Entergy Corp (ETR) — Q2 2018 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 efforts to accommodate everyone who has questions, we request that each person ask no more than one question and one follow-up. Our planned remarks will be shorter today given our recent Analyst Day and we know you have a busy morning and therefore are scheduled for 45 minutes. In today's call, management will make certain forward-looking statements. Actual results could differ materially from these forward looking statements due to a number of factors which are set forth in our earnings release, our slide presentation and our 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. Following our Analyst Day, we will keep our remarks concise. The key update is that we had a strong quarter and are on track with all our strategic, operational, and financial objectives. As we mentioned during our meeting in New York, our capital plan is robust and nearly ready for regulatory execution, demonstrating a consistent record of on-time and on-budget delivery. This plan will modernize our technology across all departments, delivering significant value to our customers in terms of service, sustainability, and costs, while also driving growth in our business. We have also made substantial progress in our transition to a pure-play utility, as highlighted by our announcement today regarding the sale of Pilgrim and Palisades to a subsidiary of Holtec International after their scheduled shutdown. In terms of financial results, we reported adjusted EPS of $1.23 for the second quarter for Utility, Parent, and Other, and consolidated operational EPS of $1.79. Drew will provide more detailed insights, but these results keep us firmly aligned with our full-year guidance and long-term forecasts. We are making good headway in achieving our goals across our operations. Regarding major projects, in Louisiana, the public service commission approved the agreement to purchase the Washington Parish Energy Center, a 361 MW facility that Calpine will construct and that we expect to acquire in 2021. We are also progressing on our four new generation projects, all of which remain on budget and on schedule. Yesterday, we issued a full notice to proceed on the Montgomery County power station, and the $187 million Lake Charles transmission project is nearing completion, with major portions already in service for our customers. We are completing the final phase of work to upgrade the Calcasieu River, which we expect to finish by the third quarter. With about 1,000 MW in various development stages, we are dedicated to offering our customers renewable power options, which are becoming increasingly important in our resource planning. In Arkansas, the commission approved a new 100 MW solar PPA, which includes a green pricing tariff for Entergy Arkansas customers. Entergy New Orleans has submitted a request to enhance three renewable projects totaling 90 MW of solar generation, including a 20 MW PPA, a 20 MW self-build, and a 50 MW acquisition, expected to be operational in 2020 or 2021. Additionally, Entergy New Orleans filed a rate case requesting a community solar option and a green pricing option, which we are also considering in other jurisdictions. In nuclear operations, ANO units one and two have returned to Column one of the NRC's reactor oversight process, reflecting the hard work of our nuclear team and our Arkansas Nuclear one employees. This effort has enhanced human performance, equipment reliability, and safety culture. At Grand Gulf, following an NRC exit conference, the plant has successfully met the objectives for a supplemental inspection, and we anticipate a transition to column one after the inspection report is released later this month. As for regulatory activity, we have been active in rate proceedings across all five jurisdictions. We are pleased to report that, when considering the positive outcomes from tax reform implementation, our customers should experience minimal rate impacts over the next few years, even as we pursue our customer-focused investment plan. For instance, Entergy Mississippi received approval for its annual FRP, resolving the effects of tax reform, which included customer refunds and rate base offsets, with no required base rate changes due to the lower federal tax rate. In May, Texas requested a net base rate change of $118 million and proposed refunds of around $200 million to Entergy Texas customers over two years. The net impact on customer rates is expected to be $17 million, which is significantly less than the base rate impact. Entergy Louisiana filed its annual FRP in June, and due to tax reform effects and costs rolling off from hurricanes Katrina and Rita, customer rates are projected to decline during the affected rate period. Entergy Arkansas Valley submitted its annual evaluation report in early June; with a 4% rate gap, we are seeking a revenue change of $65 million for 2019, which will be offset by the return of $466 million of unprotected excess ADIT by the end of next year. Lastly, Entergy New Orleans filed its base rate case yesterday, predicting a net decrease of around $20 million, alongside a request for a formula rate plan covering test years 2019 through 2021 and several new customer offerings, including a prepaid tariff and an electric vehicle charging infrastructure tariff. These filings are crucial for accomplishing our objectives and reflect the commitment of our leadership, employees, and regulators to our customers. We value our regulators' timely and constructive feedback on these filings and look forward to maintaining our cooperative relationships. As I noted, customers began to see benefits from tax reform in their bills this quarter, including $278 million in unprotected excess ADIT, with over half of that amount, $150 million, credited directly to customer bills. Achieving $278 million in benefits in one quarter is noteworthy and represents considerable savings for our customers. At EWC, our proposal to sell Vermont Yankee to NorthStar is moving forward, awaiting approvals from the NRC and the Vermont Public Utility Commission, which plans to issue its decision following the NRC's determination, likely late in the third quarter. At the plant, we've removed all remaining nuclear fuel from the spent fuel pool and loaded it into the last dry fuel canister, set to be moved to the fuel pad soon. This is a significant milestone for our Vermont Yankee transaction and completing this work is essential for closing the deal, which we still aim to finalize by year-end. Moreover, today we announced agreements to sell Pilgrim and Palisades to Nuclear Asset Management Company, a Holtec International subsidiary. With these agreements, we have firmed up plans to divest three of our remaining four EWC nuclear sites, significantly advancing our strategy to become a pure-play utility. This agreement will expedite decommissioning at both sites, with Holtec collaborating with SNC Lavalin to create Comprehensive Decommissioning International, tasked with decommissioning and site remediation. We are pleased with this development and the clarity it provides for our exit from EWC. At Indian Point, unit two has completed its final refueling outage and is now in its last operating cycle. We pride ourselves on the substantial benefits that unit has provided for its customers and community, and we are focused on finishing strong before its closure in April 2020. Lastly, I want to highlight some of our activities and achievements. In June, we received our 29th EEI award for emergency response following severe winter storms in the Northeast, demonstrating our commitment to customer service. In May, we advocated for low-income customers in Washington, helping United Way introduce a nationwide initiative to accurately convey the struggles faced by financially vulnerable households. This effort, known as ALICE, is vital for us as our success is tied to the well-being of our communities. As a result of initiatives like these, Entergy has been recognized as one of the 50 most community-minded companies in the United States. To summarize, we had a strong quarter; 2018 has already been marked by significant accomplishments that keep us on track to meet our strategic, operational, and financial objectives. At the utility, we are managing our business to maintain competitive rates for our customers as we implement our strategic, customer-centric investment plan. With our announcement to sell Pilgrim and Palisades, we are making substantial progress in transitioning to a pure-play utility. Finally, our financial results position us well to meet our full-year guidance and long-term goals. We anticipate a productive second half of the year, and I will now hand the call over to Drew.

