Entergy Corp (ETR) — Q4 2019 Earnings Call Transcript

Good morning, and thank you for joining us. We will start with comments from Entergy's Chairman and CEO, Leo Denault, followed by Drew Marsh, our CFO, who will review the results. In today's call, management will make certain forward-looking statements. Actual results could vary significantly from these forward-looking statements due to various factors, which are detailed in our earnings release, slide presentation, and SEC filings. Entergy does not take on any responsibility to update these forward-looking statements. Management will also discuss non-GAAP financial information, with reconciliations to the applicable GAAP measures included in today's press release and slide presentation, both available on the Investor Relations section of our website. Now, I will hand the call over to Leo.

Thank you, David, and good morning, everyone. Today, we are reporting strong results for another very successful year. Our adjusted earnings per share is $5.40, in the top half of the guidance range that we raised last quarter. Our financial results, combined with our operational achievements, once again show that we deliver on what we set out to do. Everything we accomplished in 2019 also reinforces our confidence in our continued success into the future. This past year, we saw solid achievements in all aspects of our Utility business. In power generation, we placed into service 2 clean, efficient and modern CCGTs totaling 1,800 megawatts. In Louisiana, the St. Charles Power Station came online in May, affirming our track record of completing major generation projects on time and on budget and sometimes better. And a few months later, Entergy Mississippi purchased the Choctaw Generating Station. These resources are part of our portfolio transformation strategy to replace older generation with cleaner, more efficient assets. They improve system reliability, reduce costs for our customers and produce significantly fewer emissions, further advancing our sustainability goals. Renewable energy is another key component of our portfolio transformation. We currently have close to 400 megawatts of renewable capacity that are in operation and nearly 2,000 megawatts of additional renewable projects in various stages of development. About half of those are specific projects that we've already discussed with you. The other half are potential new projects we are currently evaluating and we will share more details with you at the right time. We are committed to providing our customers with renewable power options. And as technology and economics continue to improve, we expect to meet even more of our supply planning needs with renewables. Also in generation, we recently commissioned a 7.4-megawatt battery at our Perryville Station in Louisiana. This is an innovative application of battery technology that will allow Entergy Louisiana to start a 150-megawatt combustion turbine without grid power, and it will support grid reliability and resiliency. In 2019, we invested $1 billion in our transmission infrastructure. During the year, we completed several projects, including Phase 1 of the Western Region economic transmission project in Texas, the Southwest Louisiana improvement project and autotransformer projects in Little Rock and Central Mississippi. Our transmission investments benefit our system and our customers as they reduce congestion, enhance system reliability, efficiency and resiliency and support the economic development of our jurisdictions by enabling service to new customers. In distribution, we are now 1/3 of the way through the installation of 3 million advanced meters across our service area. To complement this effort, we are investing in an improved digital platform to create a multichannel experience for our customers, a new outage and distribution management system, an enterprise asset and work management system and increased automation on our grid. This technology platform not only provides customer usage insights today, but also lays the foundation for advanced capabilities over time. And with billions of real-time data points available, we'll be able to glean new insights that will drive fundamental change in the way we serve our customers while they consume the least amount of energy resources. Our customers' expectations are evolving, and we're preparing to meet them. Instead of simply providing an input, electricity or gas, we're thinking about the outcomes our customers need and desire from their power consumption. With new technologies and capabilities deployed, we'll be able to anticipate their needs and offer tailored solutions. In 2019, we formed KeyString Labs, our innovation center, to engage with stakeholders and develop new solutions that address our customers' desired outcomes and make their lives better. For example, we've developed a backup generator offering for commercial and industrial customers called Power Through. We installed our first 1 megawatt generator at a grocery store in Texas, providing the store with resources in the event of a power outage and it's available to the utility at other times. Both parties share the cost, making it economic for everyone and mutually beneficial. Entergy Texas has already utilized this resource, providing cost-effective and efficient power back to the grid. We also have line of sight on additional projects. In December, we received approval from the Mississippi Public Service Commission to deploy 20 generators in the state, and we are actively working with our regulatory teams to introduce Power Through across all our jurisdictions. KeyString Labs is also working on solutions to expand beneficial electrification of sectors that currently use fossil fuels. This is an important pillar of our broader strategy to reduce societal carbon emissions beyond our own footprint. This is a practical and environmentally responsible way to help customers in other industries meet their sustainability goals by relying on Entergy's grid power instead of higher-emitting fossil fuels. We've recently launched a utility-scale shore-power project that extends our distribution system to marine vessels in ports. Our first shore power project went into service just last month, which we estimate will achieve up to a 42% net reduction in carbon emissions, a 48% net reduction in sulfur oxides and a 98% reduction in nitrogen oxides. We believe we have significant