Entergy Corp (ETR) — Q4 2017 Earnings Call Transcript

Thank you. Good morning, and thank you for joining us. We will begin today with comments from Entergy’s Chairman and CEO, Leo Denault; and then Drew Marsh, our CFO, will review results. In an effort to accommodate everyone who has questions, we requested each person ask no more than one question and one follow-up. In today’s call, management will make certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Additional information concerning these risks and uncertainties is included in our earnings release, our slide presentation, and the Company’s SEC filings. Entergy does not assume any obligation to update these forward-looking statements. Management will also discuss non-GAAP financial information. Reconciliations to the applicable GAAP measures are included in today’s press release and slide presentation, both of which can be found on the Investor Relations section of our website. And now I will turn the call over to Leo.

Thank you, David, and good morning, everyone. Today, we are reporting strong results for another productive year. Utility Parent & Other, our core business, exceeded our adjusted EPS guidance, and our consolidated operational earnings were in the top half of our guidance range and also higher than our expectations. We executed on our key 2017 deliverables. At the Utility, we had an active regulatory calendar and we continued to gain certainty for major projects in our capital plan. We received approval to build two new highly efficient gas-fired generating resources. All of our jurisdictions approved our plans to implement AMI in the respective service areas. For transmission, we completed another cycle. We made significant progress in the certification of the New Orleans Power Station. We completed three annual formula rate plans in Arkansas, Louisiana, and Mississippi. And we implemented two cost recovery factor increases in Texas. We are in discussions to extend Entergy Louisiana’s annual FRP. We continue to work toward clarity on our exit from the merchant business in 2022, and we raised our dividend for the third consecutive year, a trend we expect to continue, subject as always to board approval. Our accomplishments this year are simply a continuation of the path we set several years ago. A path to become a world-class utility that thrives by creating sustainable value for all stakeholders. We set out to be a company that delivers strong financial results to its owners, invests in its employees to create a workforce for the future, and is an environmentally and socially responsible growth engine for its communities while maintaining some of the lowest rates in the country for customers. Our key deliverables support this aspiration for our company. As we look ahead to 2018 and our three-year outlook period, our success is less dependent on strategic initiatives and more on our own operational execution. As a result, today, we are initiating 2018 guidance consistent with our previous disclosures. We are affirming our Utility Parent & Other longer-term outlook through 2020. Beyond that, we continue to see a good path for steady, predictable growth at our core business as we continue to modernize our infrastructure. We are laying the foundation now to be the sustainable solutions-oriented utility of the future that provides customer-focused innovation in a changing world. Shifting now to 2017, let’s review some details behind our key accomplishments that keep us on track to attain both our near-term goals and our longer-term aspirations. On the regulatory front, we successfully completed Entergy Arkansas' second forward test year FRP with rates effective last month. The commission approved our comprehensive settlement agreement, which, among other matters, confirmed the prudence of the nuclear costs included in the 2017 and 2018 test year filings. Entergy Louisiana filed a request with the Louisiana Public Service Commission to extend its formula rate plan for another three years. While the settlement talks have slowed to ensure parties understand the implications of tax reform, discussions have been productive and are ongoing. With respect to our large generation projects, we received approval to build the Lake Charles and Montgomery County Power Stations. Together with the St. Charles Power Station, these projects are an important part of our investment plan to modernize the electric grid and improve reliability. All three are on schedule, and we are confident in their successful, on-time, and on-budget execution. We’ve also made significant progress in the certification of the New Orleans Power Station, with the Council Utility Committee’s approval of the project earlier this week. We expect the full councils to take up the certification for a final decision on March 8. We also made strides in transmission. We invested approximately $1 billion and placed more than $900 million of capital projects into service. We made significant progress on the Lake Charles transmission project. This is our largest transmission endeavor to date and it includes 30 miles of extra high voltage transmission line and addresses reliability needs driven in part by low growth in Southwest Louisiana. We expect to complete the project in the second quarter of 2018. We wrapped up the 2017 MTEP review, and MISO approved 70 projects in our service area totaling approximately $1 billion. Regarding the growth and transformation of our distribution system, we have now received regulatory approvals for the deployment of advanced meters in all of our jurisdictions. IT infrastructure, communications networks, and meter data management systems that will enable meters to communicate are being constructed. We are pleased with the progress we’ve made on AMI, and the positive feedback we continue to receive from our stakeholders, especially regarding the benefits and future opportunities this technology will provide for our customers. The investments we make in our core business also improve our environmental footprint. We have one of the cleanest generating fleets in the United States, and our principal objective is to remain an environmentally sustainable fleet for the communities we serve. The cornerstone of this objective began when we were the first U.S. utility to commit voluntarily to stabilizing CO2 emissions in 2001. Ten years later, our commitment went beyond merely stabilizing CO2 emissions. In 2011, our environment 2020 commitment