Entergy Texas, Inc. — 2017 Form 10-K Summary
Business context and period. Entergy Texas is a regulated electric utility serving parts of eastern Texas. This summary focuses on its standalone financial statements for the fiscal year ended December 31, 2017, compared with 2016. The filing is a combined Entergy report; parent-company and other subsidiary figures are not Entergy Texas results.
Financial performance and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $1.545 billion | $1.616 billion | Down 4.4% |
| Operating income | $199.4 million | $245.6 million | Down 18.8% |
| Net income | $76.2 million | $107.5 million | Down 29.2% |
| Operating margin | 12.9% | 15.2% | Down 2.3 percentage points |
| Operating cash flow | $301.4 million | $306.6 million | Down $5.2 million |
| Investing cash flow | $(383.2) million | $(330.2) million | Greater cash use |
| Financing cash flow | $191.1 million | $27.6 million | Up $163.5 million |
| Cash and cash equivalents, year-end | $115.5 million | $6.2 million | Up $109.3 million |
| Total assets, year-end | $4.280 billion | $4.033 billion | Up 6.1% |
Net revenue, defined in the filing as operating revenue less fuel, purchased power, and other regulatory charges, declined to $626.8 million from $644.2 million. Retail electric revenue benefited from transmission cost recovery factor (TCRF) rate changes, but those gains were outweighed principally by lower wholesale revenue after the termination of purchased-power agreements with Entergy Louisiana, lower transmission revenue allocated by MISO, and higher purchased-power capacity costs. Retail billed electric sales were 18,058 GWh, versus 18,182 GWh in 2016; industrial sales rose slightly while residential and commercial sales declined.
At year-end, current assets were $479.3 million and current liabilities were $373.0 million, a current ratio of approximately 1.28. Long-term debt was $1.587 billion, including $359.8 million of securitization bonds; the securitization bonds are non-recourse to Entergy Texas. Management reported a debt-to-capital ratio of 55.7%, or 49.4% excluding securitization bonds, and net debt to net capital of 46.9% excluding those bonds. The company reported compliance with its credit-facility debt covenant.
Material changes, outlook, and risks
- Profit and cash flow: Net income fell by $31.4 million. Operating cash flow was broadly stable, while investing cash outflows increased as construction spending continued. Financing cash flow included a $115 million parent contribution and $76.6 million net long-term debt issuance.
- Capital program: Planned construction and capital investment is $530 million in 2018, $820 million in 2019, and $605 million in 2020. The 993 MW Montgomery County combined-cycle plant is estimated to cost $937 million and is expected to enter service by mid-2021, subject to permits and approvals. The PUCT-approved settlement caps recovery of generation construction costs at $831 million, subject to specified exclusions; transmission and related costs are outside the cap.
- Grid investment: The PUCT approved Entergy Texas’s advanced metering infrastructure deployment in December 2017. Estimated implementation cost is $132 million; network deployment is expected to begin in 2018, with meter deployment expected to begin in 2019. The filing’s estimated customer benefit is approximately $33 million in nominal net operational cost savings.
- Tax reform: The December 2017 Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%, effective in 2018. Entergy Texas recorded a net regulatory liability for income taxes of $412.6 million. Management expects lower taxes collected through rates and the return of excess deferred taxes to reduce operating cash flow; the amount and timing depend on regulatory decisions. The PUCT directed utilities to record regulatory liabilities pending case-by-case rate review.
- Storm and fuel recovery: The filing attributes increased 2017 storm-related construction spending in part to Hurricane Harvey, but does not provide a clear Entergy Texas total for Harvey restoration costs or their recovery. Fuel refunds of approximately $30.5 million for May–October 2017 were being billed to most customers from January through March 2018, with a final decision pending.
- Regulatory and litigation exposure: Appeals concerning the PUCT’s 2016 bandwidth-remedy decision remained pending in federal and state courts; Fifth Circuit oral argument occurred in February 2018. Fuel-cost recovery is subject to reconciliation and prudence review. The filing also identifies environmental compliance, extreme weather, MISO costs, nuclear-related exposures elsewhere in the Entergy system, and access to capital as risks.
The filing does not provide a clear Entergy Texas earnings forecast. Deloitte issued an unqualified opinion on the company’s financial statements; Entergy Texas is a non-accelerated filer and the auditor did not provide an internal-control audit opinion for the subsidiary.
Important facts for investors to verify
- How the PUCT will implement the federal tax-rate reduction and return excess deferred taxes, and the resulting effects on rates and cash flow.
- Montgomery County project cost, schedule, cost-recovery treatment, and any costs excluded from the $831 million generation-cost cap.
- Actual 2018–2020 capital spending and funding needs, including the effect on debt and liquidity.
- Final outcomes of the pending fuel refund and bandwidth-remedy appeals, including any customer refunds or disallowances.
- Hurricane Harvey restoration costs, insurance proceeds, and regulatory recovery; the filing does not give a clear company-specific total.
- Whether load, especially industrial demand, and operating costs support a recovery in margins after the 2017 decline.