opportunities to deploy shore power projects as we have 37 ports in our service area, 7 of which are among the 20 largest ports in the United States. These are just some of the innovative projects we're working on across the organization, and we are excited about the opportunities that lie ahead. Customer solutions will be an important part of our business, and we will continue to explore opportunities to improve our customers' everyday lives through new technology, data analytics, innovation and creative solutions. Over the last several years, we have built constructive relationships with our regulators that have enabled the development of progressive regulatory mechanisms across our jurisdictions. We have formula rate plans in 4 of our 5 jurisdictions: Arkansas, Louisiana, Mississippi and New Orleans. Entergy Arkansas and Entergy Louisiana will file this year to request renewal for their current FRPs. Entergy Texas has cost recovery factors for transmission and distribution investments. They also have a rider for AMI recovery. In 2019, new legislation directed the Public Utility Commission of Texas to establish a rider for generation investments. That rider is currently being developed through a rule-making process, which we expect to be finalized in the third quarter. In New Orleans, the City Council approved a rate reduction that reflects a 9.35% ROE and caps Entergy New Orleans' equity at 50%. We have appealed that decision, and we continue to work with council members to reach a fair outcome. As a result of collaborative work with our regulators, 90% of our 3-year capital plan is expected to be recovered through timely, progressive regulatory mechanisms. For the last several years, our strategy to manage risks has included the planned orderly exit from our Merchant business. This past year, we sold Vermont Yankee and Pilgrim. And with a final sale agreement in place for Indian Point, we are well on our way to completing our exit from EWC. Our leadership in sustainability and environmental stewardship has been a hallmark of who we are for nearly two decades, and it remains a key focus for us today. In 2019, we were named once again to the Dow Jones Sustainability North America Index. We are the only electric utility to receive this honor 18 years in a row, and we are very proud of this recognition, as DJSI is one of the most respected independent sustainability measures in the world. We earned perfect scores in the areas of climate strategy, corporate citizenship and philanthropy, policy influence, materiality, and water-related risks. This past year, we released our climate scenario analysis. We outlined our role in meeting the imperative to reduce risk posed by climate change. We announced a new greenhouse gas emissions goal to reduce our CO2 emissions rate to 50% below year 2000 levels by 2030. I am proud to say that today, we are already one of the cleanest large-scale generation fleets in the country, according to the 2019 M.J. Bradley Benchmarking Air Emissions report. This independent third-party analysis confirms that of the top 20 privately or investor-owned power producers in the United States, Entergy has the fourth lowest CO2 emissions rate in the nation. In addition, we have limited coal resources, which produced only 6% of our 2019 energy mix. We have definitive plans to retire the majority of those resources by the end of 2030, and we are evaluating options for the rest. We've worked hard over the last 20 years to ensure that we are one of the cleanest utilities among our peers, and our renewed environmental commitments will ensure that we remain so for years to come. Beyond environmental efforts, Entergy has established a legacy of corporate citizenship. We make an impact in our communities through a combination of philanthropy and volunteerism and advocacy. We've earned national recognition for our efforts in improving education and workforce development, eradicating poverty and protecting the environment. Our people and our culture are critical to our success. Acquiring, retaining, and developing the talent we need to meet today's business needs and to prepare for the workplace of tomorrow are important components of our business strategy. We have received many workplace awards and recognition for diversity, employee resource groups, and disability inclusion. I encourage you to visit the Sustainability and Corporate Social Responsibility sections of our website where we provide comprehensive information about our actions and strategies that create sustainable value for our stakeholders. The fundamentals that underlie our steady and predictable growth are strong. We have a robust earnings per share growth trajectory. We have among the lowest retail rates in the country. We have progressive regulatory mechanisms. The states we serve benefit from strong industrial growth and we are an industry leader in sustainability. Our solid base plan that we've laid out will upgrade the service level we provide to our customers while growing their bills at or below inflation, and that alone makes Entergy a compelling investment today. But we want to do even better. With no shortage of customer-centric investment opportunities, we are making continuous improvements on core value at our company. We are working smarter and more efficiently to improve our business. These efforts will enable additional investments that will further elevate service and reliability without significantly affecting customers' bills. That is our objective, to allow our customers to achieve their most ambitious goals at the lowest possible cost. 2019 was a very successful year for our company, and Entergy is well positioned for continued value creation that benefits all our stakeholders. We are taking our business to the next level by executing on our customer-focused investment plan, investing in our people and our culture, and maximizing growth opportunities through continuous improvement in innovation. We are excited by what lies ahead. Before I turn it over to Drew, I'm happy to announce that we will host our Analyst Day conference in New York City on June 18. Our main objective will be to give you a view of our 5-year outlook, and we will continue the conversation on key areas of focus for our company. So stay tuned for more details. I will now turn the call over to Drew, who will review our 2019 financial results, 2020 guidance, and our outlooks.

