Business context and reporting period
Entergy Texas, Inc. and subsidiaries is a regulated electric utility serving customers in Texas. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; comparisons are with the same 2013 periods. The filing is part of a combined report by Entergy and its subsidiaries, so the figures below are for Entergy Texas unless otherwise stated.
Financial performance
| Metric | Third quarter 2014 | Third quarter 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $528.5 million | $527.0 million | $1,451.7 million | $1,288.3 million |
| Net revenue (after fuel, purchased power and regulatory charges) | $183.2 million | $180.8 million | $472.7 million | $445.9 million |
| Operating income | $82.9 million | $79.4 million | $179.1 million | $144.1 million |
| Net income | $39.6 million | $35.8 million | $71.3 million | $47.7 million |
| Operating margin, approximately | 15.7% | 15.1% | 12.3% | 11.2% |
| Net margin, approximately | 7.5% | 6.8% | 4.9% | 3.7% |
For the nine months, billed retail electricity usage increased 7% (942 GWh), led by industrial demand, including petroleum-sector expansion. Total operating revenue rose about 13%, but part of the increase reflected higher fuel-cost recovery rather than higher underlying earnings. Net income increased about 50% year over year.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $225.7 million, versus $167.3 million in 2013. Capital expenditures were $130.7 million; investing cash outflow was $123.6 million.
- Cash and cash equivalents were $40.1 million at September 30, 2014, down from $46.5 million at year-end 2013. Financing activities used $108.6 million, including debt repayments and $40 million of common dividends.
- Long-term debt was $1.290 billion, including $577.0 million of securitization bonds; a further $200 million of long-term debt was classified as currently maturing. Debt-to-capital was 61.9%, or 49.9% excluding non-recourse securitization bonds; net debt-to-net capital excluding those bonds was 48.7%.
- Entergy Texas had a $150 million credit facility with no cash borrowings and $31.4 million of letters of credit outstanding.
Changes, outlook and material items
- Quarterly net income rose $3.8 million, primarily from higher net revenue and lower operation and maintenance expense, partly offset by higher taxes other than income taxes. Nine-month net income rose $23.6 million, mainly from higher net revenue and lower operation and maintenance expense.
- An $18.5 million annual base-rate increase took effect April 1, 2014 under the PUCT-approved rate-case stipulation, which set a 9.8% return on equity. The settlement also provided for recovery over three years of certain rough production-cost equalization charges and rate-case expenses; the fuel reconciliation stipulated an immaterial disallowance and did not allow special recovery of about $22 million of purchased-power capacity costs.
- Entergy Texas requested an approximately $7 million annual distribution cost recovery rider in September 2014; PUCT action was pending. The filing also reports a proposed $1.2 billion Entergy Texas capital investment plan for 2015–2017. This is a preliminary investment estimate, not earnings guidance, and is subject to change.
- Management attributed improved nine-month net revenue partly to increased usage, the base-rate increase, and lower purchased-power capacity costs following contract changes. Offsetting factors included reduced wholesale revenue after a customer contract terminated in December 2013 and changes in transmission revenue and System Agreement reserve equalization following Entergy Arkansas’s exit from that agreement.
- Entergy Texas issued $135 million of 5.625% first-mortgage bonds due 2064 and used the proceeds to repay part of $150 million of 7.875% bonds due 2039.
Risks and contingencies
- Results remain exposed to fuel and purchased-power prices, weather and demand, wholesale customer contracts, rate and fuel-cost recovery decisions, and the effects of the utility’s 2013 integration into the MISO regional transmission organization.
- Future System Agreement changes or termination remain regulatory uncertainties for Entergy’s utilities. The filing highlights potential MISO market-rule, transmission-cost allocation and planning impacts.
- The 2014 rate-case stipulation and fuel reconciliation are resolved as described above, but regulatory review of the pending distribution rider remained open. The filing states that no material changes had occurred to the risk factors in the 2013 Form 10-K.
Important facts for investors to verify
- Whether the PUCT approves the requested distribution cost recovery rider and when any approved recovery begins.
- How much of the increase in reported revenue and earnings is sustainable after separating fuel-cost pass-throughs, rate changes, usage growth and wholesale contract effects.
- The status of the $200 million current debt maturity, refinancing or repayment plans, and available credit-facility capacity after letters of credit.
- Whether the planned 2015–2017 capital investment is revised and how it will be funded.
- Developments in MISO and System Agreement proceedings and their effects on transmission costs, wholesale sales and customer recovery.