Entergy Corporation (ETR) Q2 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Entergy Corporation's Second Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. At this time, for introductions and opening comments, I would 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. I'll start today with one of our key initiatives. The proposal for the utility operating companies to join the Midwest Independent Transmission System Operator or MISO. In May, the Louisiana Public Service Commission became the first retail regulator to approve, subject to certain conditions, the proposal by Entergy Louisiana and Entergy Gulf States Louisiana to transfer functional control of their transmission facilities to the MISO Regional Transmission Organization. MISO change of control proceedings are in various stages of progress of the retail regulators in Arkansas, Mississippi, New Orleans and Texas. During the second quarter, the Arkansas Public Service and General Staff modified their position such that Entergy Arkansas should continue to progress toward joining MISO and when certain conditions are met, the APSC will grant the full change of control. An order from the Arkansas Public Service Commission could come at any time now. Testimony has been filed in the remaining 3 jurisdictions and subject to various conditions. Commission staff, all the advisers and intervenors in each proceeding generally have been supportive of or, at least, have not expressed opposition to joining MISO, with the exception of course, of the Southwest Power Pool. We believe we should receive all the retail commission orders on MISO in 2012. Given this progress, final preparations were underway now to initiate the regulatory approval process for the proposed spin-off and merger of the Entergy operating company's transmission business with ITC Holdings Corp. The retail regulatory filings will describe on both a qualitative and a quantitative basis. The benefits to customers and other stakeholders resulting from the superior independent model for transmission operations that ITC provide, as well as the improved financial flexibility and strength of the Entergy Utility operating company following the completion of the transaction. We expect to…

Thank you, Wayne, and good morning, everyone. In my remarks today, I will cover second quarter 2012 financial results, our cash performance for the quarter and then add a few closing remarks. Starting with our financial results on Slide 2, higher overall second quarter 2012 earnings were driven by higher results at both the Utility and EWC compared to a year ago, and lower results at Parent & Other. Second quarter earnings included a special item for expenses incurred in connection with the proposed spin-off and merger of Entergy's transmission business with ITC Holdings. Spending on our spin-merge initiative reduced the quarter's earnings per share by $0.05 at Utility. Now let's turn to operational results for the quarter. Slide 3 summarizes the major drivers for operational earnings. Utility results were higher than a year ago due primarily to reduction in income tax expense. This was partially offset by lower net revenue and higher nonfuel operation and maintenance expenses. An agreement with the IRS regarding the storm cost financings in Louisiana for Hurricanes Katrina and Rita reduced income tax expense by $180 million for the affected companies, Entergy Louisiana and Entergy Gulf States Louisiana. The company has also recorded regulatory charges totaling $101 million after tax to reflect an agreement to share the tax benefits with Louisiana customers. The net effect of these items increased Utility earnings by $0.44 per share. Excluding the regulatory charge, Utility net revenue was modestly higher this quarter compared to a year ago. The increase was due largely to positive weather-adjusted sales growth. After excluding the effects of weather, billed retail sales increased 4%. The Entergy region benefited from a reasonably healthy economy. Industrial sales continued to grow from expansions. However, overall weather-adjusted sales growth through the second quarter is roughly consistent with what we expected.…

[Operator Instructions] We'll take our first question from Steve Fleishman with Bank of America.

I guess on the last earnings call, Wayne, you brought up the concept of looking at strategic options for the unregulated generation business. Could you just update us on any thought process there?

Well, I'll let -- Leo and his team has been working on this. But I think one of the things that we kind of emphasize, that given the uncertainty in a lot of these marketplaces and the environmental regulations and other types of things that we almost have to go back -- one of the additional things we're doing is going back to when we tried to form an axis. And our opinion at the time, of course, it was -- these businesses don't belong together for a number of reasons. They're financed differently. They have different credit metrics, things of that nature. But then as power prices have fallen and things of that nature and credit metrics and credit quality become a real issue for this on a stand-alone basis as it's structured for the wholesale business. and -- but nonetheless, we still believe it should be separated from the utility. So one of the other options is to look at transactions or assets or whatever that impact positively credit quality, so we can get back to maybe at the notion of separating the 2 businesses rather than focus just on a functional adding power maybe at something else. I'll let Leo to have expand on his thoughts on the idea.

