Entergy Corporation (ETR) Q1 2012 Earnings Report, Transcript and Summary

Good day everyone, and welcome to the Entergy Corporation First Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. At this time, for introductions and opening comments, I'd like to turn the call over to the Vice President of Investor Relations, Ms. Paula Waters. Please go ahead.

Good morning, and thank you for joining us. We'll begin this morning with comments from Entergy's Chairman and CEO, Wayne Leonard; and then Leo Denault, our CFO, will review results. [Operator Instructions] As part of today's conference call, Entergy Corporation makes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties, and there are factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Additional information concerning these factors is included in the company's SEC filings. Now, I'll turn the call over to Wayne.

Thanks, Paula. Good morning, everyone. The theme of our 2011 Annual Report to Stakeholders is Adapting to a Changing World. Given the schedules involve for design and illustration, each year, we must select our theme 4 to 5 months in advance of production and distribution. As it turns out, looks like -- so now it looks like we have a foreknowledge of what was to come. It would be except in Philosophy 101, you learn 2 things on day 1. The first is the beginning of all wisdom is to know thyself. The second is the only constant in life is change. For some time, we've been communicating to you our plans and initiatives to address risks or uncertainties, and given our strengths and limitations to adapt to the coming reality that we are now facing. Today, I'll update you on where we stand, and will provide a context for our accomplishments and our challenges. Starting with one of our key utility initiatives, the proposal for each of the utility operating companies to join a regional transmission organization, specifically, the Midwest Independent System Operator, or MISO. Events continue to move us closer to achieving that goal. In a significant development last week, the Federal Energy Regulatory Commission issued its order conditionally accepting MISO's tariff revisions regarding cost allocations for transmission projects upon introduced transition into the MISO RTO. Just to remind you, last September, FERC denied MISO's request for tariff waiver to implement this same proposal. Moreover, FERC noted in its order that it was not making any findings on the merits of the proposal at that time. The request for the tariff waiver was just a wrong procedural vehicle to implement the proposal. In the April 19 ruling on the merits, FERC founded that it was just and reasonable…

Thank you, Wayne, and good morning, everyone. In my remarks today, I will cover first quarter 2012 financial results, our cash performance for the quarter, 2012 earnings guidance and some closing remarks. Slide 2 summarizes first quarter as recorded in operational earnings results, and Slide 3 outlines the major factors that drove the quarter-on-quarter results. First, I'll cover the 2 special items for the quarter. These 2 items are included in As Reported results but are excluded from Operational results. One special item is for expenses incurred in connection with the proposed spinoff and merger of Entergy's transmission business which we announced in December. Spending on our spin-merge initiative reduced earnings per share by $0.04 in the quarter, $0.03 at the Utility and the balance at Parent & Other. The other special item is for an asset impairment recorded at EWC for the Vermont Yankee asset. Under generally accepted accounting principles, long-lived assets are typically accounted for on a historical basis unless a triggering event occurs which results -- requires an impairment evaluation. For Vermont Yankee, the initial triggering event was in early 2010 when the Vermont Senate voted down a bill that would have allowed the Public Service Board to consider VY's application for a Certificate of Public Good. The vote raised questions regarding the operation of the plant through 2032. As a result of this vote and ongoing efforts by the state to shutdown Vermont Yankee early, the plant has been evaluated for impairment under the accounting rules, every quarter since the first quarter of 2010. The accounting rules called for a 2-step process. First, the book value of the asset is compared to an estimate of future undiscounted or nominal net cash flows expected to result from ownership of that asset. If the cash flows are equal…

[Operator Instructions] Our first question comes from Paul Patterson with Glenrock Associates.

Just in terms of the ITC transaction. I guess, listening to ITC and what have you, it sounds like you guys are planning on doing a filing in the retail jurisdictions in the summer of this year, and I can't recall a transaction on which it took that long between the announcement and the actual filings to take place. And I was just wondering if you could elaborate a little bit more on what's going on there, and how your conversations are going on with the regulators.

Okay, I'm going to let Gary Taylor, since this is his last call, get a chance to speak here.

Thanks, Wayne. I think, actually, it's gone as we would have planned. Early on, we talked about the fact that it was very important for our regulators to focus on the RTO transition piece and then file that up as there was more clarity with the transmission program through ITC. And that's what we've done. And so if you look at the timing, we want to make sure that all the hearings were down. And they've all been scheduled, and clearly, those will be completed this summer with the ruling from each of the commissions on an RTO. The second part was that we wanted to also ensure that many of the commissions had ex parte rules, and we wanted to have meaningful conversations with each of them, so when we made the filings this summer, that they were complete and address the concerns that they had. With that, we're on schedule to do that, as Wayne has said, to meet our goal of both the transition to the RTO by December of 2013 as well as supporting the closing of the deal with ITC by the middle of 2013 as well. So very much it's been consistent, and as far as regulators in general, they've been very open and very objective, and I think with what the staff is seeing is a very logical way to address it.

