Entergy Corporation (ETR) Q4 2012 Earnings Report, Transcript and Summary

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

Good morning, and thank you for joining us. We'll begin today with comments from Entergy's Chairman and CEO, Leo Denault; and then Drew Marsh, 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. On September 25, 2012, ITC Holdings Corp. filed a registration statement on Form S-4 with the SEC, registering shares of ITC common stock to be issued to Entergy shareholders in conjunction with the proposed spin merge of our transmission business with ITC. But this registration statement has not become effective. In addition, our subsidiary, Mid South TransCo, will file a registration statement with the SEC, registering TransCo common units to be issued to Entergy shareholders in connection with the proposed transactions. Entergy shareholders are urged to read the proxy statement prospectus included in the ITC registration statement and the prospectus to be included in the TransCo registration statement and other relevant documents when available, because they contain important information about ITC, TransCo and the proposed transactions. These documents, when they are available, can be obtained free of charge from the SEC's website at www.sec.gov and can also be obtained, free of charge, upon written request to Entergy or ITC. Now, I'll turn the call over to Leo.

Thank you, Paula. Good morning, everyone. Today marks the turning of the page in Entergy's story. Last week, Wayne Leonard officially retired after a long and successful career that spanned nearly 40 years. He leaves behind a legacy as a tremendous and inspiring leader to all of us. Rick Smith also retired last week. Both Wayne and Rick will be missed. They will be missed not only because of their tremendous leadership and counsel but also as dear friends of the many of us they have touched throughout more than a decade here at Entergy. That said, they leave the company and the management team well prepared for the challenges and opportunities ahead. As a result, we have 2 new participants on the call with us today. Drew Marsh, Chief Financial Officer, who you will hear from shortly to review results; and Bill Mohl, President of Entergy Wholesale Commodities, who assumed the top EWC box from Rick. They join those you already know, Rod West, our Chief Administrative Officer; Theo Bunting, Group President of Utility operations; Mark Savoff, Chief Operating Officer; Renae Conley, Executive Vice President of Human Resources and Administration; and Marcus Brown, General Counsel. Also with me today for his last earnings call is John Herron. When he announced his retirement as our Chief Nuclear Officer in December, John agreed to stay on through March to help with the transition. During his 12 years at Entergy and over his 33-year career, John made significant contributions to safe and successful nuclear operations. Most recently, he oversaw the nuclear organization through 2 major construction projects completed last year. The 178-megawatt Grand Gulf upgrade in June and the Waterford 3 steam generator replacement project in December. John is succeeded by Jeff Forbes. Over the past 14 years, the depth of our…

Thank you, Leo, and good morning, everyone. In my remarks today, I will cover fourth quarter and full year 2012 financial results, cash performance for the quarter and the full year, and 2013 earnings guidance. Now let's turn to the financial results for the quarter. Slide 2 summarizes fourth quarter 2012 results on an as reported and operational basis. Operational earnings per share were $0.78 higher compared to a year ago, driven by higher earnings at Utility and Parent & Other, while results were lower at EWC. Fourth quarter as reported earnings included a special item for expenses incurred in connection with the proposed spinoff and merger of Entergy's transmission business with ITC Holdings Corp. Spending on our spin merge initiative reduced earnings per share by $0.06 in the fourth quarter of 2012 versus the $0.07 per share recorded for this item in 2011. Slide 3 summarizes the major drivers by segment. Starting at the utility, results were higher in 2012 due primarily to lower income tax expense and higher net revenue. These are partially offset by higher depreciation expense. The utility's income tax expense was lower due primarily to the recent settlement with the IRS on the tax treatment of the utility's decommissioning liabilities. In this settlement, we conceded a position that we took in the 2004 return on including the utility's nuclear decommissioning liabilities in cost of goods sold. As part of the settlement, Entergy Louisiana also increased the tax basis of its assets, which entitled the company to approximately $550 million of additional tax depreciation for the tax years 2006 and beyond. This part of the settlement created a permanent book to tax difference, and as a result, an income tax expense benefit, net of interest, of approximately $155 million was recorded in the fourth quarter. Utility…

[Operator Instructions] We'll take our first question from Julien Dumoulin-Smith with UBS.

