Entergy Texas, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Entergy Texas is an integrated electric utility serving customers in Texas. The filing is a combined report, and the figures below are for Entergy Texas unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Electric operating revenue | $378.3 million | $411.2 million |
| Net revenue | $138.2 million | $143.7 million |
| Operating income | $41.3 million | $44.0 million |
| Net income | $14.6 million | $16.6 million |
| Operating cash flow | $75.7 million | $66.3 million |
| Capital expenditures | $91.8 million | $66.4 million |
| Cash at March 31 | $66.3 million | $2.2 million at Dec. 31, 2015 |
| Long-term debt | $1.553 billion | $1.452 billion at Dec. 31, 2015 |
| Debt to capital ratio | 61.4%; 52.5% excluding securitization bonds | 60.2%; 49.8% excluding securitization bonds |
| Net debt to net capital, excluding securitization bonds | 50.9% | 49.8% |
Operating margin was approximately 10.9%, compared with 10.7% a year earlier; net margin was approximately 3.8%, compared with 4.0%. The company had no cash borrowings under its $150 million credit facility and had $1.3 million of letters of credit outstanding. A separate uncommitted MISO letter-of-credit facility had $5.6 million outstanding.
Changes versus the prior comparable period
- Revenue fell about 8% and net revenue declined $5.5 million. Management attributed the $10.3 million adverse volume/weather effect mainly to lower residential and commercial usage amid less favorable weather; higher industrial use, particularly by petroleum refiners, partly offset the decline.
- Reserve-equalization revenue improved $5.3 million, primarily reflecting changes in the Entergy System generation mix, a new power purchase agreement, and Entergy Mississippi’s departure from the System Agreement.
- Net income declined about 12%, primarily because of lower net revenue, partly offset by lower operation and maintenance expense.
- Operating cash flow increased, while investing outflow grew with higher transmission construction spending. Financing cash flow turned positive, principally reflecting a March issuance of $125 million of 2.55% first mortgage bonds.
Outlook, risks, and contingencies
- Customer refunds: In April 2016, Entergy Texas sought approval to refund approximately $56.2 million, largely over four months beginning in June. The amount includes $41.8 million of fuel-cost over-collections and bandwidth-remedy payments of $10.9 million and $3.5 million. The company appealed the PUCT’s order requiring the $10.9 million refund; the appeals do not stay the order.
- Rates and regulatory proceedings: The company requested a $13 million transmission cost recovery factor increase. An administrative law judge recommended disallowing about $2 million; the PUCT deferred final consideration and requested further evidence. Interim rates were granted effective April 14, 2016, to apply when a final order setting rates is issued. In a separate 2011 rate-case appeal, a Texas appeals court affirmed the lower court’s decision; Entergy Texas planned to petition the Texas Supreme Court.
- System Agreement and MISO: Entergy Texas’s participation in the System Agreement was scheduled to end August 31, 2016, as part of the agreement’s termination. The filing identifies regulatory, market-rule, transmission-cost-allocation, and operating uncertainties associated with the move to MISO.
- Operating costs and load: Entergy states that a nuclear performance improvement plan is being developed and could increase operating and capital costs; the cost cannot yet be estimated. Weather, load growth, fuel and power costs, regulatory outcomes, and capital-project execution are also relevant risks.
- The filing provides no Entergy Texas-specific earnings guidance. Management cautions that interim results should not be used as a basis for estimating full-year results.
Important facts for investors to verify
- Whether and when the PUCT approves the proposed $56.2 million customer refund, and the ultimate outcome of the appeal over the $10.9 million bandwidth payment.
- The final PUCT decision on the transmission cost recovery filing, including the treatment of transferred spare transformers and the timing of any rate change.
- The outcome of the planned Texas Supreme Court petition concerning the 2011 rate case.
- Actual load and industrial demand trends, particularly whether industrial growth continues to offset weaker residential and commercial usage.
- Debt and liquidity developments, including the effect of new borrowing and the scheduled August 2016 System Agreement termination.