Yes, Steve, the bottom line is if you go all the way back to the kinds of things we would have been looking at the time we came up with the separation concept, a lot of those ideas haven't gone away. As we've always looked at that portfolio, ways to grow the business, ways to protect the business, way to enhance the credit quality of the business, ways to provide liquidity of the business, we continue to look at all of those kinds of opportunities whether they involve internal moves or transactions-based ideas, and really could run the gambit of ways to improve the credit quality, improve the margins, improve the valuation and to make sure that we continue to protect not only the parent company but the Utilities as well.

Okay, one other question. Just Leo, thank you for giving some of those 2013 drivers and beyond. Is there just maybe kind of a punchline of what you're trying to highlight with -- these seem generally the stuff that we normally kind of you've highlighted in the past. Was there any -- is it mainly these rate cases that...

Well, you're really, Steve, just to give you all an indication of what's going to drive 2013 and beyond, and the timing of when those things actually show up during the year as much as anything else.

And we'll hear next from Dan Eggers of Crédit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: I just wondered if we could go back to the kind of the MISO conversation and the ITC transaction. If you think about timing and then kind of perpetual delays to get in the filings done for ITC, is there something structurally you're seeing that is slowing down that process and what is the level of confidence we'll see filing get done in the third quarter?

Theo Bunting is really heading that process up as the CEO of our Utility. But Dan, I don't think there's anything structurally that's holding it up. Our commitment is to put on the strongest possible case in an area that is kind of new to a lot of the parties to the case, and we want to make sure that we fully support and emphasize how important this is. We're bringing together 2 companies, Entergy and ITC, along with a number of outside experts, who believe very strongly and have evidence to support why the independent model is so much better than how we're doing it today. And just bringing all the different points of view and testimony together, it's clearly everybody's on the same page and it's clearly, there's a -- to the commission and other intervenors on the case has been a little more challenging probably than we might have expected. We thought that we would be able to make our first filing in Louisiana near the end of this month. We gave ourselves kind of another week to button everything up, and we're just not quite there yet. Now, Leo and Theo are having meetings this week to try to resolve any issues that we feel like are not supported as well as we want. To get that analysis and the testimony to -- typically the way we would do it or ITC would do it when you just do it on your own. So it's nothing structural, it's just complicated when you involve more parties, and we want to get it right. Theo, anything to add or...

Yes, I would like to add something, Dan let me -- I agree with a lot of -- all of the things Wayne said. The other thing I think you need to consider is we're doing this in multiple jurisdictions, and we're trying to do this on a manner that would allow us to make those filings in those jurisdictions with not much passage of time between filings. So obviously, we have to think about how do we ensure we incorporate all of items need to consider relative to those jurisdictions so that when we start that process, we don't get any significant slowdown. I do think, as Wayne said, there's still some things we need to work through. We'll be working through those things over the next few weeks, and we'll begin that filing process. Dan Eggers - Crédit Suisse AG, Research Division: Great. And I guess just, Leo, on the tax issues for the year, is there anything else we should be looking at that you could provide a benefit for this year? And did you anticipate this level of benefits showing up in the guidance when you guys updated this spring?

Well, we updated the guidance this year obviously. We had the possibility of both positive and negative items in the tax arena. We knew we were working obviously on the settlement, but at the same point in time, we had the appeal of the foreign tax credit decision, which had already been lost in a different jurisdiction at a different district for which we had provided the reserve last year. So that could have been the positive that you saw this quarter because of the win. But if we had lost that case, it was a significantly larger negative possibility. So we had indications around both of those things, but they were unknown at the time and could have gone either direction. There's always a few things in the hopper, as you know, based on the size and number of the positions that we've got in front of us at the moment that may or may not turn out, may or may not happen, could go to litigation like the foreign tax credit case or could be settled. It just depends on where we are on the audit cycle and what issues are available there. We had taken some of that into consideration when we reset the guidance, remember the $0.22. I think, we characterized that as other in the improvement. In the original guidance, some of that was taken into consideration tax items that may or may not occur. I think we've mentioned that at the time.

We'll hear next from Greg Gordon with ISI Group.

