Entergy Texas, Inc. — Q1 2017 Form 10-Q
Business context and period. Entergy Texas is a regulated electric utility serving customers in Texas. This summary covers the three months ended March 31, 2017, compared with the same quarter of 2016; balance-sheet figures are compared with December 31, 2016. The filing is a combined report for Entergy and its subsidiaries, and the figures below are specific to Entergy Texas unless noted.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Electric operating revenue | $363.9 million | $378.3 million; down 3.8% |
| Net revenue | $140.3 million | $138.2 million; up $2.1 million |
| Operating income | $38.8 million | $41.3 million |
| Net income | $10.9 million | $14.6 million; down $3.7 million |
| Operating margin | 10.7%* | 10.9%* |
| Net margin | 3.0%* | 3.8%* |
| Operating cash flow | $59.6 million | $75.7 million |
| Capital expenditures | $68.8 million | $91.8 million |
| Cash and cash equivalents, March 31 | $0.088 million | $6.2 million at December 31, 2016 |
| Long-term debt | $1,484.6 million | $1,508.4 million at December 31, 2016 |
| Debt to capital, excluding securitization bonds | 50.0% | 50.2% at December 31, 2016 |
*Margins are calculated from reported operating revenue, operating income, and net income. The filing reports no separate Entergy Texas gross-margin measure.
Q1 investing cash use was $69.6 million and financing provided $3.9 million; cash decreased $6.1 million during the quarter. Entergy Texas had no cash borrowings under its $150 million credit facility and $4.7 million of letters of credit outstanding. It also had $27.6 million of letters of credit under an uncommitted facility supporting MISO obligations, and posted $14 million of cash collateral in March.
Changes versus the prior-year quarter
- Net revenue rose $2.1 million, with favorable volume/weather and lower purchased-power capacity costs partly offset by lower wholesale revenue. Management attributed the capacity-cost benefit to the August 2016 termination of purchased-power agreements between Entergy Louisiana and Entergy Texas; the same termination reduced wholesale capacity revenue.
- Retail electric price added $3.9 million, primarily from the transmission cost recovery factor (TCRF) rider. The volume/weather contribution was favorable by $10.3 million, although billed electricity use fell 97 GWh, or 2%.
- Despite higher net revenue, net income fell to $10.9 million. Management cited higher depreciation and amortization and higher taxes other than income taxes; lower other income and higher interest expense also appear in the statements.
- Operating cash flow declined $16.2 million, primarily because of the timing of fuel and purchased-power cost recovery. Construction spending was lower year over year, mainly because transmission construction expenditures declined.
Outlook, regulatory matters, and risks
- Rates: The PUCT approved an amended TCRF annual revenue requirement of $29.5 million, including the approximately $10.5 million already authorized. The revised rider applied to usage on and after March 20, 2017.
- Fuel reconciliation: The PUCT approved a settlement providing for a $6 million disallowance and a $21 million refund of over-recovered fuel costs to most customers, scheduled for April through June 2017.
- Generation investment: Entergy Texas sought approval to build the proposed 993 MW Montgomery County combined-cycle station, estimated to cost $937 million. An intervenor opposed certification; a PUCT decision was expected by October 2017, with commercial operation targeted for mid-2021 subject to approvals and permits.
- Risks: Results remain exposed to regulatory decisions and cost recovery, fuel and purchased-power costs, weather and customer usage, construction execution and financing, and environmental and operating requirements. The filing states there were no material changes to the risk factors in the 2016 Form 10-K.
- Guidance: The filing provides no specific Entergy Texas earnings or revenue guidance. Management cautions that interim results should not be used to estimate full-year results because of seasonal fluctuations across Entergy’s business.
Important facts for investors to verify
- Whether the TCRF rider and fuel-refund settlement produce the expected customer billing and cash-flow effects.
- The PUCT’s decision on Montgomery County Power Station, final project cost, financing plan, and any conditions imposed.
- Why earnings declined despite higher net revenue, including the relative contributions of depreciation, taxes, other income, and interest expense.
- Liquidity and collateral requirements: quarter-end cash was only $88,000, while MISO-related letters of credit and posted cash collateral were material relative to that cash balance.
- Future billed usage, particularly whether the reported 2% decline persists, and the effects of fuel-cost recovery timing.