Quick first question here for you. On the -- given all the rate cases upcoming, what were your earned regulatory ROEs across your jurisdictions? And I'm specifically thinking about 2012 for those jurisdictions where you're filing?

Theo?

In 2012, I think if you look at what the earned ROEs were, they were -- actually they were within -- a little above the allowed ROEs in the jurisdictions where we're talking about filing, principally Arkansas and Louisiana. So as it relates to 2012, ROEs in those jurisdictions were fairly close to slightly above the allowed ROEs.

Great. And sorry, you said Arkansas and Louisiana?

Correct.

And then with respect to Texas, if you could just comment where that is and perhaps specifically in the back half of the year and how that's trending given the PPA?

I mean, obviously, as Leo spoke earlier, we have our challenges in Texas and as you would expect, given the impacts we talked about realistically in the filing of our rate case, if you remember back a couple of quarters ago, on the impact. Not recovering that capacity cost would help on ROEs. And we talked about ROEs maybe impacting earned ROEs to a level of somewhere close to 6%, and obviously, you'll see that impact in 2012 in Texas. So obviously, it's not as nice a picture as say, Arkansas and Louisiana. But as Leo laid out, we do have options in terms of how we'll work to address that, and that's our objective and goal in 2013, is to pursue the paths we have available to improve that result.

Great. And then just turning to the EWC segment for a quick second. Obviously, the New England results came out the other day, can you indicate whether you committed Vermont Yankee into that auction and whether it cleared, by chance?

Julian, this is Bill. We did actually commit VY and it did clear. And you may ask a question, why did we do that? As we haven't in the past, but now that, that unit has been delisted, it's not considered a reliability must-run unit that takes away a lot of our relicensing risk as it relates to the CPG issues. So that in the event that we would encounter any problems, we could replace it with a fungible product.

And we will take our next question from Dan Eggers with Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Leo, just kind of following up on the comment you made earlier. Just -- you're at the daily cash generation of the assets in how you evaluate keeping the plants in service. What do you need to see market condition wise, maybe to change your opinion on whether these assets stay in service and is there some sort of time line you guys think about to try and address some of those questions?

Well, as far as the time line goes, Dan, it's -- as you might guess, it's an ongoing time line. We never stop and we never start, it's just always something that we would be doing regardless of what's going. As far as absolute levels, we are not going to get into the specifics around plant economics at this price or that price. But suffice it to say that it's the kind the thing that we look at on an ongoing basis. We've always look at it on ongoing basis as it relates to every decision we make, whether it be continued operation, with it be hedging or whether it be any kind of portfolio management activity that might be around those assets. So there's no specific time line other than making sure that we're doing everything with our eyes wide open. The big time periods are obviously when you have CapEx that goes into it or something like that where you've got to make an assessment of how much money you're going to spend going forward. And so, if there's a time frame around which you make more decisions rather than less, it has to do with big changes in cost structure, for example, a big CapEx program or if there was something else that happened. But otherwise, it's just an ongoing evaluation. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And I guess just with the utilities, the weather normalized demand growth was seemingly well above trend for what we saw across the country. Although we did see industrial trail off a bit in the fourth quarter. Can you just kind of talk about the mix of the 1.25% growth for '13, and where you see the most positive signs, and the most concerning issues right now?

You really faded out there, Dan, so I'm not sure. I think you asked the load growth question. So I think, Theo can answer that.

Dan do you mind kind of just repeating the last portion of that? As Leo said, you were fading out. Dan Eggers - Crédit Suisse AG, Research Division: I was just wondering, with power demand growth, you guys had a good 2012 weather normalized relative to the rest of the country. What do you guys see as the trend for '13? And from a mix perspective, is residential going to continue to be so strong or is commercial catching up or how do you guys see that kind of evolving this year?