Thank you, Leo. Good morning, everyone. As Leo stated, we are reporting strong results for another very successful year. 2019 adjusted earnings per share were $5.40, in the top half of our guidance range that we raised last quarter. These results keep us firmly on track to achieve our longer-term growth aspirations. I'll begin with a review of results for the fourth quarter and then move to the full year. I'll provide an overview of our guidance for 2020. Starting with the quarter on Slide 5. On a per share basis, Entergy adjusted earnings were $0.68, slightly below the fourth quarter of 2018. Turning to Utility on Slide 6. Rate actions in Arkansas, Louisiana, Mississippi and Texas contributed positively to the quarter's results. Regulatory charges and provisions recorded last year also contributed to the quarter-over-quarter variance. Lower retail sales volumes and higher operating expenses, primarily depreciation and O&M, partially offset the increase. The higher share count also affected this quarter's results on a per share basis. Moving to EWC on Slide 7. As-reported earnings were $1.08, approximately $3 higher than a year ago. This is largely the result of higher returns on decommissioning trust investments during the quarter, favorable tax items and lower asset write-offs and impairment charges. On Slide 8, you can see that operating cash flow in the quarter was $699 million, $173 million higher than a year ago. The biggest driver was the lower amount of unprotected excess ADIT returned to customers. Another offsetting key driver was an incremental $200 million contribution to our pension trust, made possible by the strong cash flows in 2019. Now turning to the full year on Slide 9. Entergy adjusted EPS for 2019 was $5.40, $0.11 higher than for 2018. These results exceeded the midpoint of both our original and our revised guidance ranges. Utility-adjusted EPS on Slide 10 was $6.95 in 2019, $0.07 higher than 2018. While the magnitudes are different, the drivers for the annual increase were the same as for the quarter I just reviewed. Slide 11 summarizes EWC as-reported earnings, which were $0.74 for the full year 2019. Gains on the decommissioning trust fund investments, lower asset write-offs and impairment charges and lower operating expenses were the main drivers. Partially offsetting this increase was lower revenue, primarily due to the shutdown and sale of Pilgrim. Full year operating cash flow, shown on Slide 12, was approximately $2.8 billion, $432 million higher than last year. The most significant driver was an approximately $300 million reduction in the unprotected excess ADIT returned to customers. 2019 results also benefited from increased collections for fuel and purchase power cost recovery at Utility and lower revenues at EWC partially offset the increase. Moving to Slide 13. Our 2020 adjusted EPS guidance range is $5.45 to $5.75 with a midpoint of $5.60. This and our 2021 and 2022 outlook ranges remain the same as our outlook at EEI. We continue to target a 5% to 7% annual growth rate for adjusted earnings per share. A few of the key drivers for 2020 earnings growth are summarized on Slide 14. Starting on the top line, a full year of 2019 rate activity at Entergy Louisiana and Entergy Mississippi will contribute to 2020's growth as well as Entergy Arkansas' new rates that were effective in January of this year. We will also make FRP filings in Mississippi, New Orleans, and Louisiana, and we expect the Lake Charles Power Station to go into service during the second quarter, with rate recovery in the month following its in-service date. Additionally, our project sales volume in 2020 is expected to increase year-over-year, driven by strong industrial sales growth of approximately 5.5%. This is partly offset by slightly negative residential and commercial sales volume. We continue to expect volatility in industrial sales from quarter to quarter as new and expansion customers ramp up operations. Overall, we see about 2% positive sales growth for 2020. We project Utility O&M to be approximately $2.6 billion, in line with our previous disclosures and about $30 million higher than 2019. This is driven by pension expense and items offset in revenue, such as energy efficiency and storm reserves. A smaller amount is due to a full year of St. Charles and Choctaw as well as the Lake Charles Power Station coming online. Depreciation and interest expense are also expected to increase as we continue to grow our business through productive investments to benefit our customers and our communities. On a per share basis, we expect our average share count to be 201 million shares as a result of settling the remainder of our equity forward mid-year 2019. Finally, our cash and credit metrics as of the end of the year, as shown on Slide 15. Our parent debt to total debt is 21.6%, and our FFO to debt is 14.6%. This includes the effect of returning $300 million of unprotected excess ADIT to customers over the last 12 months. Excluding this give-back and certain items related to our exit of EWC, FFO to debt would have been 16.8%. While we still have some unprotected excess ADIT remaining, we have returned over $1 billion to our customers, and the bulk of the credit impact is now behind us. We remain committed to our credit targets, including at or above 15% for FFO to debt by 2020, and below 25% for parent debt to total debt as well as maintaining our investment-grade profile. I'd also like to note that our finalized capital plan is in the appendix of our materials. Our capital plan through 2022 continues to grow and now totals nearly $12 billion, led by incremental transmission investment in Louisiana and Texas. The financing framework for our capital plan has not changed since 2018, and we don't see a need for equity until 2021. Now that we are in 2020, we are actively considering the timing and method to fill that need in a manner that best supports our financial goals. As Leo mentioned, 2019 was a very successful year for our company. The fundamentals that support the steady predictable growth of our business are strong. As we continue to optimize our efficiencies through continuous improvement, technology, and innovation, we see an opportunity to take our business to the next level. We are excited about the growth ahead. And now, the Entergy team is available to answer questions.