included a voluntary pledge that through the year 2020, we would maintain our carbon dioxide emissions at 20% below year 2000 levels on a cumulative basis. I’m pleased to report that we are meeting our commitments, and the investments we are making will enable us to continue to lower our emission rates at the utility. For example, highly efficient combined cycle power stations such as St. Charles, Lake Charles, and Montgomery County will produce fewer carbon emissions than the legacy units they replaced, improve our average fleet efficiency, and use less water. Nuclear generation is also an important non-emitting base load resource. Prudently investing to preserve these valuable assets is an important part of our strategy to deliver sustainable value to all of our stakeholders. Our planned investments in new technologies to modernize our grid, such as advanced meters, will further improve efficiency. On top of that, our customers of all classes are interested in the deployment of renewable resources, and we are working to meet these expectations. To that end, over the next three years, we expect to contract for over 800 megawatts of renewable resources. Of these, approximately 180 megawatts are the two power purchase agreements in Arkansas that we have discussed with you on previous occasions. Of the remainder, approximately half represent ownership opportunities. These are just a few illustrations of the many investments that we are making today to develop an electric generating and delivery system that is well-positioned for operations in a carbon-constrained economy, whatever that may look like in the future. Turning to EWC, we’ve taken important steps to provide a clear path to exit that business in 2022. We reached an agreement to cease operations at Dominion Point in 2021 and submitted our deactivation notice to New York ISO. The ISO concluded there will be no reliability issues resulting from Indian Point’s retirement. We sold FitzPatrick, preserving the plant's benefits for its employees and community. We decided to continue to operate Palisades through the spring of 2022, a cash-positive decision. Finally, in 2017, we received a number of awards that recognize our accomplishments, values, and commitments. We are once again included in the Dow Jones Sustainability in North America Index. We are named one of the top 10 utilities in economic development by Site Selection Magazine. The Women’s Business Enterprise National Council listed Entergy as one of America’s top corporations for women’s business enterprise. We are one of Corporate Responsibility Magazine’s 100 best corporate citizens, and we received EEI’s Emergency Recovery and Emergency Assistance Awards for our storm restoration efforts. Our commitment to our communities is further evidenced by our charitable contributions, which total approximately $16 million annually, including investment in workforce development across our jurisdictions. Our employees and retirees are also generous with their time, volunteering some 100,000 hours annually. All of our accomplishments and successes are the result of our employees' first-rate level of professionalism, dedication, and hard work every day. I want to thank more than 13,000 men and women of Entergy for living by our values, working safely, and acting with integrity. Their ideas and can-do spirit make Entergy a better company. Looking ahead, our 2018 plan supports our financial outlook, as well as our aspirations for the future of our company. As I mentioned earlier, the foundation for success this year is largely in place and less dependent on strategic initiatives and more on our own operational execution. We’ll be building projects that have already been approved, continuing with the annual MISO MTEP process, and making regulatory filings in the normal course of business. Two major transmission projects will be completed this year: the Lake Charles project noted earlier and the $130 million Southwest Mississippi improvement project. We look forward to their completion and the benefits that they will provide to our customers and to our region. We will also complete AMI’s core IT system implementations and initiate deployment of the communications network. This will support meter installations beginning early next year when customers will start to see the benefits this technology provides, giving them the ability to manage their usage and their bills. Another important goal for 2018 is for ANO to exit Column 4. Over the past few years, we have worked with the NRC as well as our peers, and we have systematically completed the actions outlined in our confirmatory action letter. ANO is on track to return to normal oversight this year. As for our regulatory agenda, we are working with each of our regulators on the effects of tax reform, and we welcome the change for our customers. On an ongoing basis, the lower tax rate means that customer bills will be lower than they otherwise would have been. That’s important to us, as evidenced by the fact that our rates are among the lowest in the country. We plan to make rate filings in each of our jurisdictions this year, and we expect actual points to be addressed in the normal course of those proceedings. We are also focused on efforts to address customer needs in unique ways. For example, in Mississippi, working with the Public Service Commission, we are teaming up with Cease Fire on a fiber infrastructure project. This project will span over 300 miles in 15 counties to bring next-generation broadband services to consumers and businesses in some of the most isolated and rural parts of the state. These services will open doors that were not previously available in those areas. At EWC, we will remain focused on safe and reliable operations to finish strong in the last few years of operation. Regarding our VY NorthStar transaction, we have made substantial progress towards finalizing an agreement, and we filed a status update with the Vermont Public Utility Commission earlier this week. As the report states, the parties anticipate filing a memorandum of understanding by March 2. That some or all of the parties will join. The MOU will address financial assurances and site restoration standards. We still target closing the transaction by the end of 2018. All of these plans support our guidance and are the foundation for our long-term outlooks, which we affirm today. Drew will provide additional color around our forward-looking commitments.

