $75 million rate-case request and its application to acquire a 495 MW Union Power Station block after PUCT staff and other parties opposed recovery of the acquisition costs. The PUCT dismissed the certificate case on July 30, 2015. The block was proposed for acquisition by Entergy New Orleans, subject to approvals and other closing conditions; the broader Union transaction remained subject to regulatory approvals.
• In the fuel-refund proceeding, the PUCT had approved an approximately $24.6 million interim refund, completed in October 2014. In July 2015, parties sought an additional $10.9 million refund tied to 2006 bandwidth remedy payments; the proceeding remained pending.
• Environmental and regulatory exposure includes a $0.6 million asset-retirement obligation recorded for coal-combustion residual management. The filing also identifies potential effects from MISO charges and future environmental rules; certain compliance costs and outcomes are not yet determined.
• Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Entergy stated that there had been no material changes to the risk factors in its 2014 Form 10-K.

Important facts for investors to verify

• Whether revenue and earnings pressure from lower industrial usage and the changing sales mix persists, and how rate recovery affects margins.
• The final resolution of the withdrawn PUCT rate case, the additional $10.9 million refund claim, and approvals and cost recovery for the Union Power transaction.
• Construction spending, Lewis Creek repair costs, and the effect of MISO transmission and purchased-power costs on cash flow and earnings.
• Debt maturities, liquidity needs, and the effect of the 2015 bond issuance on interest expense and leverage.
• Environmental compliance obligations and potential costs, including coal-combustion residual requirements.