Entergy Texas, Inc. — Q3 2018 Form 10-Q
Business context and period: Entergy Texas is a regulated electric utility serving customers in Texas. This summary focuses on its results for the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $477.2 million | $432.9 million | $1,229.7 million | $1,175.3 million |
| Operating income | $100.0 million | $79.0 million | $199.7 million | $165.4 million |
| Net income | $65.8 million | $39.6 million | $114.0 million | $71.5 million |
| Operating margin | 21.0% | 18.2% | 16.2% | 14.1% |
| Net margin | 13.8% | 9.1% | 9.3% | 6.1% |
- Revenue and earnings: Q3 revenue rose about 10% and net income about 66%; nine-month revenue increased about 5% and net income about 59%. Management attributed earnings growth to higher net revenue and a lower effective tax rate, partly offset by higher operating and maintenance costs; year-to-date depreciation also increased.
- Revenue drivers: Net revenue was $210.9 million in Q3 versus $181.5 million, and $525.7 million for nine months versus $474.8 million. Billed retail electricity usage increased 8% in Q3 and 7% year to date. Management cited favorable weather, commercial recovery from Hurricane Harvey-related outages in 2017, and growth in industrial customers. Lower purchased-power capacity costs and approved transmission/distribution rider rates also contributed.
- Cash flow: Nine-month operating cash flow was $197.7 million, compared with $193.0 million. Investing used $233.9 million versus $228.6 million, primarily reflecting greater construction spending, including on the Montgomery County Power Station. Financing used $58.8 million versus providing $30.9 million. Cash and cash equivalents were $20.5 million at September 30, 2018, down from $115.5 million at year-end 2017.
- Debt and liquidity: Debt was approximately $1.53 billion, comprising $500 million of current maturities and $1.03 billion of long-term debt. The debt-to-capital ratio was 52.6%, down from 55.7% at December 31, 2017; net debt to net capital, excluding securitization bonds, was 46.8%, essentially unchanged. The $150 million revolving credit facility had no cash borrowings; $1.3 million of letters of credit was outstanding. A separate $20 million letter of credit supported MISO obligations.
- Costs and tax: Q3 and nine-month effective tax rates were 20.4% and 21.1%, respectively, versus 35.9% and 34.6% in 2017. The filing cites tax-law changes and tax-accounting items, including a 2018 write-off of a stock-based-compensation deferred tax asset for the year-to-date rate.
Material changes, outlook, and risks
- Rate case: In October 2018, parties filed an unopposed settlement of Entergy Texas’s 2018 PUCT base rate case. It provides for a $53.2 million base-rate increase, a $25 million refund for the lower federal tax rate, and customer refunds of protected and unprotected excess deferred taxes. Interim rates took effect for service on or after October 17; the settlement remained subject to PUCT approval. The proposed return of excess deferred taxes included $242.5 million of protected amounts and $185.2 million of unprotected amounts, including tax gross-up.
- Investment plans: Entergy Texas preliminarily expected approximately $1.9 billion of capital investment in 2019–2021, including the Montgomery County Power Station and transmission and distribution improvements. The estimate may change with regulatory decisions, project conditions, costs, and access to capital.
- Regulatory and legal matters: The Fifth Circuit reversed a lower-court ruling concerning a $10.9 million bandwidth-remedy refund; Entergy Texas had already refunded the amount to customers in 2016 and filed a notice of nonsuit in its state-court appeal in October 2018. The filing also reports an estimated $2.2 million remediation liability for a 2016 mineral-oil release at a substation; final remediation requirements remained subject to TCEQ direction.
- Other risks: Results remain exposed to weather, fuel and purchased-power costs, rate and cost-recovery decisions, capital-project execution, environmental requirements, and other utility-regulatory risks. Management provided no specific earnings guidance in the supplied filing text.
Important facts for investors to verify
- Whether the PUCT approves the base-rate settlement and the final timing and amounts of rate changes and deferred-tax customer refunds.
- How the $500 million current debt maturity is refinanced or repaid, and the resulting effect on liquidity and interest costs.
- Whether operating cash flow supports the planned capital program and whether construction costs or schedules change.
- How much of the reported earnings improvement reflects recurring utility operations versus lower tax expense and weather-related factors.
- The final remediation requirements and cost for the Hartburg substation oil release, and any material developments in regulatory or legal proceedings.