Entergy Corporation (ETR) Q1 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Entergy Corporation First Quarter 2013 Earnings Release Conference Call. Today's call is being recorded. At this time, introductions and opening comments, I would like to turn the call over to Vice President, Investor Relations, Ms. Paula Waters. Please go ahead.

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. ITC filed a registration statement on Form S-4 with the SEC registering the offer and sell of shares of ITC common stock to be issued to Entergy's shareholders in connection with the proposed transactions. This registration statement was declared effective by the SEC on February 25, 2013. ITC shareholders are urged to read the prospectus included in the ITC registration statement and any other relevant documents, because they contain important information about Transco and the proposed transactions. In addition, Transco will file a registration statement with the SEC registering the offer and sale of Transco common units to be issued to Entergy's shareholders in connection with the proposed transactions. Entergy's shareholders are urged to read the prospectus included in the ITC registration statement and the prospectus to be included in the Transco registration statement when available and any other relevant documents because they contain important information about ITC, Transco and the proposed transactions. The registration statements, prospectuses and other documents related to the proposed transactions, when they're 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.

Thanks, Paula, and good morning, everyone. As Paula said, I will give some opening comments before Drew reviews the details on what was a very solid first quarter. Over the past 3 months, the executive leadership team has spent a lot of time making sure we are focused at every level of the organization in what we are trying to accomplish and how we plan to get there. I want to take some time this morning to share some of what we've discussed with all of you. Before doing so, I would be remiss if I did not mention the tragic accident that occurred at the Arkansas Nuclear One plant on March 31. First and foremost, our thoughts and prayers go out to the family and friends of the ironworker who lost his life, as well as the other workers who were injured when a crane carrying a 550-ton piece of equipment collapsed as it was moving the component out of the turbine building which is a non-nuclear area of the plant. We are deeply saddened by this event. Drew will touch on where we stand in the process in a moment, but I wanted to express our appreciation for all of the employees who are working tirelessly to restore order and get both units back online in a safe manner to provide a clean and reasonably priced power for our Arkansas customers. Now the opportunities that lie ahead of us are great. We've distilled these opportunities into 7 strategic imperatives that benefit our key stakeholders, owners, customers, employees and the communities we serve. I will go through each strategic imperative in turn, and in doing so, I will include an update on recent key events. To repeat something we've said many times before, we first have to do the…

Thank you, Leo. And good morning, everyone. In my remarks today, I will cover first quarter 2013 financial results, cash performance for the quarter, 2013 earnings guidance, a status update on the efforts following the tragic accident at ANO and a few closing comments. Now, let's turn to the quarterly financial results. Slide 2 summarizes first quarter 2013 results on an as-reported and operational basis. Operational earnings per share were $0.50 higher, compared to a year ago, driven by top line growth at Utility and EWC, results were slightly lower at Parent & Other. First quarter as-reported earnings in both periods 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 $0.04 in both periods. First quarter 2012 results included a special item for the Vermont Yankee impairment recorded at EWC, which reduced earnings per share $1.26. Slide 3 summarizes the major drivers by segment. Starting with the Utility, operational results were higher in 2013, due primarily to higher net revenue and lower income tax expense. These items were partially offset by a higher non-fuel operation and maintenance expense and higher depreciation expense. Utility net revenue increased due to both pricing and volume factors. Pricing adjustments included regulatory actions for the approximately $2 billion in investment placed in service in 2012. I'm referring to the Grand Gulf upgrade, the Hinds and Hot Spring plant acquisitions and the Waterford 3's steam generator replacement. All of these investments provide efficient, low-cost, clean energy for our utility customers. Net revenue for the first quarter of this year included recovery of these major investments and the associated expenses. Quarter-over-quarter retail sales also increased due to the effects of weather. At EWC,…

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

I was curious, actually to get a sense -- first on the sense of forward New England prices here. I know you realized a lot from the first quarter, are just -- have gone forward here representing the upside resulting from the cash shortages, is that the -- do you see that as being fairly characterized?

Bill, you want?