Thank you, Leo. Good morning everyone. As Leo mentioned, 2017 was another productive year for us with significant accomplishments. Before we get into the details, for Entergy consolidated, we finished in the top half of our operational guidance range, exceeding our expectations for the year despite the negative effects of weather. This is better than we told you to expect on our third quarter call, primarily driven by two factors. First, with Utility, we experienced strong sales growth, led by our industrial sector which came in at 7% quarter-over-quarter. Second, we saw benefits from our continued efforts to derisk our EWC business. Our Utility Parent & Other on an adjusted view ended above our expectations and above the top end of our guidance range due to strong sales growth. Beyond the financial results, we also know the tax reform is on your mind. Leo mentioned that new legislation will provide significant benefits to our customers. Over time, we will return approximately $1.4 billion for the unprotected portion of the excess ADIT in one form or another, whether through customer refunds, cash investment in new assets, accelerated depreciation, or other options our regulators may consider. On an ongoing basis, the lower tax rate will translate into lower bills for our customers than they would have otherwise. In addition, our 2018 guidance and a longer-term outlook we are affirming today include expectations for the effective tax reform. I will now turn to some of the drivers for our fourth quarter results in more detail, starting with our core business, Utility Parent & Other, on Slide 6. On an adjusted view, earnings were $0.21 higher than fourth quarter 2016, driven by strong sales growth. For the industrial class, we saw robust sales from existing customers largely from the chlor-alkali and primary metals sectors, as well as new and expansion customers. We also recorded non-recurring regulatory charges totaling $0.10 in fourth quarter 2016. Higher non-fuel O&M partially offset these benefits, primarily due to higher nuclear spending, which continued to drive our nuclear strategic plan. EWC on Slide 7, operational earnings increased $0.39 quarter-over-quarter. FitzPatrick contributed a $0.11 loss to fourth quarter 2016 results and the sale of that plant in 2017 affected variances from multiple line items. Excluding the effect of FitzPatrick, earnings increased $0.28, due largely to higher income from realized earnings on the decommissioning trust, which we highlighted as an opportunity on our third quarter call. Strong market performance increased trust value to a level where we locked in gains by rebalancing some of the trust investments toward lower volatility fixed-income instruments. On Slide 8, operating cash flow in the fourth quarter was $911 million, approximately $165 million higher than a year ago. The increase is primarily due to collections of fuel and purchase power costs at Utility. Now turning to the full year on Slide 9, consolidated operational earnings for 2017 were $7.20 per share, higher than the $7.11 in 2016. It is also above our guide midpoint despite negative weather and better than our expectations in October. As I mentioned, drivers for the change versus our expectations included strong sales growth at Utility and higher realized earnings on the decommissioning trust. Utility Parent & Other adjusted EPS on Slide 10 was $4.50 in 2017, $0.18 higher than 2016. The increase was due largely to rate actions to recover productive investments to benefit our customers, as well as residential, commercial, and industrial weather-adjusted sales growth. This increase was partly offset by our spending on nuclear operations and other operating expenses. Slide 11 summarizes EWC operational earnings, which increased year-over-year to $3.24 per share in 2017 from $2.01 in 2016. Excluding FitzPatrick, this increase was due largely to income tax items and, as previously mentioned, higher realized gains on decommissioning trust funds. 2017 results also reflected higher decommissioning expenses, primarily from the establishment of decommissioning liabilities in Indian Point 3 in August 2016. Full year 2017 operating cash flow, shown on Slide 12, was approximately $2.6 billion in 2017, $375 million lower than last year. Higher refueling outage costs as we completed seven refueling outages this year at both the merchant and utility fleet, unfavorable weather at Utility, and lower EWC net revenue were the main drivers. Today, we are issuing our 2018 consolidated operational EPS guidance of $6.25 to $6.85, and Utility Parent & Other adjusted guidance of $4.50 to $4.90. On Slide 13, starting with Utility Parent & Other on an adjusted view, our range is consistent with the outlook represented at the EEI financial property last November. Walking through a few of the key drivers, let’s start with the top line. Our projected sales volume for 2018 is largely unchanged from our view at EEI, and our guidance reflects a slight decline year-over-year. However, we expect volatility from quarter to quarter. For example, we expect industrial sales growth in the first quarter as new customers become fully operational, but we expect sales declines over the remainder of the year as existing customers return to normal operations and take maintenance outages following strong performance in 2017. Despite the tempered outlook for our industrial sales growth in 2018, we see growth resuming in 2019 and 2020 as new projects come online. We are projecting non-fuel O&M to be approximately $2.6 billion, which represents a slight increase compared to 2017. This reflects slightly higher pension expenses due to a pension discount rate assumption of 3.78%, which is lower than our previous expectation. The return of excess ADIT affects the top line, but it’s essentially offset in income tax expense. 