Thank you, Leo and good morning everyone. As Leo mentioned, our accomplishments this quarter directly support the plans and objectives we reinforced at Analyst Day, in particular results for the quarter were strong and keep us firmly on track to achieve our full-year guidance and longer-term outlooks. While I turn to the results in greater detail, there are two items of note for the quarter that I would like to point out. First, we reached a settlement with the IRS for the 2012 and 2013 tax years. This is a positive outcome and generated an earnings benefit of $0.31. Second, as Leo mentioned, our customers started to see benefits from $278 million of unprotected excess ADIT related to tax reform. As a result, the net revenue and income tax lines are complex, and I will continue until customers have received the full benefit of the return. Remember these entries offset each other dollar-for-dollar, so there is no bottom line earnings impact. Beyond the accounting, I want to point out that within six months of the enactment of tax reforms; we achieved sufficient clarity around implementation such that our customers are already receiving significant benefit. This accomplishment is a direct result of efforts with our retail regulators to meet our customers' expectations. Now turning to results on Slide 4, operational earnings for Entergy Consolidated were $1.32 lower than second quarter 2017. You will recall that last year's results reflected approximately $2 of income tax benefit at EWC. This year's results include $0.31 of income tax benefit, $0.24 of which is at new P&L. This is the result of the 2012 and 2013 IRS Audit I mentioned a moment ago. Breaking down the results starting with Utility, Parent and Others on Slide 5, adjusted earnings were $0.11 higher than the prior year. Excluding the $278 million of unprotected excess ADIT, net revenue increased as a result of higher unbilled sales and positive rate actions in Entergy Arkansas and Entergy Texas. Similar to last quarter, regulatory provisions to return benefits of the lower tax rate to customers and Entergy Louisiana and Entergy New Orleans, partially offset the quarter's increase. Other factors included higher non-fuel O&M due largely to powerful average cost as well as energy efficiency and storm reserves, lower income tax expense due to the reduction of the federal income tax rate and lastly other drivers related to our growth such as higher depreciation and interest expenses. Moving to EWC's result on Slide 6, operational earnings were $0.14 excluding last year's tax item; the key driver for EWC was higher net revenue due to higher sales volume as a result of fewer outage days in second quarter 2018. Lower energy pricing somewhat offset this increase. Before leaving EWC, I would like to mention a few details regarding the progress of efforts to reduce risk at EWC and transform our company. As Leo said, with the Pilgrim and Palisades transactions, we have now solidified plans to fully divest three of four remaining EWC nuclear sites. And these transactions support our expectation for EWC to provide positive net cash to parent through 2022. Energy sales are approximately 90% hedged for the remaining life of our merchant assets significantly reducing our revenue risk. We've improved operations through the focus work of our dedicated nuclear employees and expect Pilgrim to return to Column one before the plant closes in 2019. As Leo also mentioned, at VY, all the remaining nuclear fuel has been removed from the spent fuel pool and would soon be loaded to dry fuel canisters for long-term storage. These collective actions significantly further our strategy to transition to a pure-play utility. Turning back to the quarter; Slide 7 shows operating cash flow totaling $523 million, approximately $230 million higher than the year ago. The increase is due to lower nuclear refueling outage spending, lower severance and retention payments in EWC and increased collection of fuel and purchase power costs at utility. However, return of the unprotected excess ADIT to customers partly offset the increase. Slide 8 and 9 contain our 2018 earnings guidance ranges and our longer-term Utility, Parent & Other adjusted outlook, both of which we are affirming today. For 2018, we expect results to come in around the midpoint for Utility, Parent & Other adjusted and in the top half of the range for consolidated operational. Also, as we mentioned on last quarter's call, our consolidated operational guidance assumes a $100 million favorable tax item at EWC which we still expect to materialize in the third quarter. Our credit metrics are shown on Slide 10. Our FFO to debt percentage remained at 15.4% and our parent debt to total debt has increased to 24.1%. The increase in parent debt to total debt is timing related due to the return of the unprotected excess ADIT and capital investments for growth. This measure should move lower later this year with incremental debt issuance that the utility and realization of a portion of the forward equity sale. We remain committed to our FFO to debt target at or about 15% by 2020; and our parent debt to total debt at or below 25%. Before we turn to Q&A, I want to thank you for joining our Analyst Day either in person or through the webcast. As we demonstrated, we have compelling strategy that translates into strong financial growth and value for our investors. With our capital plan largely ready for execution from a regulatory approval standpoint and good visibility on our rate growth, we are confident in our 5% to 7% UP&O adjusted earnings growth trajectory. Our accomplishments this quarter directly support our plan and objectives, and we're firmly on track to achieve our full-year guidance and longer-term outlooks. And now, the Entergy team is available to answer questions.