Sure. Well we certainly saw an uplift in those markets from both the real-time and the forward perspective. So yes, I think you're right, Julien, that, that's been driving that. And so that's had an impact on improved pricing for that area.

Great. Secondly, here, just thinking more structurally. As you think about the Indian Point asset, how much upside -- how do you think about quantifying Lower Hudson Valley next year? When are you thinking that implementation realistically takes effect? And how do you think about the downside here of the contingency planning -- how do you kind of put that all together here, in terms of cash flows [ph]?

Let's take those 2 separately. So as you think about the LHV zone, we're cautiously optimistic that that's going to be put in place in the summer of '14. Obviously, there are some steps to follow through on and that's not finalized, but we remain optimistic that will happen. We see that as, obviously, providing an uplift in those capacity prices for that zone. It's really hard to say, but we're probably looking somewhere in the range of $2 to $4 KW month as it relates to that. So we're bullish on that issue. As it relates to the reliability contingency plan, obviously, we're engaged in that overall effort. Our point of view, quite honestly, is that Indian Point remains the most cost-effective resource to meet the reliability needs for the state, and especially for New York City. We've seen a lot of projects that are being proposed. Obviously, we're looking at each of those. A couple things you have to keep in mind, all of those projects are going to be more expensive than the alternative of continued operation of Indian Point. And majority of those projects are in the early phases, so they have to be permitted, they have to be licensed, they have to be financed and they have to be constructed. So we will continue to, kind of, work down that road, but our point of view is the best option out there is Indian Point.

And, kind of, tying those 2 together, is there an opportunity for a conversation with the state about Indian Point's future at any point? I know you've kind of alluded to that in the past, is that on the table in any sense here?

Well that -- I guess, that's always on the table. So we are always willing to engage in discussions that are mutually beneficial, but obviously we couldn't -- can't comment on these specific discussions at this point in time.

Great. And then perhaps in the same vein of thinking -- looking at the Southeast portfolio rather. So Louisiana, there's been some discussion about a so-called trust structure. I'll be curious, what does that mean to you as you think about any potential middle points or consensus, if you will? I mean, is that, at all, on the table here, in any sense?

Theo, do you want to take that?

Sure, Julien. This is Theo Bunting. As what it means to us, if you read the context in which this was discussed, it was really about jurisdictional concerns, which, obviously, we knew going into this, there'd be jurisdictional concerns. So, I mean, we take this question much as we have all other questions around jurisdictional concerns and issues that have been raised in that context that resulted best from a procedural perspective was that it extended the discovery period but did not extend the overall in-date in terms of a decision from the Louisiana commission. And as we go forward through that process, we will obviously address any additional questions that may be raised as a result of this and respond accordingly. But again, it's not something that, quite frankly, we view as an issue that is dealt with any differently than all issues within the context of this proceeding. We'll address it, we'll answer the questions. We believe the transactional structure is the right structure, we believe it's the right party, we believe it's the right time. So we continue to appreciate the benefits and value associated with the transaction structure and obviously that's something we'll have to continue to work through and convey the benefits associated with that structure to all parties and ensure that they understand that.

We'll take our next question from Mr. Dan Eggers with Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Just stepping back a little bit on the ITC transaction. But -- when you guys announced the deal, and there was an awful a long time between announcement and filing because you want to take the time to work with this different parties involved, and you just wanted the states to understand, you explained the merits of the deal and understand their concerns to trying find a good compromise before the filing process started. We now look at, kind of, intervenor testimony coming in and there is, kind of, probably the expected oppositions still showing up, and, kind of, the points being made. Is there a bridge too far to cross from where their positions are, relative to what you guys tried to educate them on beforehand? Or is this a posturing negotiation exercise? And if so, what do you guys think of the key hinge points to resolve for these parties?

