Entergy Texas, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
Entergy Texas is a regulated electric utility serving customers in Texas. This summary focuses on Entergy Texas and its subsidiaries, not the consolidated Entergy Corporation results. The unaudited quarter and nine-month periods ended September 30, 2017 are compared with the corresponding 2016 periods.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $432.9 million | $442.1 million | $1,175.3 million | $1,233.3 million |
| Net revenue | $181.5 million | $203.4 million | $474.8 million | $498.6 million |
| Operating income | $79.0 million | $108.0 million | $165.6 million | $207.3 million |
| Net income | $39.6 million | $56.1 million | $71.5 million | $94.8 million |
| Operating cash flow | — | — | $193.0 million | $196.7 million |
Net income declined 29% for the quarter and 24% for the nine-month period. Operating margins were approximately 18.2% for Q3 and 14.1% for the nine months, versus 24.4% and 16.8%, respectively, in 2016. Lower net revenue was the principal pressure; higher depreciation and non-income taxes also weighed on earnings.
For the nine months, investing cash use was $228.6 million, including $243.2 million of construction expenditures; financing provided $30.9 million. Cash declined from $6.2 million at year-end 2016 to $1.5 million at September 30, 2017. Current assets were $335.6 million and current liabilities $390.1 million (current ratio approximately 0.86). Long-term debt was $1.452 billion, including $371.4 million of securitization bonds. Debt to capital excluding securitization bonds was 48.6%, down from 50.2% at year-end 2016.
Material changes versus the prior period
- Q3 net revenue fell $21.9 million; nine-month net revenue fell $23.8 million. Texas reported reduced wholesale capacity revenue after purchased-power agreements with Entergy Louisiana ended in August 2016, lower transmission revenue allocated by MISO, and higher purchased-power capacity costs.
- Retail rate riders partially offset these pressures: the transmission cost recovery factor (TCRF) increase took effect in March 2017, and the distribution cost recovery factor (DCRF) rates took effect in September 2017.
- Electric retail sales were down 3% in Q3 and 1% over nine months; industrial usage increased, while residential and commercial usage declined. Total billed sales fell 15% in Q3 and 19% over nine months, largely reflecting lower sales for resale.
Outlook, commentary, risks, and unusual items
- Hurricane Harvey: Restoration costs were estimated at $75–$105 million, with management expecting costs toward the lower end. The company is pursuing regulatory recovery, potentially through securitization or traditional rate recovery; approval, recoverable amounts, and timing remain uncertain. At quarter-end it had recorded approximately $13.1 million in regulatory assets and $25.9 million in construction work in progress for storm costs.
- Capital investment: Entergy Texas anticipated approximately $1.9 billion of capital investment for 2018–2020, subject to revision. The 993 MW Montgomery County combined-cycle project was estimated at $937 million, with PUCT-approved generation cost recovery capped at $831 million, subject to exclusions; related transmission and network costs are outside that cap. Commercial operation was estimated for mid-2021, subject to permits and approvals.
- Rates and proceedings: The PUCT approved the TCRF and DCRF rider changes. A fuel-cost reconciliation included a $6 million disallowance and a $21 million customer refund; a separate approved fuel refund of approximately $30.7 million was billed back to most customers during July–September 2017. A Texas Supreme Court review request in the 2011 rate case was denied, and Entergy Texas’s rehearing motion remained pending.
- AMI: Entergy Texas proposed advanced metering deployment, with nominal net operating cost savings to customers estimated at $33 million. An unopposed settlement was filed in October 2017; PUCT action remained pending.
- Management cited higher depreciation from additions to plant and higher ad valorem taxes as additional earnings headwinds. The filing reported no material changes to risk factors and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether Hurricane Harvey restoration costs are approved for recovery, and the final amount and timing of recovery.
- Whether the $831 million generation cost-recovery cap for Montgomery County adequately covers the project’s eligible costs, and how excluded transmission costs affect total investment.
- Whether approved rate riders and any future rate proceedings offset lower wholesale capacity and transmission revenues.
- Cash and working-capital needs given the low cash balance, current ratio below 1.0, capital spending, and reliance on the Entergy money pool.
- PUCT decisions on AMI and the pending rehearing motion in the 2011 rate case.