It's actually Constantine here for Shar. Congratulations on a great quarter.

Thank you.

You talked about some of these innovative capital deployment programs that you're putting in place. And I just wanted to kind of get a little bit of an idea for how big do you see the opportunities for all of the electrification and customer solutions. And how does that fit within the plan that was presented at EEI?

As far as the plan, there's very little in there. We have added some dollars when we went through the process at the end of the second quarter where we had some continuous improvement opportunities, and then we put money back into the business for all of our stakeholders. There was some level of that from the KeyString Labs sort of initiatives, but there's very little in the plan really at this point for those opportunities. It's a little early for us to start to size it up. As the year goes on and we start to develop more, we will. But our view is that at the end of the day, the distribution side of the business and these customer solutions will be the fastest-growing part of our business. Customer solutions could include all kinds of electrification. If you look at, for example, Louisiana, the industry is the second largest emitter of greenhouse gases behind transportation with utilities third, which is a little bit different than it is in the rest of the country given the nature and the size of the industrial complex in Louisiana. So across all of our footprint, we see a significant amount of opportunity in the electrification space, once we work beyond shore power and into manufacturing processes and even the transportation sector. So that could get significant over time as we go forward. And there's a lot of other things that they're going to be able to do in addition to what we've already done in solar, and in addition to what we're already doing in backup generators. As I mentioned, while we put the footprint of AMI, EAM, customer digital and all of those other technological improvements that we do on the system, we get significant amounts of data that will allow KeyString Labs and the rest of the company to actually create products and services based on that. So it's too early to size it up and give you any numbers. But if you go 5, 10 years down the road, we think that it's going to be pretty significant.

Wonderful. Just one quick follow-up is on the numbers for the sales volume in 2019, which seemed a little bit weaker and a little bit weak on the industrial sales and just the customer count. Can you comment on what you're seeing in terms of just economic activity? And how does that play into 2020?

Sure. This is Drew. The fundamental strengths in our service area remain intact, including low energy costs, favorable rates, supportive communities for industrial growth, access to the river, and robust infrastructure and labor resources. These factors continue to present opportunities for growth in our industrial base. Comparing 2019 to 2020, we mentioned that several key customers we expected to see increase their activity in 2019 did not ramp up as quickly as we had projected. However, we still anticipate their presence, which is influencing our year-over-year expectations for 2020. Additionally, some smaller industrial customers were affected by significant rainfall in Arkansas, which impacted their agricultural pumping activities. We expect them to return in 2020, assuming typical weather patterns in Arkansas. This explains the year-over-year changes and the softness we experienced in 2019. Now, I'll let Rod discuss our outlook for customers moving forward.