Focusing on Table 4 on Page 3. Your weather-adjusted sales growth has been quite robust. You make some comments in there about growth in -- industrial sales growth, particularly in Louisiana. You also had retail sales growth. Can you extrapolate, a, on what's going on in terms of residential growth, why that's so strong, what types of industrial activity you're seeing that are leading to this type of growth? And then the decline in the refineries, could we characterize that as seasonal, because as I understand it, they were down for maintenance, and therefore, that should be additive when they come back? It's really a very positive underlying theme here.

Okay, Theo, you want to take that?

Sure. Craig, as Leo mentioned in his opening comments, obviously, on the residential -- let's start with the residential side first. We are seeing some impacts from still a fairly strong economy in our region, especially when you compare it to what's going on nationally. Also, I think, you have to think about some of the things we had last year that didn't necessarily repeat themselves this year. We had certain events last year that had a dampening effect on sales, for instance the flooding we had from the Mississippi River that reduced sales volumes. And also, I think last year, we had fairly extended periods of extreme weather, high bills and generally customers respond to that. So we probably had some amount of customer response relative to bills last year. And also I think, Leo mentioned the fact that our -- may have mentioned the fact that our billing cycles this year for the quarter had a few days beyond what we would have seen last year as well. And all of those things really coupled together had some effect on the year-over-year change. And if you back and if you look at the residential growth year-over-year last, it was actually slightly negative. So given that, we saw a fairly robust change year-over-year. But again as we have said earlier, I think, we still fundamentally feel like we're -- where we -- about where we expected to be at this point in time relative to sales. In terms of industrials, I think at the chemicals, that continue to show fairly strongly in terms of segments in the second quarter, and a lot of that is relative to facilities expansions. As we go through the year, we'd likely see some of that moderate as we're kind of seeing those expansions and when they hit in various points in times in prior years. There are, obviously, we do get outages in certain areas in terms of customers, bringing their facilities down for various reasons. And that can move our industrial sales up and down as you compare period-to-period.

We'll take our next question from Julien Dumoulin-Smith with UBS.

Just on the Texas rate case here, just if things don't turn out as positively with the final reg here in August, what are the various avenues? You've kind of alluded to them quickly on the opening statements, but if we were to see a move towards a capacity-type rider, when would that happen? Or alternatively, if we weren't , at what point down the line, say, 6 months, a year from now, do we see another filing, just to be a little bit more explicit about the timeline?

Theo?

It sounded like you had a number of questions there, Julien. I'm trying to get though them. Yes, I guess the first thing I would make sure we well understand is where we're at today is we basically have a kind of proposal for decision. It's not an order from the commission. And that's still forthcoming. And part of that, obviously, what we would do relative to that would have a lot to do with what comes out of that commission order. I would say it's not unusual in Texas for the commission to not accept all aspects of a PFD. And as Wayne talked about earlier, in terms of various riders that are in place today, in the current rate construct in Texas, obviously, those will be opportunities for us given once we know the outcome of the case itself. And obviously, to talk about what we might do and whom we might do it at this point in time is probably a little premature because we don't have the outcome of the case yet. The capacity rider, it's in a rule-making phase, and we are working and we'll continue to work to move that along. Also, as Wayne mentioned in his opening script, the big part of what's the issue in the case, as it relates to the recommendation of ALJ is capacity. And if in fact, just assuming for a second that we don't fundamentally give what we believe is appropriate treatment relative to that, and we would obviously like to -- and try to ensure that we move that rule-making along in order to get proper alignment of the regulatory construct in Texas with what we fundamentally believe is appropriate and what's taking place there.

Yes, I think, like Theo said, we need to get the order out of the commission. Hopefully, it will undo some of these what we think are inappropriate adjustments. But, it won't only just be for the outcome, it will be tone set in the order. Hopefully, it will give us some guidance, that will be instructive at which way to best to proceed. And obviously, we want -- we don't want to start a war with the commission by going one way if they would prefer another. We're hopeful that they will acknowledge that this does not give us the opportunity to earn a fair return and they will fix that or give us a strong guidance on how to fix that ourselves.

We'll take our next question from Paul Patterson with Glenrock Associates.