Dan, the -- I wouldn't characterize what we did in the process when we were reaching out to everybody after we announced as trying to find compromise. We would characterize that was to get a good handle on their concerns, and I think we did. And as I pointed on in my script, the kinds of things that we see in the testimony that has come in so far are the kinds of things that we would have anticipated, and actually, they're the kinds of things we've talked about with you and others over the course of that time. So there really -- it really wasn't trying to find a compromise, it was trying to make sure that we were listening to them and that we understood what they were going to be concerned about, and as it turns out, we got, I think, a pretty good handle on that. We don't think it's a bridge too far, obviously. And the bottom line here is, at the end of the day, we believe that this transaction will provide lower costs of delivered energy to our customers, and you can read that to mean lower rates for customers over time. That's going to come about based on everything that I mentioned in the script, as it relates to limiting congestion, improving reliability and access to more generation that would have happened in the alternative. We realize it's difficult to paint the picture here versus what we painted in MISO, because MISO is based on a system that exists today. If you think about all the types of issues we had to deal with when we were trying to prove up the case with MISO, as it relates to the transmission system that exist and the limitations around that, the single path…

If we don't -- if ITC does not operate the system, if they don't own the system, then all of it, the value that comes from true independence, that interaction with market participants, it's different than what we would do, that planning across scenes which is different than what we would do, that planning done by a, as we would described, a super-regional transmission organization, it's just not going to happen. The transmission system of the future that congress and the FERC envisioned when they put all of this in place isn't going to come about. And so, that's -- those are customer benefits that would not be realized. But because the system is going to be planned in large -- it will be planned differently than we do it today under MISO. But MISO doesn't own the transmission systems, so they don't do the actual bottoms up planning. And they're not in the same position to have the desire to create that cross-customer boundaries, cross-regional boundaries, cross-RTO schemes, that ITC will.

We'll take our next question from Mr. Stephen Byrd with MorningStar (sic) [Morgan Stanley].

I'm wondering if you could -- and I'm with Morgan Stanley. Just wondered if you could give a quick update on the New York water quality process, just in terms of things we should be looking out for -- from a process timeline point of view or anything else that's, sort of, going on, on your water quality.

Sure. Bill?

Sure. We got, obviously, 2 paths in that. So we've got the actual certification docket this before the nice deck at this point in time. And we expect a decision on that probably sometime in 2015, but, also, remember that we have the waiver argument in front of the NRC, that we probably wouldn't get a ruling on that until all of the renewal litigation comes to a close, so that would -- it's probably even beyond 2015.

Okay. Understood. And just as a follow-up on the accident in Arkansas Nuclear One. Is there an NRC process there that we should be thinking about or just as you go through the assessment process, I know it's early days, but just -- should we be thinking about a NRC process that plays into that review that you're doing?

Steve, I'm going to let Jeff Forbes, our Chief Nuclear Officer, answer that question. I don't know that Jeff has had the opportunity to talk to you before, but...

There is -- there has been engagement on the part of the NRC through the entire timeframe since the event happened. They've had inspectors that have been on the ground reviewing the operator response and the actions that we've taken to address the event, and I really don't see any risk moving forward with that.

Okay. Is there an NRC, sort of, review process that you need to go through in terms of coming forward with the proposed remediation or some sort of review before you're given the official approval to take whatever steps you want to take?

Yes. I wouldn't characterize it as we need their approval to restart. But absolutely, there are steps to -- when we review the data that we've compiled. And our approach and strategy to ensure that there's no lasting effects on this when we review that with them. We have conducted some of those reviews already.

Our next question will be taken from Scott Senchak with Decade Capital.

Just -- you mentioned, earlier, the importance of an investment grade rating. And just looking at the slides, and it looks like you're EBITDA is declining at the Nuclear business, yet the capital requirements in that business are increasing. So I'm just wondering, do you see any required actions, at this point, to offset that decline in cash flow to maintain the investment grade rating?

Drew?

Well, as Leo mentioned, we've undertaken a number of different efforts to try and find ways to operate those plants more productively and efficiently going forward. And so that's been sort of our key focus while we maintain safety and security of those plants. So we're examining every process up there that we can right now, to see if there's opportunities to sort of change those trends that you're talking about.