I'll just add one thing. Gary made a good point yesterday in that -- I know you've all, many of you have talked to the regulators, you've heard statements by the regulators, and if you go back to MISO, where we were at in that process, and they were well down the road on MISO now, but the ITC were basically, is where we were on MISO at this point in time. With the regulators taking a wait-and-see approach, waiting to hear the testimonies, waiting to see exactly how we are going to address some of these issues, and that's their job. And on MISO once the numbers were put on the table and they could see what the trade was, then it's been very positive ever since. And so maybe it appears a little slow at someone out of the box, but we expect that once we make the filings, that things will pick up pretty fast.

Okay. And just in terms of the flexibility of the transaction, if one of the states, I mean, you're dealing with a variety of states there, if one of the state pulls out, I mean, just somebody says no, objects, I guess, is better way to put it. I mean, how flexible are you guys in terms of dealing with that, or any potential change? I guess, settlement, what have you, how flexible is the transaction do you think in terms of dealing with that potential situation from developing?

Gary? I was just kidding Gary about that one. I was going to give him all the questions today, just as a sort of surprise.

I'm surprised!

Leo, you want to take that?

Sure, sure. Paul, that's just not a place that we're going to go. We anticipate that we're going to get, make it the same case in every jurisdiction in terms of the benefits and then we'll get this done across the board. Certainly there is considerations about the structure we picked and the transaction that we've struck. So it's not just a regulatory approval of the rate case or something like that where we've got a lot of flexibility around our structuring of this, we have a transaction to preserve and structure that transaction to preserve. So there's really nothing I can comment on there.

Okay. And just the middle of the next year is what we're thinking about still here?

There's been a lot of discussion about that and what we've said is next year. And it would be nice if it was in the middle of the year. That's about as early as you could I think as you could reasonably project it could happen. But we do expect it in next year, but I would hesitate to pick a time period at this point.

Our next question comes from Leslie Rich with JPMorgan.

Leo, could I ask you to walk through Slide 7 again on the ongoing impact from Vermont Yankee? I'm not clear I understand what all those different categories are.

The categories have to do with the items that are part of the plant balance. From an accounting point of view, there's the plant itself and that's the one that you can look at from a depreciation standpoint, that's the value of the plant on the books that's depreciated every year. Since we took the impairment for a portion of the plant balance, that will reduce depreciation expense going forward. The deferred fuel or the fuel outage costs and the fuel itself, also given the way outages work, if you think about it, you were buying the fuel upfront and you have so much of it that comes out every cycle and you have costs associated with the fueling outage, you could amortize over a period of time, those are just shorter-lived assets. So you allocate the impairment across the asset group of the fuel, deferred outage costs and the plant balance, then those would be ongoing as long as those what you've written off you won't have to write off over the period of which those would have been amortized. So the fuel and the outage costs have a short life. The plant, obviously, has a life through the end of the license, so the depreciation expense goes down through the remainder of the life.

Okay, and that's another 20 years because you have the NRC extension?

Correct, correct.

Our next question comes from Julien Dumoulin-Smith with UBS.

I'd be curious to get your perspective, you mentioned it briefly earlier on the RFI on New York State regarding on incremental transmission and power development. Just wanted to get, first your perspective on how these upgrades might change the need ultimately for Indian Point? Secondly, the timing of any such outcomes, again you eluded to clearly sort of an initial look at the potential moving forward of this project? And finally, what is your expectation of the outcome here, clearly transmission and power upgrades being considered? So, I'll leave it to you guys.

That's an excellent question. Certainly one that Rick, who's actually moved out of New York and is very involved in it and John also. And we've been following and been very involved in a lot of the details of what is going on and what is likely to happen. So I'll let Rick kind of summarize where we come out on that one.