I think when you -- we think about 2012, 2012 ended up pretty much in line with what we expected as it relates to growth. Not only overall, but really even among some of the specific customer classes, particularly residential. As we look to 2013, I think as we said earlier, we had -- I believe 2012 we ended at about 1.9% weather adjusted. 2013, I believe we mentioned on the last call, we were expecting somewhere in the range of 1.3%. So obviously, you see that moving down a little bit. And I think we will obviously -- it's moving down because of things you'll probably see with other companies, primarily in the area of residential, energy efficiency, programs that have caused changes relative to -- I mean, speak to government programs around lighting and such. So we do see some impacts in residential as it relates to that. We are optimistic that maybe it won't be as impacting it as much as we may think at this point in time. In the industrial, we tailed off second half of the year, much as we had expected, primarily because of outages. In 2012, we continue to see GDP much above the national average which, as we spoken of many times, has helped to differentiate us to some extent, as it relates to sales volumes. I think as you go into 2013, if you look at some of the projections around GDP, that gap starts to close. So we will probably tend to trend more to what you may see with -- across other utilities in the country. But what I'll also say is we still continue to be a place for opportunities as it relates to economic development and potential new industrial customers. So we'll continue to keep our eyes on that and obviously, as those things materialize and mature, you will start to see the impact of those. Hopefully, we'll see them in our service area. If not in our service area, you will see the impacts they may create even if they're in other service areas where they could potentially affect us through some of the impacts of changes as it relates to commercial and residential, even in support of those, if those industrial customers are not in our area.

And we will go next to Paul Patterson with Glenrock.

I just wanted to ask you guys about -- there's a decommissioning dispute that was talked about in the press this week with another company, nothing to do with you guys. Just wondering, I'm not going to ask you to comment on that but I'm just wondering are you -- have you guys had any interaction with the NRC? Is this something that you've heard about either in your neck of the -- I mean, with your plants or what have you or just any ideas about -- have there been any disputes about decommissioning calculations or any kind of review that's sort of generally generically happening at the NRC?

I'll let John Herron address that.

Yes. We are very familiar with the issue that you're talking about. Again, we don't have all the details. The Office of Investigation has concluded their investigation on that issue. I will tell you that we are very familiar with the decommissioning rules and regulations and the submittals that we have to provide to the NRC. We've had some discussions with the NRC about one of our sites. We worked that out and resolved that issue but clearly, not a 50.9 issue which is what the NRC concluded with that utility decommissioning submittal. We are familiar with it, certainly, have done a lot of detailed understanding of what went behind that and clearly, we don't have that same issue.

Okay, great. And then there was an article just today, I think I saw on how the state of Vermont, I guess, is perhaps looking at some legislation. It doesn't sound like it's a huge amount of money but it looks like there's sort of a $40 million potential, that they're concerned about higher needs for decommissioning expense from a state perspective, it sounded to me from reading the article, as opposed to the federal level. Does the state have any -- I mean, generally speaking, my understanding is decommissioning and the requirements associated with that are completely federal. Is that pretty much the case or is there -- are there some other sort of decommissioning or cleanup costs that states might have if there was in fact, decommissioning happening?

This is Rod West. The rules relative to decommissioning are federal, federal jurisdiction in nature. We were not at all, and have not been surprised by Vermont's efforts to test the limits of the federal jurisdiction and to assert whatever state's rights or concerns they'd have around the decommissioning issue from a state interest perspective. But it is, from our point of view, primarily a federal question and those are the rules that we are seeking to abide by.

And there were examples of -- do you know of any examples where the state actually does have authority over something like that?

I can't comment on it. Sorry, I wish I could be more helpful there.

And we will go next to Kit Konolige with BGC Brokerage.

To follow-up a little bit on the question about the earned ROEs, would it be possible to project in the guidance for '13, what earned ROEs are embedded in those expectations?

Kit, this is Theo, I mean, we just don't get into that discussion.

Okay, fair enough. And the other area I just wanted to follow on a little bit was on the PPA issue with the Texas Commission. Do you have a sense of what the timing might be on that, and kind of what boxes need to be checked there, who needs to be satisfied about what at this point?

Theo?