Then, Scott, I'll -- just from a historical standpoint. Obviously, we always have planned liquidity capital structure and all that. Not at a single point estimate, but with the idea that things could turn out better than we thought or worse than they thought, et cetera, things like the way our dividend policy has been sent out of the utility as opposed to total earnings and how we manage liquidity, as I mentioned, $3.8 billion of liquidity at the end of the first quarter. So I think the bottom line is, it's better when the prices are higher and the margins are bigger, but we plan to be able to withstand when or not. It doesn't mean we don't do anything about it when or not, but that's kind of a historical perspective.

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

I want to touch base with you on the System Agreement. It's rather complicated and we've gotten expirations here coming up with Arkansas and, I guess, a little later with Mississippi and you had some discussion in Texas. And I noticed the slide on SIRI and what-have-you. I was just wondering, how should we think about the expiration of the System Agreement in terms of this potential financial impact on theory or any -- or just in general, how should we think about it?

Theo, do you want to take that?

Sure, Paul. First, I guess, I'll start by saying I don't believe SIRI is a party to the System Agreement. So from a SIRI perspective, the elements of the System Agreement, I would not expect to have any impact. I mean, obviously, there is a SIRI-owned Grand Gulf, and there is a life of unit purchase power arrangement out of Grand Gulf back to various operating companies. But SIRI, in and of itself, is not a party to the System Agreement. The exit of Arkansas, as you said, is contemplated at the end of 2013. Mississippi, I believe, at the end of 2015. And obviously, as we've worked through the MISO process in Texas, there is a condition around System Agreement notification as part of that process in Texas. At this point in time, the agreement, it's contractual relationship among the companies and there is typically an 8-year notification period to exit. And the agreement, in and of itself, has parameters and provisions. It provides, basically, tariff schedules, that sort of thing. But, I mean, the companies will exit as the dates have been defined, thus far. We will continue to work through what is an efficient exit timeline as it relates to Texas as part of our commitment under the MISO change of control in Texas. And we expect to move forward with that as we've said we would, and the change-in-control conditions in Texas.

I guess what I'm trying to find out there is just in terms of as this System Agreement is unwound, is there any potential that, from a hole-fill perspective, that we'll see a -- an impact on earnings, one way or the other, as these states begin to exit? Or is it set up that it's the last state that sort of will be the impact? I mean, how should we think about -- is there anything we should be thinking about in terms of this rather complicated, I mean, it's just very difficult to follow. I mean, how, if this expires -- as it expires, should we think about any potential financial impact, I guess, is what I'm saying?

Paul, I mean, I'm not -- I can't sit there and tell you if there is specific financial impacts that you see. I mean, obviously, the agreement is a FERC-regulated document to various operating companies have provisions in place today that allows the costs associated -- that result from that agreement to be effectuated through the regulatory process. Obviously, as those costs go away, they go away as you would see any other costs. And so it is an agreement that, again, moves it -- kind of governs the inner -- these intercompany transactions. And it's not an agreement, per se, that as companies exit, that we would expect to see a detrimental impact on Entergy Corporation.

Okay. So we shouldn't expect to see a negative -- that's fine, I mean, I just wanted to clarify that there's no -- we shouldn't see any significant EPS or earnings impact associated with this agreement.

This is Leo. You shouldn't, I mean, it's really just a cost allocation. I appreciate your understatement of, " rather complicated," but it is -- it's really more of the way system costs are shared, not -- and so it's not really anything where you should see an impact.

We'll take our next question from Paul Fremont. Paul B. Fremont - Jefferies & Company, Inc., Research Division: I guess first question would be, you talked earlier about not necessarily seeking compromise in the initial phases of getting the reaction of the intervenor parties. Should we anticipate, given the number of jurisdictions, that this is more likely to go to a litigated order? Or how would you, sort of, describe the possibility of settlement in the ITC proceedings?