Good morning, guys. So, congrats on the Pilgrim and Palisades decommissioning sales, just one question mainly about Indian Point, anything to read into the fact that Indian Point wasn't sort of part of this package deal, is there sort of some logistical challenges that are pertinent to Indian Point, so how we should think about the last remaining asset that you guys own?

There is no challenge associated with that, Shar. It's really a function of the fact that, until recently, Palisades was going to be the first plant we would close. Since that didn't happen, we continued on the path of the package deal with Pilgrim and Palisades, as they were originally the first two in line after VY. So, there’s nothing significant to read into it. The only takeaway is that there is a developing market for this type of activity, as we and others have observed following the decommissioning of these plants.

Hi, everyone. Congratulations on Pilgrim and Palisades. Can you share more details about the price and any terms you’ve provided? I’m interested in understanding more about the transaction and the challenges you anticipate regarding approvals.

Sure, Praful. It's Drew. In terms of the price, I think what we said it was a nominal amount which means that you could afford it if you can demonstrate the capability to decommission a nuclear plant, but it's not a lot of money, and so the main objective for us, of course, is to move the risk to a party that is capable of doing it and doing it much quicker than we can. And that will benefit our communities and/or other stakeholders much better. So, I think that's the main point of that.

Got you. And from an approval process perspective, would you see a similar path that you went down with VY as the NRC kind of the key driver or do you see other kind of approvals that may take longer here in these transactions?