Greg asked my question on sales growth. I was wondering though, on the -- one of the commissioners in Louisiana is talking about changing the ROE kind of significantly on the downward side. And I was wondering if you could sort of elaborate if he's being joined by anybody else or if he's kind of an outlier on that, and any thoughts you have on that.

I'll let -- Theo is maybe closer to it. But as you know, in this interest rate environment, I suspect there isn't a commission on the country -- you don't have, at least, one commissioner who's bringing the issue up as it appropriate. It's a good question. Obviously, interest rates are much lower than we're used to and the -- in like Louisiana specifically, we really have not heard a lot on the issue, we do have one commissioner who more outspoken on it. But again, it's fairly,[indiscernible] I think across the country. But Theo, why don't you...

Yes, I think also one thing that you will note in Louisiana. I mean, that issue has come before the commission, at least, on maybe one, couple of occasions and they just not moved it along. And as Wayne said, I think we have one commissioner there who is very interested and looking into this. But I think you also have to consider, and I think, they have to consider interest rates is really just one input into that the entire process of defining what's an appropriate ROE. You also have to think about risk premiums and you also have to think about the fact that there's a legal standard around what is the appropriate ROE. And ROE basically should be set such that you can maintain the financial integrity of the company, you can raise capital on a reasonable term, such that the Utility can discharge its public duty relative to the customers. And in this period of time, we're seeing fairly extensive capital investment across the Utility industry. And I think regulators really need to think about and consider all of these elements as you think about what is the appropriate ROE for Utility.

Okay, great. And then on the stock buyback repurchases, any thoughts to sort of -- at this point in time, I know you got a lot of things going on, a lot of initiatives. Obviously, the ITC stuff and everything else. How should we think about your thoughts about stock repurchases, given everything that you're looking at and what have you?

Leo?

Well, obviously, we haven't -- we didn't have any stock repurchases in the quarter. We've completed $150 million of the $500 million of authority that we have at the moment, so it's $350 million less. Just philosophically, the way the repurchase program works is based on the results out of EWC and/or any kind of transactional-based results that we have, for example, if we sold an asset or what have you. The dividends usually paid for by the Utility, so that's the construct around it. And depending on what capital expenditures are, the cash flow may or may not be used for that. So for example, at the end of last year, when we acquired the RISEC plant, we spent over $300 million on that plant. That part of what goes into the decision-making process around the repurchase. So I guess at the moment we haven't done any recently, we typically don't signal what we are going to do, but just philosophically to know that transactions and/or EWC non-utility earnings, that's where the buyback money comes from.

We'll take our next question from Stephen Byrd with Morgan Stanley.

You've been making progress at the state level and in moving towards membership in MISO. And in the filings, obviously, comes up the discussion of distinguishing between MISO membership and approving the ITC sale. Can you talk about just general a feedback that you've been receiving at the state level to the ITC sale element relative to MISO. appreciating that that's a later element. But just nonetheless, just any color on the feedback you received at the state level?

Theo, do you want to in detail?

Yes. Stephen, I'm not sure I was -- the audible level of your -- it's fairly low. Let me see if I can repeat your question on which you were asking. Were you asking us to, in the MISO proceedings, are we getting questions around the ITC sale and/or -- just want to make sure I understand what your question was.

Yes, I think my focus really was just in your conversations about the overall ITC transaction at the state level, which I understand we will come up as part of the MISO proceedings. Can you just talk generally to the feedback that you've been receiving at the state level relating to the ITC transaction?

Yes, and I made a huge mistake. I said sales, it's not a sale. It's just been merged. And I hope I don't think I used that term in my testimony that I plan to file. But in any case, It does come up from time to time, but we try to make sure folks understand that they are separate processes, they're separate transactions, they're separate steps. Obviously, we need to get to MISO to an RTO in order to effectuate the ITC transaction. And as we've said to many regulators, I mean, we are focused on getting in MISO and getting to an RTO. And that's part of the reason, I think, why you've seen some passage of time and some separation as it relates to the filings around the ITC transaction is that we are -- we're trying to work through within the various jurisdictions that MISO process. And moved the various commissions along and other parties to get through that MISO process and get on MISO approvals, but it does come up from time to time.