2018 also assumes normal weather and no income tax planning items at Utility Parent & Other. Additionally, as a result of tax reform at Parent & Other, we’ll see a lower tax yield on that segment’s loss. We also expect higher financing costs. At the Utility, the tax change will affect each operating company differently, and we expect the more significant impact to be in Entergy Arkansas. Because of the mechanics of the FRP, Entergy Arkansas can earn closer to its allowed return in 2018. This is a key driver that helps offset the negative drag at Parent this year. At EWC, we expect earnings to decline in 2018 largely due to income tax planning items. As you recall, in the second quarter of 2017, EWC recorded an income tax benefit contributing $373 million to operational earnings. This year, we are assuming that EWC will record another tax benefit currently estimated to be approximately $100 million. In addition, we expect lower net revenue largely due to lower energy prices and higher non-fuel O&M due to higher projected nuclear spending, partly due to the decision to operate Palisades until 2022. These decreases are offset by lower depreciation expense, also due to the Palisades decision, and higher earnings on decommissioning trust due to the change in accounting rules that require us to mark the equity portion of those investments to market. Right now our guidance reflects a return assumption of 6.25%, which equates to approximately $1 in earnings per share. We also expect lower income tax expense due to the lower income tax rate. Before we leave EWC, I’ll give an update on our cash position. We now see neutral to positive cash flow from EWC to the Parent from 2017 to 2022, and this includes our current view on potential decommissioning trust contributions. This is slightly better than last quarter due to walking in strong nuclear decommissioning trust returns and continued strategies to mitigate nuclear decommissioning costs. Tax reform will also affect our cash needs. And as shown on Slide 14, we will require incremental financing. The two primary needs are from, first, the return of excess deferred taxes, and second, lower tax expense and rate. We expect to finance this reduction through a combination of Utility company debt, Parent debt, internal cash generation, and external equity. We plan to issue approximately $1 billion of equity over our outlook period, and currently, we expect that all to occur before the end of 2019. Moving to the longer-term view on Slide 15, our earnings expectations continue to firm up as we execute on key deliverables. Our outlook through 2020 is unchanged despite the Parent drag that I previously noted. That’s in part because we will see an increased rate base as we return excess ADIT to customers over time. Also, before tax reform, we were trending at the upper end of our ranges in 2019 and 2020. Collectively, these allow us to maintain our outlook. While I don’t normally talk about where in these outlooks we see ourselves, given the significant changes in tax reform, you should know that we do not see ourselves at the bottom of the ranges. Of course, these are our current expectations, but ultimately the amount and timing of earnings and cash impacts from tax reform will depend on the regulatory treatment. All of our jurisdictions have opened a docket in one form or another, and ratemaking regulatory proceedings are scheduled this year in each of our jurisdictions. We will work with our regulators through these proceedings to address the effective tax reform and develop the appropriate path forward so that this opportunity provides value to our customers as fast as possible and also gives all of our Entergy stakeholders a fair and reasonable outcome. Finally, our cash and credit metrics as of the end of the year are shown on Slide 16. The reduction in cash from tax reform will also put pressure on our FFO to debt credit metric. Even though this metric would be adversely affected, we are focused on maintaining the financial integrity of this credit profile by internally identifying opportunities to improve cash flow and externally working with our retail regulators. Throughout, we expect to continue to hold an investment grade rating. As I mentioned earlier, 2017 was another strong year for our results, and we look forward to 2018. The foundation for success this year is largely in place as we focus on building projects that have already been approved, advance our operational capabilities, work with the regulators to implement appropriate changes and tax reform, and prepare for the customer-centered and opportunity-filled future that Leo described in his remarks. And now, the Entergy team is available to answer questions.