I think we commented during the last quarter that our confidence in the outlook comes from the fact that our growth expectations stem from our ability to actually identify specific projects, and we know exactly who those customers are. Over the last several years, we've improved our capacity to engage those customers, giving us greater visibility and insight through various aspects of their project development cycle, from concept to financial investment decision. And so when we give you our outlook, it's a probability-weighted assessment of the timing of those projects coming online and the associated load and financial implications. So our outlooks are still strong, and we can tie our expectations in the near term to specific firms within different industrial segments. So we still have clarity. Admittedly, they sometimes come in lumpy over the course of quarter-over-quarter. But our confidence is still high in the industrial outlooks driving our growth.

So to follow up on some of the previous comments, Leo, could you provide more details on the customer-focused aspects? Specifically, I've heard that some of your commissioners in Louisiana have mentioned the need for more direct access, not in a competitive sense, but in terms of procurement options. Should we anticipate initiatives like green tariffs to facilitate new opportunities in this area? I'm also interested in your thoughts regarding the broader resource portfolio. I understand a retirement study is currently in progress, and I would like to know how that may influence future planning and the development of specific dockets in the near to medium term.

Okay. Let me address that question and the series of inquiries related to it. In the customer solutions area, we cover a wide range of all customer segments. We've implemented low-income rooftop solar projects through KeyString Labs and provided backup generation for small industrial and commercial businesses. At the utility level, we are engaging with our larger industrial customers in various ways to help them improve their operations. We're exploring green tariffs and community solar, as well as a broad range of products and services that can help our customers achieve their desired outcomes. From an economic perspective, the utility function goes beyond merely supplying reliable power at low cost; it also encompasses the customers' objectives for their consumption. If a customer has sustainability goals, for example, we want to assist them in achieving those objectives in addition to selling them electricity. This is where we can electrify certain sectors. In the area of shore power, for instance, we assist customers in meeting their sustainability targets while doing so in a cost-effective manner. This approach is crucial for us as we serve our customers, benefit the communities, enhance our sustainability footprint, and help our customers remain competitive. Regarding specifics, our development of products and services will emerge through innovation by collaborating with our customers in new ways made possible by advancements in technology, data, information, and analytics. As we integrate more technologies into the system, we will gain greater access to data and information, enabling us to achieve these goals. We are excited about the diverse opportunities available across different segments of both residential and commercial sectors, as well as specific customers in the industrial space. On the topic of our resource plan, we are continually evaluating its future across all jurisdictions. As technology evolves, our understanding of possible resources expands. This includes evaluating various technology choices in energy efficiency, renewables, gas, and others. We aim to expand our resource portfolio, and as renewables and storage technologies become more economically viable, we expect their increased integration into our systems. Through our resource plan, we strive to provide three key benefits to our customers: ensuring operability so that when they switch on the lights, they work; maintaining our position as one of the lowest-cost providers in the United States to support economic development in our service areas; and helping our communities and customers meet their sustainability goals. We are committed to optimizing all three objectives as effectively as possible, leveraging all available technologies. I'm not sure if Rod wants to add anything to that, but I hope this covers it.

Yes. I mean I would only add that in Louisiana, we'll be making filings with the commission relative to green tariff options that we want the commission to consider in response to some of the sustainability objectives of our industrial customers. But that's an ongoing conversation that falls right in line with the comments you just made, Leo.

And we have a retirement study to do after the St. Charles project goes in service that will address some of the things that Leo was talking about.

So Leo, on the generation side, you had mentioned that you have opportunities for more generation projects going forward. Just wanted to understand, is that from load growth driven, or the 5%, 6% goal that you have currently that you plan to retire? What's kind of driving the new generation opportunities? And what kind of fuel mix are you looking for as you go forward in the new generation?