Okay, Julien, I mean, as you think about the energy highway objectives, I mean it's everything that we think makes good sense for long-term utility planning. And I think you start with that, they're looking at, they have a lot of generation up North, north of the state, west of the state that isn't fully utilized, a lot of wind generation out West. And what they're looking at is trying to eliminate some of those constraints, and try to give an opportunity of some of that generation serving the lower part of the state. And they are also looking at the long-term reliability, the electric systems, and as most states do in the Northeast, they have a pretty aggressive policy around renewable generation, how that could be developed. So I think as it relates to need, there's plenty of excess generation in the North and the West, and so that will drive a lot of transmission projects. Makes a lot of sense also from a little bit the intent of what the governor laid out, create more jobs. So you're going to build a lot of transmission with a nuclear, I mean, renewable portfolio out West, looking at more sustainable, environmentally friendly generation. But 2 things that we think they've laid out as part of their intent is also to maximize rate payer value, adhere to market rules and procedures, and maintain the overall reliability of the system. And I think that all plays well with the Indian Point unit as has been laid out in the past. Both the New York ISO, the CRA study, the Public Service Commission itself, Indian Point satisfies all those objectives very well. As it relates to timing, anytime you're coming in or their going through an RFI process, they just had another meeting about a week ago I think it was, and their expression of interest are supposed to be filed by the end of May. And then, the task force is looking at potentially identifying some of those requests for interest to maybe take to the next step which would be they'd issue a -- and it won't be the task force that's going to have to be, probably the utilities themselves request for proposals around particular projects. So as it relates to anything like that, that's going to take a while to kind of work through that, work it back through the New York ISO process and the Public Service Commission process, and then you eventually get to real projects probably a couple of years down the road. And I think a lot of them probably will be transmission. So I think as the timing is going to take a couple of years to play out, and I think the outcome will be more transmission than generation. I think there is enough generation in the state, it's just not all in the optimum places.

Yes, all I need is Rick could expand on or even Mark could expand on that issue. From the reliability standpoint even though over the years, we've developed in the industry a number of devices that can help, there is no replacement for local generation, it is just good. If you're talking about reliability, you can have all the energy, all the capacity. And we are pushing it down wires, no matter how big they are, or how many devices you put on them, local generation is absolutely critical to maintain reliability. And these are like 2000 megawatts optimally positioned in New York. And no plan that you are going to come up with is going to produce an expected reliability level as good as one that includes Indian Point. It's just that simple.

Maybe kind of looking a little bit, taking a different direction, more directed towards Leo. I saw the refinancing in the quarter, January obviously taking some more off the revolver. What is the expectation as you stand here today with regard to pushing more of that off to revolver into long-term financing? Is it baked into your '12, is it another '12 issuance or are we talking 2013 and beyond at this point? And maybe more structurally, are you looking to proceed any kind of further refinancing with any kind of transactions of any sort?

As far as the parent company goes, if you go back in time prior to the spinoff announcement, the nature of our term versus liquidity at the parent is pretty much in the same position now as it has been. So I wouldn't expect major changes on that, all other things being equal, in terms of pushing more from the revolver to term or anything like that. As it relates to transactions, when we look at the majority of the transactions that we've got keyed up, for example the power plant acquisitions or even the ITC transactions, those are operating company financings. So if you think about the power plants at a specific jurisdiction, those jurisdictions do their own financing for those power plants. And in the ITC transaction, when you think about the financing that we'll do associated with that separation it will be to a fixed -- to alter the balance sheets to the right size of the operating companies themselves. So from a transactional standpoint of anything that we've got out there right now, that's all related to the operating companies. And I think that all other things being equal, the parent company has got the right mix of the facility term debt right now.

Our next question comes from Steve Fleishman with Bank of America.

Wayne, you kind of mentioned this issue of the DOJ investigation from a couple of years ago and tie it into the Hinds transaction. Is it just the issue that those transactions need to be approved by DOJ so that's how they might end up the getting tied together?

Well, it's speculation. I mean it's just speculating on logic in terms of you have 1 agency with 2 things in front of them. And people sometimes tend to want -- not want to let go of one until they see the outcome of the other. We don't know that. I'm just -- I'm trying to do is to bring up the issue of we don't know really what's going at DOJ, and whether they would somehow relate the two. We don't think they're related. But I want to make you aware of that possibility, that it could get delayed. Not necessarily because they are tied together but because it's 1 agency with 2 different things they're working on for 1 company.

Yes, okay. And then secondly, on New York, is there any schedule on ruling on the water treatment issues at Indian Point? Any update on the hearings for that, the Wedgewire cooling towers?

Yes, go ahead, Chuck.

Yes, Dave, this is Chuck Barlow. There will be -- it will be a relatively slow summer. There will be a couple of wrap-up type hearings on some issues that have already actually been tried. This summer, there is some briefing, post-trial briefing, going on this summer, but the other issues that we have outstanding such as what is actually the technology that will be required, looks like it will definitely go into 2013, as we look at having and wrapping up that trial. So we don't see the likelihood of any incremental decisions being made by the administrative law judges or any final decisions being made on the water quality front before that.

Our next question comes from Michael Lapides with Goldman Sachs.