Hey, good morning, congratulations.

Good morning, Julien.

Good morning, Julien.

So first quick question. Just on tax reform to kind of nail this down early on. In terms of FFO to debt, where does the $1 billion equity raise get you on a kind of a pro forma and run rate basis? And how is that relative to where you want to be? Obviously looking at 2017 trailing, kind of what are the rating agencies wanting from you today? And how much buffer, more importantly, are you looking to have against that?

Julien, this is Drew. Right now the $1 billion will give us around a 14% range. And so that’s where we’re starting from, and we think that will maintain our investment grade as we talk about and discuss. And of course, we like to do better than that. We’re looking for other ways to do that by driving internal cash flows and working with our retail regulators, but that’s kind of the place where we see it bottoming out. The amounts we’ll see will vary by the exact timing of the return to customers of any excess ADIT, but that’s kind of where we see it bottoming out.

Got it. Excellent. You generally speaking beyond the $1 billion equity. You would think that you would organically see the growth of the business to support an improvement in the FFO?

Yes. Over time, it will improve. But early on, that’s where we’re seeing.

Excellent. And then on the NDT side, obviously, constructed statements in your prepared remarks. But as you see the wider strategic effort to kind of move that side of the business off your books, where do you stand on that front as well, if any developments?

On EWC? Yes.

Julien, you’re asking about the cash generation of that business. Is that what you’re getting at?

No, I was thinking more around the strategic angles, around sort of divesting that business more structurally.

Okay. So Leo, in his remarks and yesterday or a couple of days ago, you saw the update on the Vermont Yankee process, so you’re clear on that. Beyond that, we continue to work through our process to try and duplicate that effort at our other plants, and those processes continue to be ongoing. We are making progress, but the first thing is going to be Vermont Yankee, and we really focus on making sure that we bring that one home and then the others will follow on behind it.

Got it. So you really want to see the case study of VY first and foremost before we could close on that?

That’s right.

Got it. All right. Excellent, thank you. Best of luck.

Thank you.

Thanks, good morning.

Good morning, Greg.

Thank you for the guidance around tax and appreciate you deviating from your normal way you talk about your ranges to give us a sense of that. So just to rephrase back to you what you said in your comments, so that I’m sure I got it correctly, given the regulatory outcomes you’ve seen, like your ability now to earn out your authorized ROEs in Arkansas because of the formula rate plan and that type of demand growth you’re seeing, at tax reform not happened, you are looking, given what you know now, at being at the high-end of the range? And then the impact of, A, the loss of partial loss of tax shield at the parent debt; B, the $1 billion of equity that you need to fund to offset the cash flow impact of tax; and C, the positive impact of rate base going up because of deferred tax. You still no lower than the midpoint of the range as you see it today?

Right. Well, yes, we said we’re not at the bottom of the range. So I think you would be – I will not kind of characterize around the midpoint specifically, but we’re not at the bottom of the range.

Fair enough. I’m not trying to put words in your mouth. But generally speaking, as I think about the moving parts, have I missed anything salient?

No, those are the correct theses, Greg.

Okay, thanks. And what can you tell us on the margin has changed between your last disclosure and your current comments on the cash flow impact of exiting EWC? What, on the margin, has changed to put you in a position to say you think it will be neutral to positive?

I think the main pieces are strong performance in the trust. And as you’ll see in our K, when it comes out early next week, the decommissioning actually I think it’s in the back of the disclosures in the appendix today. The trusts are up over $4 billion at this point. So we see strong performance in the return of the trust. And then, secondly, we continue to work through our expectations on what it would cost to decommission facilities in the Northeast. And as we work through that, we are finding that we may be able to reduce our cost expectations there. So the combination of those two things is giving us the confidence to continue to move our expectations on the overall cash need at EWC.

Great. Last question, how do you not – let me rephrase this. All things equal, before the things you’ve done to offset the impact of tax reform on your credit metrics, how much of a negative impact on your FFO to debt metric before – this is obviously before the things that you’ve done to offset it, the tax reform has had impact in a vacuum? I mean, you say you’re going to be at 14%. Where would you be had you done nothing to offset it?

We would have probably been around the 16%, 17% range FFO to debt.

Perfect. Thank you guys.

Thank you, Greg.