The generation opportunities are similar to what we've discussed in the past. We still see a need to transform our fleet from the older, less efficient generation to new, cleaner, more efficient ways to provide power. Our perspective on the mix hasn't changed from where we were at EEI that if we look at 22 million to 30 million in that 7,000- to 8,000-megawatt range, and we think that based on where technology is going and what we could foresee that roughly half of that could be renewables. The way we're going to fill that out is going to be specific to those 3 points that I made a minute ago, has to be the right operational characteristics at the right cost with the right sustainability footprint. Our objective is to optimize that as much as possible. And so as we've discussed before, as we get closer to each one of those resource choices, to the extent renewables, storage, technologies, and other factors have made those more operable and cost-effective, they become a bigger part of the resource mix. That doesn't change how much capacity we need because we need to provide the service we need to provide and the age of the fleet is what it is. And as I mentioned, we have plans for retirement of the majority of the coal resources that are out there, and we're looking at what to do with the others. So that, plus the old gas fleet that still needs to be refreshed, all go into the mix.

Got it. Second question or a follow-up on the equity needs point. Drew, I think you mentioned or at least at EEI, you had a range of 5% to 10%. Now you're saying you're at the upper end of that, so closer to the 10%. Just wanted to understand what's driving that equity need going up a little bit. And is that a little bit of managing the credit as well? Just wanted to understand that driver.

Sure, Praful. I believe that this is partly what we are addressing. Our position hasn't changed since we outlined our plan in 2018. We are considering various factors, including credit and earnings, as we navigate through these issues. Additionally, our capital plan has expanded since last summer, and as Leo mentioned, we may need significantly more equity or capital in the future. All of these factors are influencing our perspective on where the equity needs may be when we address that requirement in 2021.

Got it. And finally, any performance, the outperformance that you had in your decommissioning trust especially on Indian Point? I'm assuming that doesn't accrue to Entergy because that was part of the deal that was struck in terms of the sale of Indian Point, correct?

That's correct. So the trust fund at Indian Point is whole tax responsibility in terms of the level that it's at. And that will help be part of the NRC proceeding that is underway right now.

Congrats on the quarter.

Thank you, Sophie.

I wanted to discuss cash flows and the balance sheet further. It's clear that both the operating cash flow metric and the leverage metrics are showing improvement, which is very positive. Where might we see an unexpected boost, or what opportunities for change exist compared to your current expectations? It could potentially relate to pension performance or perhaps an unexpected increase in load growth. Could you elaborate on the factors that could impact the pace of this improvement in either direction?

There are several positive factors that have contributed to our performance in 2019. Firstly, at EWC, our cash flows exceeded our expectations, thanks to the team's effective cost management and efforts to lower capital requirements as we prepare to shut down certain plants. Additionally, we witnessed favorable changes in working capital within our Utility segment, which could continue this year due to declining fuel prices. The pension trust's performance has also been strong, but we have seen an increase in our liability, which rose by approximately $1 billion from $7.4 billion to $8.4 billion, primarily due to a drop in interest rates of over 100 basis points. While our assets also increased, the gap between our assets and liabilities remained consistent at about $2 billion year-over-year, meaning we didn't close the gap as much as we had hoped despite the positive performance. However, we were able to allocate an additional $200 million to the pension trust at the end of the year, more than we initially planned, which will help mitigate pension liability risks. Moving forward, I expect to see opportunities for further improvements, such as lower fuel prices benefiting our working capital and additional prospects at EWC. This doesn't even account for the potential gains from continuous improvement efforts discussed by Leo, which could provide us with extra cash flow we can reinvest, benefiting our customers and adding value for all our stakeholders.

Got it. And the follow-up I have is on Indian Point. So we've seen the objection filings by the New York Attorney General. Can you just walk us through how these proceedings typically are going to go? And how much way would be afforded to a party like that, I guess, in this proceeding? Like should we be worried about this?

Yes. The questions posed by the New York Attorney General are similar to those we have already addressed in the NRC proceedings for both Vermont Yankee and Pilgrim. They focus on Holtec's financial and technical capabilities to handle the decommissioning work. This is exactly what the NRC is evaluating in their process, and we believe this will be an appropriate platform to address those concerns. We are confident that Holtec will be able to respond effectively, as they have already successfully addressed these issues in other proceedings, including those involving Pilgrim and Oyster Creek.

