Entergy Texas, Inc. — Q3 2019 Form 10-Q Summary
Business context and period. This is a combined Entergy quarterly filing; the figures below are for Entergy Texas, Inc. and its subsidiaries unless noted. Entergy Texas is a regulated electric utility serving customers in Texas. The unaudited reporting period ended September 30, 2019; comparisons are with the third quarter and first nine months of 2018.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $442.9 million | $477.2 million | $1,146.9 million | $1,229.7 million |
| Operating income | $69.5 million | $100.0 million | $122.3 million | $199.7 million |
| Net income | $73.2 million | $65.8 million | $133.5 million | $114.0 million |
| Net margin (approx.) | 16.5% | 13.8% | 11.6% | 9.3% |
- Profit and margins: Net income rose about 11% in Q3 and 17% year to date, despite lower operating income. Lower income tax expense was a major offset: Entergy Texas reported income tax benefits of $13.5 million in Q3 and $43.4 million for nine months in 2019, versus tax expense of $16.9 million and $30.5 million, respectively, in 2018. Management attributed the low effective tax rates mainly to amortization of excess deferred income taxes and book-tax differences related to allowance for funds used during construction.
- Cash flow: Nine-month operating cash flow was $174.9 million, down from $197.7 million. Investing activities used $603.1 million, including $622.3 million of construction expenditures. Financing provided $520.4 million. Cash ended the period at $92.3 million, versus $0.1 million at year-end 2018.
- Debt and liquidity: Long-term debt was $1.938 billion, including $220.6 million of securitization bonds; no current maturities were reported at September 30. Debt-to-capital was 53.7% (50.7% excluding non-recourse securitization bonds); net debt-to-net capital excluding those bonds was 49.3%, compared with 46.4% at year-end 2018. Current assets of $418.1 million and current liabilities of $382.2 million imply a current ratio of approximately 1.09.
- Capital and equity: Total assets were $4.953 billion and equity was $1.677 billion at September 30. The company issued $35 million of cumulative 5.375% Series A preferred stock in September.
Material changes versus prior comparable period
- Revenue fell 7% in Q3 and 7% for the first nine months. Lower fuel, rider, and other pass-through revenues and customer returns of excess deferred taxes reduced reported revenue; these items generally have offsetting expense or tax effects and do not necessarily reduce net income.
- Retail rate increases—the base-rate increase effective October 2018—supported results. Q3 revenue also benefited from volume and weather, while nine-month volume/weather effects were positive overall. Nine-month billed retail electricity sales declined 2% to 14,388 GWh; total sales including resale declined 4% to 15,845 GWh.
- Operating income declined substantially, principally reflecting revenue mix and higher operating costs, including depreciation. Depreciation and amortization rose to $38.7 million in Q3 from $31.4 million and to $113.1 million year to date from $93.3 million. Other operation and maintenance expense also increased.
- Interest expense for the first nine months decreased to $54.6 million from $62.4 million, partly offsetting operating pressure. The company issued $700 million of mortgage bonds in January 2019 and $300 million in September, and repaid $500 million of 7.125% bonds at maturity in February.
Outlook, regulation, risks, and unusual items
- Investment outlook: Entergy Texas preliminarily anticipates approximately $1.8 billion of capital investment in 2020–2022, including the Montgomery County Power Station, transmission and distribution reliability projects, advanced meters, and system improvements. Estimates may change with regulatory requirements, project plans, market conditions, and access to capital.
- Rate and cost recovery: The company’s fuel-cost reconciliation filing for April 2016–March 2019 reported approximately $1.6 billion of eligible expenses and sought approval to carry forward an estimated $25.8 million under-recovery. The proceeding remained pending. The PUCT approved a distribution cost recovery rider of approximately $3.2 million annually. A proposed transmission cost recovery rider of approximately $19.4 million annually was pending; a second rehearing motion concerning an earlier rider order was also pending.
- Other regulatory matter: A settlement in principle for 2018 base-rate-case expenses includes a $1.4 million disallowance; it was filed with the PUCT for review in October 2019. The filing also notes regulatory review of the prudence of transmission investment costs.
- Construction and funding: Construction spending increased sharply, primarily due to the Montgomery County Power Station and transmission work. Financing cash flow included bond proceeds, an $87.5 million parent capital contribution, and the preferred-stock issuance.
- Risks and contingencies: Results depend on regulatory decisions and recovery of fuel, purchased-power, and capital costs, as well as construction execution, demand, weather, and financing. The filing reports no material change to the risk factors in the 2018 Form 10-K. Management stated that interim results should not be used as a basis for estimating full-year results because utility operations are seasonal.
Most important facts for investors to verify
- Whether the PUCT approves the pending fuel reconciliation, transmission rider, and base-rate-expense settlement, and what recovery or disallowance results.
- Whether the Montgomery County Power Station and other capital projects remain on budget and schedule, and how the planned $1.8 billion investment program will be funded.
- Whether the increase in net income is sustainable given lower operating income and the material contribution of tax benefits.
- How declining billed retail sales and the higher debt-to-capital ratio affect future cash generation and financing needs.
- The terms and cash-flow implications of the $35 million preferred stock, including its cumulative 5.375% dividend.