Thank you so much. Hi, guys.

Good morning.

Hey, good morning.

Good morning. So on the equity just wanted to understand, which piece is more correlated with the timing? Is it from a regulatory perspective if you get a decision on the unexpected piece for DTL and the timing of the refund? Is that going to drive the timing to be more of a 2018 versus a 2019 event? Just wanted to understand how should we think about the timing.

I think that it’s more of a back-end question, Praful. So we will probably start executing the second half of this year even though our processes are not complete based upon expectations for having to go into some amount of cash, no matter what, and then the question would be how quickly we get the certainty and we go ahead and how fast we begin to return those cash flows to customers. If it’s very quick, then we will accelerate the back end forward. But if it’s slow, obviously, we would need the cash until later. Did I answer your question?

Yes, that’s super helpful, thanks. So on the second question on EWC, clearly, it was good to see the decommissioning trust performing well and the fact that you walked on those gains. But just obviously, it opens up the question to if it performs now, there is also now the risk that if it doesn’t perform well, what happens then, given now you’re in a positive position from a cash flow perspective? Just wanted to understand how you protect against that risk of downside on the decommissioning trust now that it’s performed. And secondly, now that you have these assets in a good position, is this a better time to execute sales with people who are experts at decommissioning these assets?

Okay. So on the first question, we have been actively trying to derisk our portfolio, particularly for that for Vermont Yankee, for example. As that trust has grown, we do know we have expenses that are coming, and so we’ve taken them ahead of schedule out of sort of an investment profile and putting them more into a cash profile to derisk because our trust has grown to a higher level. Similar for Pilgrim as we prepare for the retirement of that asset next year, plus Pilgrim's trust by itself is up over $1 billion. So it’s a very well-funded. We’ve been actively derisking in that way. And then the second question was? What was your second question again, Praful?

In terms of executing on sales for these assets...

Yes, of course, it makes it much easier to manage that sales process as though stress becomes higher. That is true.

All right. Thank you, guys.

Thank you.

Hey, good morning, guys.

Good morning, Shar.

Let me just follow up on Greg and Julien’s question for a second on EWC. So it’s nice to see that you’ve got a higher cash flow trajectory upon an exit. But sort of how does the cash flow trajectory look under an assumption that you sell the decommissioning trust? So in light of the performance of the funds, would it be cash flow diluted for you to exit the decommissioning trust funds?

Not necessarily because we wouldn’t necessarily have access to those decommissioning trust funds except to do decommissioning until well down the road. So the fact that it is performing better, I guess maybe to Praful’s question, helps us to move towards a transaction, but it does not necessarily move more cash into the business.

Got it. Okay, that’s helpful. And then just on the Louisiana FRP extension, it sounds like, Leo, obviously from your prepared remarks that you’re confident in the second-quarter settlement. So has tax reform sort of improved the conversations you’re having in the settlement talks? And then can you just remind us how much capital and O&M is on the nuclear side is embedded in this current filing?

I will address that first part. This is Rod.

Hey, Rod.

Yes, the conversation around taxes has slowed down our negotiations. But to the point that you just raised, we still feel good about our ability to settle the FRP. And our regulators issued the accounting orders as sort of a flag post to account and track how the tax reform would flow through that FRP before we close out the settlement discussion. Just keep in mind that our objective is still to resolve the issue to have rate effect changes happening in September. As it relates to the nuclear cost embedded in the FRP, I’ll have to get back to you on the actual numbers. I’m not sure whether we’ve disclosed a specific nuclear number in the FRP filing. But I’ll make sure that David gives a specific number if it’s public.

Okay. And then just let me just rephrase it. Has the Arkansas order improved sort of what you’re looking to do in Louisiana?

Well, remember we talked about that in prior discussions. The nuclear issue has been less of a conversation in Louisiana. Our focus, because of the size of our capital plan, has been around the transmission conversation. So nuclear is a much smaller component of Louisiana’s capital plan, and as a result hasn’t been a line item, if you will, in the negotiation. So it’s been less of an issue.

Got it. Thanks so much, guys.

Thank you.

Hey guys. A couple of questions. I just want to make sure I understand a few things. First of all, Drew, what is the O&M growth rate year-over-year you are assuming in 2018 versus 2017 at the Utility?

I’m trying to think about the percentage. It’s probably 1% to 2%, Michael.

Okay, so inflationary. And then do you see significant opportunity for O&M cost savings post-2017 at the utilities? Or do you think that’s kind of a normal run rate you go from there? I’m just asking because of the heightened nuclear spend that you had in 2017?