I believe you may have indirectly addressed most of this. However, when I look at the slide deck from EEI compared to the current slide deck where you've refined your guidance, particularly regarding O&M costs, I see that we previously expected them to increase by $0.10 at EEI, but now they're anticipated to rise by $0.25. I think this is partly due to a lower pension discount rate, which was initially set at 4% as a placeholder, and is now just below 3.4%. Additionally, you've mentioned that many of the increased costs will likely be offset by higher revenues. Can you confirm if I've understood everything correctly, or is there something I've overlooked?

I think you're correct, Greg. The pension discount rate decreased more than we anticipated during the EEI discussions. This accounted for about 40% of the increase in O&M costs. Additionally, another 40% is related to factors that offset in the revenue side, such as energy efficiency and changes in storm reserves, which will result in a net zero impact. There are also some minor adjustments, but those amounts are quite small. Overall, we're aligned with our expectations, aiming for $2.6 billion in utility costs and seeking to maintain it around $2.65 billion moving forward, as we discussed last summer. We've managed to address the factors that raised O&M slightly while staying within our overall expectations.

Yes, that's a good answer. As I compare the expected rate actions from the fall until now, it seems that the DCRF and TCRF filing and the AMI riders filing weren't explicitly included in the retail price actions in the fall presentation but are included now. Are these modest increases in regulatory activity compared to the fall plan, or were they always anticipated but just not highlighted?

Yes. I think we were anticipating that we were going to do those things, but we hadn't explicitly called them out.

Okay, great. Regarding the CapEx plan, it has increased slightly through 2022, but there are 2 gigawatts of potential additional opportunities. If I estimate at $1,000 per kilowatt, can we consider that as long as we ensure that these additional capital expenditures provide benefits to customers? Could this potentially result in a $2 billion increase in CapEx? Also, what would the timeframe for that be?

Absolutely. It's a big opportunity for us. We've talked about the capital plan is inching towards a $4 billion average. At this point, if we look beyond our capital horizon 2022, I would expect that it would be up above $4 billion. And all the things that you're talking about are going to be a piece of that opportunity. That's on the generation side. I mean Leo was saying that the biggest opportunity is on the other end of the value chain, at the distribution end and the customer services; that's where the biggest growth opportunity, we think, will ultimately be. So there is significant capital opportunity out there for us. But the thing that you said is really what we are working through, which is how do we make sure that we can create value for our customers and really all of our stakeholders while we put this capital to work and do it in a way that allows our customers to manage this through their bills. And that's kind of the key to this whole thing and all the continuous improvement and the innovation, the new products and services, the leveraging of technology, creating headroom in those bills. That's what we're after. And we see opportunities for that in a significant way down the road.

Hey, Leo, I have a question for you that you might not want to answer, but I’ll ask it anyway. With the opportunities you have available, it seems that you have control over your own destiny. However, you have mentioned being open to exploring better strategic directions for the company. Given the abundance of organic opportunities, is that stance still relevant? What circumstances would need to arise for you to consider a strategic offer that could distract you from your current path?

I believe the criteria remain unchanged. Our management team and board are receptive to better ideas, as you noted. If there's a way to make significant progress beyond our current capabilities, we will explore it. However, any option must not only advance our goals but also be feasible from both a counterpart and regulatory standpoint. There is no value in pursuing something if it cannot be successfully navigated through the necessary processes. Additionally, as you mentioned, we always need to consider the potential for distraction, which in our industry can take 18 to 24 months to resolve. During that time, we must ensure we don't divert from the successful strategies that brought us to this point, risking losing momentum even if the new initiative succeeds. If we can address that challenge, we would still consider such opportunities to be worthwhile. I believe we currently have the best stand-alone plan we’ve ever developed for all four of our stakeholders, with considerable chances to enhance our service levels and customer support. We also have significant prospects for continuing our sustainability goals and community initiatives, which include efforts in environmental stewardship, education, workforce training, and poverty alleviation, all aimed at adding value to our communities. Our aim is to further cultivate a culture that deeply engages our employees, leading to a growth investment profile that benefits our shareholders. Therefore, the threshold for considering new ideas that truly advance our goals has never been higher. This does not mean we are not open to new concepts; it simply means our standards are currently very high.

Real quickly, can you remind us what the stated retirement dates are for some of your coal units? I'm thinking larger ones like White Bluffs and then some of the smaller ones, independents, Nelson, et cetera.

Yes, the Arkansas units are included in that settlement which is expected to be completed by the end of 2030. Yes.