Paul, it's just like any regulatory process. We're starting to see what everybody else is putting forward. If there is room for settlement, that's always more expeditious and sometimes more efficient. So if there's a potential for that, it's certainly something that we will pursue. And so at this point, I wouldn't say that you can make a call, but it's more likely to go to litigation -- to a fully litigated proceeding or not. We're just starting to see what everybody's position is, but settling it might be the more efficient way to go about it. And certainly, that's something that saves time, effort, money on everybody's part. If you can get that done, you don't have to go through the whole process all the way to the end. And I think, quite often, all parties have a desire to see that occur. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And I guess my second question has to do with -- I guess, the NRC sort of talked about embrittlement, sort of the initial finding using the old calculation. And then they raised the option of using a different calculation which, I guess, is a voluntary calculation that the company can do for Palisades. Have you been able to, sort of, go through the math of the revised calculations to see -- to get an indication of where Palisades would stand under the alternative test?

Jeff?

Yes. First of all, I'd say, just to put this in proper light here. This is not a new issue that you need to Palisade, it's a generic issue for the industry where all pressurized water reactors or modern reactor vessel. The public information, I think, has generated confusion on the risk here, there's a, sort of, premature shutdown of Palisades in 2017. I would just say that, that's simply not the case. Here's a very structural process as you referred to the alternate methodology, and we're following that, we will be doing inspections on the reactor vessel in the fall of this year and then folding that into our calculation. And we -- our preliminary look at this would indicate that there's a very low -- extremely low probability of there being any meaningful technical issues with that process. Paul B. Fremont - Jefferies & Company, Inc., Research Division: So, I mean, based -- so in other words, you're concluding that you would likely come out okay under the revised calculation based on what you know right now? Is that...

That's exactly right. Yes, that's exactly right. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And I guess the last question that I have is, there seem to be a lot of regulatory proceedings in Louisiana. If I take, also, the ITC proceeding, I mean, is just the size of the case load going to represent sort of difficulty in getting answers, timely answers, in all of the proceedings there in front of the Louisiana Commission?

Bill?

Paul, it's -- that's -- some folks, I mean, regulatory proceedings is -- I mean, we're a regulated industry, that's what we do, a regulated company. I mean, we have procedural schedules around the ITC transaction. We're working with the staff, as a matter of fact we had a, I believe, a schedule in conferences yesterday around the Louisiana rate case. And I think we have a schedule to move forward relative to that case. There are also specific timelines around the EGSL, ELL rate cases in terms of getting a decision out of those cases. So we don't believe that the workload is obviously as challenging to all parties involved. And -- but thus far, we've seen the willingness from parties to work through various cases and work through what we view as efficient timelines as it relates to getting decisions within a meaningful timeframe.

We'll take our last call from Michael Lapides with Goldman Sachs.

This is Neil Mehta stepping in for Michael. After acquiring the Rhode Island gas plant a year or so ago, how do you think about the size and scale on the merchant business? And whether, from an asset perspective, this is a business you'd rather seek to grow or reduce in the coming years?

Well, I'll start, but I'll let Bill finish off. I mean, the intent is to improve the results of the business. That can come from growing it, that can come from a whole host of different structural things like we've talked about quite a bit in the past. And as far as the Rhode Island plant addition to the fleet, I think, Neil, Bill talked about this -- it doesn't necessarily add to the size of our fleet as much as it adds to the size of New England fleet. Bill?

Yes. That's right. It's we're able to use that asset not only to kind of hedge ourselves from our -- with the nuclear fleet that we've got, but it's also provided some good opportunities, especially with what we saw in the first quarter of this year, to be able to capitalize on that market up there. So I think Leo is right, we've got to focus on, kind of, getting the portfolio to a position where it's -- it looks like it's sustainable from a long-term perspective, and then we'd decide what the next steps, strategically, are, whether to add to that portfolio or to, potentially, somebody else had -- would consider that portfolio. I mean those are the options that we constantly look at. I mean, each and every day, we're looking at how do we make it more efficient, how do we make it more profitable, and what are the options on the table to achieve that.

And that concludes today's conference call. I would like to turn the conference back over to Paula Waters.

Thank you, Tiffany, 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 9708842. 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. The telephone replay will be available through May 2, 2013. This concludes our call. Thank you.

And that concludes today's conference call. Thank you for your participation.