ENTERGY TEXAS, INC. quarterly report, Q2 FY2017

Business context and reporting period

Entergy Texas, Inc. and subsidiaries filed this unaudited quarterly report for the three and six months ended June 30, 2017. The company is a regulated electric utility serving customers in Texas. Comparisons below are with the corresponding 2016 periods.

Financial performance and liquidity

Calculated operating margin was approximately 12.6% in Q2 2017 versus 14.1% in Q2 2016, and 11.7% for the first half of 2017 versus 12.6% in 2016. Net margin was approximately 5.6% and 5.8% for Q2, respectively, and 4.3% and 4.9% for the six-month periods.

For the six months, operating cash flow was $132.4 million (down from $172.2 million); capital expenditures were $155.8 million; and cash declined by $5.1 million to $1.1 million at June 30. Total assets were $4.09 billion. Long-term debt was $1.47 billion, including $391.2 million of securitization bonds. The reported debt-to-capital ratio excluding securitization bonds was 49.5%, down from 50.2% at year-end 2016; net debt to net capital on the same basis was also 49.5%.

Material changes versus the prior comparable period

• Q2 revenue fell 8% and net income declined $3.0 million; first-half revenue fell 6% and net income declined $6.7 million.
• Lower net wholesale revenue was the main pressure on net revenue, reflecting the August 2016 termination of purchased-power agreements between Entergy Louisiana and Entergy Texas. Retail transmission cost recovery rider increases partly offset that decline.
• Retail billed electricity sales were nearly flat for the first half, up 36 GWh; wholesale sales for resale declined 20%.
• Operating cash flow decreased $39.8 million year over year, primarily from the timing of fuel and purchased-power cost recovery.

Outlook, regulatory matters, risks and unusual items

• Entergy Texas’s planned Montgomery County Power Station is a nominal 993 MW combined-cycle project with an estimated cost of $937 million. In July 2017, the PUCT approved a settlement capping recoverable generation construction costs at $831 million, subject to specified exclusions. Commercial operation is estimated for mid-2021, subject to permits and approvals.
• The PUCT approved the amended transmission cost recovery rider, designed to collect about $29.5 million annually, with implementation beginning March 20, 2017. A proposed distribution cost recovery rider of $18.3 million annually had a settlement but remained subject to PUCT action as reported.
• Entergy Texas filed for a fuel refund of approximately $30.7 million for December 2016–April 2017. Interim approval was granted; final resolution remained pending, with most customer refunds expected in July–September 2017.
• The company sought PUCT approval for advanced metering infrastructure, with estimated nominal net operational savings to customers of $33 million. The proposed three-year deployment was expected to begin in 2019, subject to approval; a decision was expected by December 2017.
• Management cited higher depreciation and maintenance costs, and fuel-cost recovery timing, as pressures. The filing gives no specific earnings guidance for Entergy Texas. As a utility, results also depend on regulatory decisions, weather, power costs, capital execution and other risks described in the filing.

Most important facts for investors to verify

• Final PUCT outcomes and customer effects for the $30.7 million fuel refund and $18.3 million distribution cost recovery rider.
• Whether the Montgomery County project stays within the recoverable-cost cap and its estimated schedule and total cost.
• AMI approval, final deployment costs, customer cost recovery and realization of projected savings.
• Cash generation relative to construction spending, and changes in debt and liquidity as major investment proceeds.
• Future load, wholesale sales and earnings effects of the terminated power-purchase agreements and continuing retail rate recovery.