Is there a scenario where, especially considering the economics of coal, gas, and solar, you would consider moving up the retirement dates? This could create a slight capacity need but might also lead to savings for customers.

I mentioned in my script that in addition to what we're doing, we were looking at what to do with the rest of the fleet. There is that kind of analysis going on, on a regular basis. We look at all of the resources we have and what's the right balance between spending the money required to keep them operating versus replacement. And so that's on the table. At this point in time, we haven't made that call.

Got it. My other question is about the nuclear side. Can you provide some insights on the dispatch economics and overall economic performance of your nuclear fleet in the southeast? I’m curious about how you view those plants in terms of their economic position in the dispatch system. We've observed nuclear retirements in other parts of the country, both regulated and nonregulated, and I'm trying to understand if we should consider the nuclear units in the context of fleet transformation over time.

Michael, this is Drew. Regarding the dispatch stack, nuclear plants typically operate at a low position because they run continuously and have low variable costs. We acknowledge the challenges we've faced economically, especially in the Northeast with the shutdown of our EWC fleet. However, there are significant reasons to keep the nuclear fleet operational from a quality standpoint, which can be better assessed in a utility context than in a merchant power market where only the marginal price of electricity counts. There's ongoing support for nuclear plants in unregulated markets for these very reasons, including clean energy that stabilizes the grid, consistent availability, portfolio diversification, and substantial tax contributions, leading to job creation and active community engagement. These factors create strong policy incentives to maintain nuclear plants, but they are challenging to evaluate in a merchant context. We see this happening in Illinois, New York, and other regions, with a more favorable environment for assessing these attributes in a regulated rate setting.

Understood. And then last question, where do you think you stand when you benchmark yourself on P&D costs, either on a per line mile or per customer or whatever you all think the most appropriate metric is? Kind of where do you think you stand versus the peer group? And how do you think about the path to kind of getting the top decile?

Well, it's a tricky metric to be making broad generalizations about the peer group, because the peer group would have to be somebody whose service territory characteristics mirror ours. So there's a big difference between people who are in urban dense versus rural versus mountainous versus swampy versus all of any other things that make that up. It doesn't mean we don't do it. It doesn't mean we don't compare favorably in a lot of respects, but we need to go beyond just those benchmarks, Michael, and get into what can we do to continuously improve ourselves once we get outside of the plant level, because there's too many variables to just make broad generalizations. I wouldn't think, even if we are top decile, that we wouldn't be able to find ways to improve.

Can you give us a little preview of what kinds of things we might expect you to do at the Analyst Day? I mean obviously, you've talked about a lot of evolving opportunities at the margin. But more specifically, do you think you'll roll forward your outlook to '23? Are you going to continue giving these multiyear outlooks? Is that the plan? But just a sense of what we should be practical opportunity.

Yes, as I mentioned earlier, we typically hold an Analyst Day every other year. During these events, we present a five-year outlook instead of the usual three-year one. I expect we'll continue this practice, allowing us to delve deeper into our initiatives and explore opportunities in more detail. We have a solid foundation, including some of the lowest rates in the country, a clean fleet, industrial growth, and strong regulatory frameworks. We have numerous opportunities to enhance our customer service while keeping costs in line with inflation. Our position as a company is quite strong, but we remain focused on improvement. Our team is continuously identifying new investment opportunities that can elevate service levels, whether through sustainability, reliability, or emerging customer solutions that prioritize outcomes. Continuous improvement is vital, and it can manifest in various ways, such as optimizing our supply chain and IT functions to reduce costs while increasing performance, or through new economic development that creates additional load growth. Additionally, with gas prices remaining lower than expected, we see a significant opportunity to benefit our customers.

Great. Well, keep up the great execution and look forward to hearing more about it in June.

Thank you, Jonathan.

Thank you, Sherry, and thanks to everyone for participating this morning. Our annual report on Form 10-K is due to the SEC on March 2 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 will be reflected in our financial statements in accordance with generally accepted accounting principles. Also as a reminder, we maintain a web page as part of Entergy's Investor Relations website called Regulatory and Other Information, which provides key updates on regulatory proceedings and important milestones related to our strategic execution. While some of this information may be considered material, you should not rely exclusively on this page for all relevant company information. This concludes our call. Thank you very much.