Right. And we are still actually ramping up some of those nuclear costs. And I think a big piece of a driver for us is the pension expense and where that will go. But beyond that, operationally, we have several programs internally to try and drive operational efficiency within our organization. And as we begin to roll out our automated metering efforts in the next year, and we start to install meters and then we start to put all the other parts together with that, new operational and management distribution systems and asset management systems and linking all those things together, we would expect to begin to realize some operational savings going forward for our customers. And as we realize that, I think that will create headroom for incremental investment, but it would not at least maybe on a temporary basis, it might drop to the bottom line, but we would expect that it would be recaptured in rates fairly quickly.

Got it. And then Arkansas and Rod, I want to make sure I understand the puts and takes that are happening here. Can you walk us through how tax reform helps get you closer to earnings authorized? Is it simply because the 4% cap is no longer as big of a deal because you’re reducing rates this year? Or is there some other driver there?

Michael, I think the straightforward answer is the revenue requirements, because of the lower tax expenses, is less, and as a result, you’re closer to your allowed rate of return that you’re not having to worry about the carryover year-over-year for true up. So you’re actually earning your allowed ROE in the year because of tax expense that is presumed to be lower.

So I want to just kind of think about the Arkansas income statement. This is actually a pretty big deal for you guys. So tax rate goes down, but revenue goes down to adjust for the tax rate. But that’s earning – that would be earnings neutral by itself. But because you didn’t get the full increase that you could have been authorized due to the 4% cap, now you can actually get that full increase in 2018?

No, tax rate goes down. The revenue requirements, that is the amount of revenues that are embedded in our rates, don’t go down. Remember, we are over. And so all I’m saying is the overage that we wouldn’t be earning on that would be subject to a true-up is actually less in 2018. And so we’re actually earning closer to our allowed rate of return because of the taxes that we’re not paying, that the over-reach is not as great as it would otherwise have been.

So, Michael, maybe think about it this way. Our original revenue requirement request was about $130 million. The cap limited us to think $70-ish million. And so we were short by $60 million. We are under-earning by that amount. What I think Rod is saying is, under the lower tax regime, the revenue requirement gets something closer to the $70 million. So if you think of it as our revenue requirements kind of our revenue line, if you thinking about it 2018 income statement, our revenue line is about the same, our tax expense will be lower, and all of it will kind of balance out to where we get close to our allowed return in Arkansas. Of course, next year we will be moving through the FRP, and we’ll have an expectation for a lower tax expense next year as well, and we’ll just continue to roll forward in the FRP process in that way.

But thinking about the post-2018 growth in Arkansas because of the legislation and the change in ratemaking, are you thinking that 2019 and beyond, barring any unforeseen things, you should be very close to annually to earnings authorized there now?

We should get much closer, yes.

Got it. Okay. Thank you guys. Much appreciate it.

Yes. Good morning, guys.

Good morning.

Yes. I just noticed the comments about 100 megawatts of renewables potentially over three years. And if I heard you rightly, it’s about 180 that’s PPA, but then you said that the remainder, I guess 600 or so, would be about half of that would be ownership opportunities. Did I hear that right?

Yes, yes. And over the next three years, we would anticipate entering into contracts for those – the projects themselves would be kind of more towards the back end of the period or beyond.

I guess, how do you have confidence that in that split at this point? And which jurisdictions OEM are we talking about?

Well, we’re in the process right now in some of those jurisdictions with some discussions around those. I really don’t want to get into any detail about it at the moment because those discussions are ongoing. But we’ve been looking at them for a while. It’s obviously the price point of renewables and everything that has come down begins to make sense in certain instances around the system, so we’re pursuing that.

Okay. Thank you for that. And then just on the comments about FFO metrics, and I think you said a couple of times you obviously intending to remain investment grade. But with the Baa2 Moody’s rating, are you – are we to understand that you might be willing to not to downgrade, or are you also pushing to try and defend the current rating as opposed to just staying investment grade?

Right. So we’re committed to investment grade, but we still wouldn’t prefer to keep our current credit rating, and so certainly, we’re not giving up on that. And so we’re going to be continuing to look for ways to manage to our current credit rating while we maintain our earnings outlooks that we’ve committed to you all to achieve. So I wouldn’t say that our current credit rating is going to necessarily fall down a notch, but our commitment is to maintain investment grade.