Sure. From an approval perspective, it's really just the NRC in this case, and we don't see specific state regulatory role right now.

Got you. Thanks. And then finally as you continue to make this successful transition to the pure-play utility story, wanted to understand, again strategically, if there is anything else we should be thinking about as you step back and look at the path going forward, is there anything in terms of utility growth or in terms of your own portfolio optimization, anything you should be thinking about as you look at the utility story going forward?

I believe we are still conveying the same message we shared just over a month ago during Analyst Day. We are maintaining a strong capital plan at the Utility, and our current mechanisms align with that plan, along with some regulatory adjustments to accommodate new types of investments as we move forward. This situation has provided us, through the various aspects Drew discussed regarding hedging and operations, the sale of facilities, and so on, with significant financial and operational capacity, as well as management resources, to concentrate on the growth of the utility and the advantages our customers will enjoy from these investments. These include the new generation plants we are constructing, the renewable energy projects we are implementing, and advanced metering infrastructure, along with future developments. Our primary goal is to make investments that drive business growth while ensuring we remain one of the most competitively priced electricity providers in the United States, and we aim to maintain this position as we rapidly expand our business.

Hey, good morning. Congrats on the recent announcements. Just keeping up with the EWC business quick, can you give any additional color on how to think about the cash flow impact of the agreement? I am specifically thinking about kind of the NRC minimum site costs required versus the NDT balances that you disclosed in your slides?

This is Drew. On an overall cash flow basis, as I mentioned earlier, we anticipate positive net cash flow returning to the parent through 2022. This expectation remains unchanged, and regarding NDT expectations, we do not plan to contribute any additional funds to those NDTs before the transactions for Pilgrim and Palisades.

Thanks. Just switching to UP&O quick, I know that there has been higher authorized asks at Arkansas specifically, in the 5% to 7% forecast for UP&O how do you kind of think about the high-end versus the low-end of the forecast and your assumptions for equity layers? If we kept equity layers kind of flat through the period, where would that put within your guidance range?

Our expectation is that the equity layers at the utility will need to grow gradually over time, targeting around 49% over the next few years. I don't have a forecast suggesting we maintain flat equity layers, but if we did, it would certainly reduce our current debt, which would be beneficial from a parent-debt perspective. However, I believe it might overall be slightly negative. Our goal is to increase the equity layer on utilities in the coming years.

Thanks. So with agreements in place for three of the nukes and also a significant amount of hedging through everybody's remaining life, can you just give us a sense of what the cash flow associated with those three units is going to look like through 2022?

You're talking about Pilgrim, Palisades and I guess Vermont Yankee, right? Because Indian Point still isn't resolved, right?

Okay, you're asking about the agreements in place for the three nuclear units.

Vermont Yankee is currently in the decommissioning phase, and funding for this process is mainly coming from the trust. We anticipate closing by the end of the year. After this point, we do not expect any significant ongoing cash flow related to decommissioning. The situations with Pilgrim and Palisades remain unchanged from what we previously presented. From a cash flow perspective, once Pilgrim is closed, the funds in our forecasts will be derived from the decommissioning trust, similar to Palisades, which is mentioned near the end of our forecasts provided at Analyst Day. Overall, our cash flow projections for EWC, which take into account the shutdown of these plants and their eventual sales, indicate a positive net cash flow back to the parent company through 2022.

So is it fair to assume that for Pilgrim and Palisades, it is likely sort of a negative cash flow profile that's offset by the contract revenue that's coming in from Indian Point?

I'm not sure. There's isn't contract revenue at Indian Point. There is one at Palisades.

I'm sorry, the hedge run is still ongoing.

Yes. Palisades is our most cash flow positive plant to be sure during the contracted period. On a merchant basis of course that's a different question. But you there is positive cash flow at Palisades through 2022.

Thank you, Glenda and thanks to everyone for participating this morning. Our Annual Report on Form 10-Q is due to the SEC on August 9 and provides more details and disclosures about our financial statements. Events that occur prior to the date of our 10-Q 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. Also, as a reminder, we maintain a webpage as part of Entergy's investor relations website called regulatory and other information, which provides key updates of regulatory proceedings and important milestones on our strategic execution. While some of this information may be considered material information we should rely exclusively on this page for all relevant company information. And this concludes our call. Thank you very much.