Wayne, you made comments about the market cycles for power generation, and how things are tough now, and they're likely going to be tough for another couple of years, but they're not going to be tough forever. And I also think about your companies and your leadership history of being what I would call a contrarian buyer, meaning there weren't so many guys who went out and bought nuclear plants at a couple of hundred bucks per kilowatt back in the late '90s, early 2000s. Are there -- when you look at the merchant power markets today, are you seeing opportunities that have the similar value creation potential to the ones you saw in the late '90s, early 2000s around nuclear? And if so, are there specific, either asset classes or markets, that attract you the most?

Well, if I had the benefit of hindsight, I could, 10 years from now, I could tell you which ones will fit that description. When we bought the nuclear, we never expected the prices to be as high as they were for a period of time there. And we don't see that certainly happening again for really any asset class. Probably the most certain thing that when you look at it is environmental regulations are going to get tougher now. Probably not nearly as tough as EPA has outlined, which is just a point of view that is going to work its way and will be played out in probably the courts over the period in time. And there will be assets that people don't view as having much value that will probably have a lot longer life than people think. But I think from our perspective, there's a lot of opportunity because we have a number of companies that are feeling the pressure of these low prices, and they're looking for -- to reduce the risks that they were [ph] out with these assets. And we do have the advantage of having really clean, well located plants. And so, I think there are opportunities available. I wouldn't get in depth to any particular detail, but to work with some of the other companies who have merchant capacity fleets and who develop a more robust kind of portfolio that would rather than bet on any one particular kind of future. I know that's not being very specific, but we're spending a lot of time on this and there's a lot of interest, I can say that, with a number of other companies in terms of trying to figure out how they work their own way through this also. It's a very uncertain time because I mean you have to -- it's not like one thing you're betting on. There's just a lot of different issues that could swing one way or the other.

I would argue all times are like that and it just depends on where you are in the cycle, right? Are there -- would you prefer to add concentration in markets where you already participate in, where you already have physical presence versus expand into other markets?

Yes, absolutely.

Okay. And this one might be one for Rick. Rick, when do you expect rulings in the New York ICAP docket?

We really don't know.

I mean, it seems that it's been sitting in front of the FERC for a while, just kind of sitting there.

Yes, you're right. I mean, everybody has done their filings and stuff. They're going to have to kind of make their own -- they're going to have to make a decision, and we'll see where that goes after that. They must be pretty busy with other things.

And we have time for one additional question, and we'll go to Dan Eggers with Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: I guess, I was just kind of thinking about the ITC transaction, and as you guys have had a chance to spend some time with the different commissioners and staff members. How are you maybe verbalizing the value proposition of having ITC run the system? Obviously, there is real cost benefit that the MISO involvement as you guys have demonstrated, but with the higher cost of capital and that sort of thing, what value are you guys trying to really sell them on, to get them on board with the deal?

Well, I think I mentioned in the comments, a lot of the advantages. But clearly, the scale they bring and the focus that they bring is unique, and maybe that's a leap of faith that they will find ways to do things that we wouldn't necessarily. But as you know, all of our state regulators have been, ever since the merchants came into our territory in these very large numbers, they've been inundated with complaints and we've had various investigations and various requests for data and oversights and we have processes and to address all those issues and every single one of them, it would always come up that we're doing things exactly right according to the rules and all that. But there's always that suspicion that because you're in the business that you're not. And that somehow, something is being wrong or whatever -- being done wrong. Some of us come from at least partial backgrounds like you all do in the trading business, and in the trading business, oversight only go so far. It's separation of duties is everything. And for the commission, the oversight is with all this merchant capacity is sole owners and it never settles the question. And so, by separating the businesses, any concerns that anybody has that there's anything going on here that's not in the best interest of everybody or consistent with the law, and they've heard that over and over again from all the merchants and all the different parties, and just the independence alone, is what stakeholders want. That's what we're giving them. And then at the same time, we still think there's enormous upside of having focus on that business. And I think the main thing that we are emphasizing to them is what the stakeholders want is independence, and these hearings, they've tended to agree with the stakeholders that independence would be good. And that's -- now, they have the opportunity to achieve that. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And then I guess, Leo, just to make sure I understood, on the tax treatment, the Louisiana income tax reset was unique to this period. So kind of going forward, there's not going to be anymore variation and we should assume a normalized tax rates up there?

Yes. You're talking about the Gulf States? Dan Eggers - Crédit Suisse AG, Research Division: Yes.

Yes.

At this time, I'd like to turn the conference back over to management for any closing remarks.

Thank you, Lauren, and thanks to all for participating this morning. Before we close, we remind you to refer to our release and website for Safe Harbor and Reg G compliance statements. Our call is recorded and can be accessed on our website and by dialing (719) 457-0820, replay code 4034210. The recording will be available as soon as practical, after the transcript is filed with the U.S. Securities and Exchange Commission. The telephone replay will be available through May 3, 2012. This concludes our call. Thank you.

This concludes today's conference. Thank you for your participation.