So if I’m not wrong, the downgrade threshold is around 15%, so would you consider more equity to stay where you are or in that instance, do we – I guess I’m just pushing for how hard you defend the current number – current grade.

Right. I mean, we will also endeavor to maintain our earnings outlooks, and so that’s going to be the balancing mechanism.

Thank you. Can you quantify the tax reform impact on your rate base?

Sure. This is Drew. It’s going to depend mostly upon the amount of cash that’s ultimately returned to customers because that will represent sort of incremental rate base. If there is some of the excess ADIT that turns into accelerated depreciation of existing assets or is put into sort of pay for assets that we were already planning to put into rate base, then that would be kind of neutral. Right now, we would expect that we would grow the rate base by a little over $1 billion after the three years, and then also what we already have.

Right. So in essence, I mean, you’re issuing equity, but you’re issuing equity to build rate base over and above what you had an original plan?

That’s correct.

Okay. And then can you also – on the unfunded pension for 2017, can you give us an idea of where you ended 2017?

Yes. So we ended 2017 with about finishing trust assets around $6.1 billion and pension liability around $8 billion. So we’re at about a $1.9 billion difference in that.

Okay, so you actually improved there relative to where you were last year, so that should also help in terms of the FFO to debt metrics, right?

It will. But it’s not improved all that much. I want to say it’s improved by $50 million to $60 million. The rates have been going up, but the pension discount rate at the end of the year versus the end of the prior year was still lower because, as you know, corporate spreads have tightened, curves have flattened, and most of our liabilities are longer dated. So the liability went up more than we were anticipating despite the fact that we had strong returns and $400 million of contributions into our pension last year. And by the way, we would expect to put about $400 million in this year as well.

And then beyond that, I mean, should we assume that $400 million number continues as a run rate? Or should we look at those more as just one-offs?

Well, that was – this year will be the end of a five-year effort to put $2 billion of incremental assets into the pension trusts. I don’t know that it would necessarily continue, but that is something that we’re investigating.

Good morning. I believe you said the $1 billion of external equity will depend on the timing of the rate case or rate filings. Do you have an at-the-money or turbo program?

David, we don’t have one currently established. We would need to go get authorization with our board but also with the SEC to make that happen. We would anticipate that probably occurs in the second quarter or so.

Got it. Okay, and what’s the capacity of your internal equity programs like DRIP?

We don’t have one currently established right now.

Okay, got it. And I believe you may have just addressed this, I apologize if I missed this, but can you explain why your pension discount rate assumption is falling again, given the rate environment that we’re seeing?

Yes. Well, it’s said at the end of the year, and so it’s a once-a-year snapshot, and so you compare it to 12/31/2016 and versus 12/31/2017. And if you look at that time frame, sort of a 10-year treasury, it actually came down a little bit even though the front end and shorter-term treasuries have come up. Meanwhile, so you had a flattening of the curve, and then you also had corporate spreads, which had tightened to that. So using a longer-dated curve, corporate rates were a little bit lower than what they had been previously. So those are the two comparison points.

Got it, great. And actually sneaking one more on your sales forecast, I know you said that there’s some volatility within the year. I know you see forecast the sales growth beyond this year rising. I mean, just can you characterize whether these are using conservative assumptions about industrial growth? Or are you kind of fairly comfortable with your assumption now? Just any room for further improvement and further upside?

Yes. So this is Drew again. On the industrial side, I would say that we are kind of middle of the road on our expectations for industrial growth. It’s for our large customers, it’s based upon our expectation for projects that we can see under construction right now through 2020 and what our expectation for them is in the marketplace. So I’d say that fairly middle-of-the-road expectation on industrial. For residential and commercial, there may be a little bit of near-term opportunity in 2018. But beyond that, we expect that the effects of automated meters and getting our customers better information about how to manage their energy usage would allow them to be more efficient and conservative on the way that they actually use their electricity. So we have actually built in an expectation that over the longer term, we would expect to see a decline in residential and commercial sales.

Thank you. Our first question comes from Julien Dumoulin-Smith of Bank of America. Your line is now open.

Thank you, Leo.

Thank you, David. Thank you to everyone for participating this morning. Before we close, we are reminding you to refer to our release and website for Safe Harbor and regulation G compliance statements. Our Annual Report on Form 10-K is due to the SEC on March 1 and provides more details and disclosures about our financial statements. Events that occur prior to the date of our 10-K filing that provide additional evidence of conditions that existed at the date of the balance sheet would be reflected in our financial statements in accordance with generally accepted accounting principles. And this concludes our call. Thank you.