Sure. At this point, as Leo mentioned, we've prepared an updated analysis. That analysis is now being reviewed by -- with what we consider kind of an independent third party. Again, as Leo discussed and we expect that process to click -- go on through the month of February, more than likely. And at that point, we would hope that their analysis will be complete somewhere within that time line, and we would then have an opportunity to see the results, all other party see the result. And if that analysis obviously aligns with what we have done, then we would hope we could move this forward and folks would be comfortable again, that whether the PPAs -- whether you exit the system agreement, the PPAs stay in place or not, the economic effect is effectively the same. And we do believe that's a major concern and we understand that concern. And so we're moving that. We are optimistic it will allow us to move this issue along. If you had an opportunity to view the open meeting in which this was discussed, there was some discussion around how that would move. It wasn't very -- it wasn't completely clear but obviously, we know our starting point is with the staff out of PUCT and getting the staff comfortable with the body of work that's being done and giving them an opportunity to weigh in on that from their perspective and obviously, what the staff views will be communicated up to the commission and we'll just have to see how it moves at that point. But our expectation is we're doing everything we can, and we believe other parties are as well, to move this along as quickly as possible. And we believe all signatories to the NUS are obviously interested in getting to MISO as quickly as possible so customers can achieve those benefits. So we are optimistic this will move along on a quick pace.

And we will take our next question from Michael Lapides with Goldman Sachs.

Guys, just real quickly on Texas. At what point -- I guess my question there is there something about Gulf States Texas that leads to a lower earned ROE than what some of the other utilities, regulated utilities in Texas generally earn. Is there something that is specific to Gulf States that tends to drive that? And I'm thinking not just in 2012 or 2013, but just over the last 5 or 10 years. I'm trying to think about whether it's a structural issue with the market or a structural issue with the company.

Theo?

I mean, obviously, we're operating in a market where we're still a vertically integrated utility and subject to full jurisdiction by the PUCT. So there is no kind of market -- wholesale market type of issues. If you go back a few years, I mean, over the past 3 or 4 years, we've had successful rate outcomes in Texas and we are moving, in our view, toward a very positive path as it relates to returning to a position to earn our allowed ROEs. At the last rate case, we took a step back. And right now, our objective is to get back on that path of moving in a positive direction and heading in a positive direction of earning allowed ROEs. I can't say that structurally, there's anything different from us as it relates to operating in a vertical integrated utility market than any other vertically integrated utility. We'll just -- we'll keep working it and we've had past success and we believe we'll have success in the future.

And we will take our final question from Neel Mitra with Tudor, Pickering & Holt. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: A question on kind of the weak nuclear economics. How are you looking at unit contingent hedging right now? Are you thinking about using less of those hedges and would you be open to acquiring another CCGT like in New England, like in New York to maybe held backstop some of the nuclear plants?

Bill?

I mean, the certain part of our portfolio continues to include unit contingent hedges. As Leo mentioned, we've taken more of an approach to protect our downside and leave opportunities for the upside. And right now, we think that's probably the best way to approach it. As it relates to adding additional assets, it's pretty similar to anything that we would do. We are always looking at opportunities in the marketplace but those opportunities have to provide value. And so I wouldn't exclude that. As a specific opportunity, we currently have no specific plans to acquire any specific assets at this point in time. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay. And then just as a follow-up. On the New York capacity markets, could you update us with your thoughts for the expectation for a lower Hudson Valley capacity zone and maybe the timing of that?

Sure. We are cautiously optimistic that we will see that zone go into effect in the summer of '14. However, there are still a lot of details to be worked out regarding the various rules and procedures that will apply to that pricing zone. So we're actively engaged in that and trying to make sure that when that zone is put in place, that the capacity prices associated with that are consistent with the competitive market and not suppressed due to issues such as minimum offer price rules or out of market entry, that type of thing. So we are optimistic that's going to happen.

That concludes today's question and answer session. Ms. Waters, at this time, I will turn the conference back to you for any additional or closing remarks.

Thank you, Angela, 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 6847131. 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 spinoff and merger of Entergy's transmission business with ITC Holdings Corp. The telephone replay will be available through February 15, 2013. This concludes our call. Thank you.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.