Yes, I think the discussions I had been involved in, I think, it's actually been very encouraging. The regulators have been very interested in trying to understand more. When we proposed a similar -- actually, I guess, it wasn't all that similar 2 years ago, it was hostile environment with regard to some type of divestiture of the transition system. They have -- the questions we've gotten had been very much on point with regard to how things will change. The overall feeling seems to be that they -- given the amount of merchant capacity we have in our territory, given some of the feedback that they've gotten from some of the merchants and some of the extensive audits and -- that we've had relative to merchants, some of the merchant's concerns and other concerns, they understand that this needs some sort of resolution other than continuing to try to just regulate this thing to debt. Separating, it resolves all those issues and eliminates this -- any perception along with it solves a lot of problems for Entergy with regard to credit quality and that just lowers rates for customers and assures reliability. And we've had really good dialogue, I think, with the commissions. And the big concern -- the biggest concern that I've heard is to try to explain exactly how giving that jurisdiction, the FERC would have ultimate authority on how they maintain authority to execute their job assuring reliability at a fair price and all those type of things, and they don't want to end up just as another intervenor at FERC. And so that's kind of, I think had been working through the process, trying to make sure that, that doesn't happen. That's really the issue with them, but again it's been very constructive.

And our final question comes from Mike Lapides with Goldman Sachs.

I just want to make sure I'm following the rate changes you expect between now and maybe the year end of 2013, kind of following on some of Leo's comments. You discussed the Texas rate case. I guess, the question is do you think you would file another case and have new rates in place before year-end '13? Then the Louisiana formula rate plane adjustments that are outlined in the appendices, do you expect the incremental adjustments before the actual Louisiana rating changes or rate cases kind of resolve? And then the timing of an Arkansas case, how early would you file, when do you think rates would go into effect there? And apologies, a fourth item, how do we think about how Grand Gulf's operate will impact rates?

I think Theo is getting a good introduction here to his new job, but he's, like we've said before, he's certainly up to the challenge and probably the most knowledgeable person we've ever had in this job, so we'll let him prove it right now.

I think he's asking me to prove that because, first, he wants to make sure if I can actually remember all the questions. I'll start maybe in reverse order. Grand Gulf, I don't think, as you know, Grand Gulf is FERC regulated and there is a specific tariff around how cost through the unit power purchase agreement of SERI and the various operating companies, how that cost flows from Grand Gulf or from SERI to the operating companies. And the various operating companies have different regulatory mechanisms in place to recover cost associated with those billings from SERI. And they vary a little bit jurisdiction to jurisdiction, but they all have fairly timely mechanisms in place to recover cost associated with Grand Gulf. In terms of filings, obviously, we would expect the filing in Arkansas consistent with its departure from the system agreement. And obviously, that's targeted for the end of 2013. Louisiana, when you talked about FRPs, Wayne talked a little bit about the FRP results as it related to our filings, based on the 2011 test year, I think, as Leo mentioned, we would be making rate case filings in Louisiana in January of 2013 to basically reset rates. Depending upon the length of the proceeding, it's potentially, you could have some impact from that decision relative to that case in 2013. But that will be a function of the procedural schedule that obviously we will get once we make those particular filings. As it relates to one of the questions you had, Mississippi, we made our FRP filing, no changes relative to that filing based, again, on 2011 test year. And was there another jurisdiction that -- where there jurisdiction I missed?

When would you -- if Texas rate case resolved in the next month or so, when do you expect you would be back in filing for a new place rate increase?

I mean it's pretty mature to talk about that at this point. We don't have an order out of Texas. And so until we get an order and realistically see where we are, we'll evaluate that and make an assessment as to what is the appropriate time to file.

And at this time, we have no further time for any other questions. I'd like to turn the call back over to our speakers for any closing or final remarks.

Thank you, Deanna, 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 Regulation G compliance statements. Our call was recorded and can be accessed on our website or by dialing (719) 457-0820, replay code 8666645. The recording will be available as soon as practical after the transcript is filed with the U.S. Securities and Exchange Commission due to filing requirements associated with the proposed spin-off and merger of Entergy transmission business with ITC Holdings Corp. The telephone replay will be available through August 7, 2012. This concludes our call. Thank you.

Again, this does conclude today's conference. We thank you for your participation. You may now disconnect.