Entergy Corporation

Hello, good morning. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to Entergy's second quarter 2023 earnings conference call. All lines are then placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and the number one. Thank you. I would now like to turn the call over to Bill Abler, Vice President of Investor Relations for Entergy Corporations.

Good morning, and thank you for joining us. We will begin today with comments from Entergy's Chairman and CEO, Drew Marsh, and then Kimberly Fontan, our CFO, will review results. In an effort to accommodate everyone who asks questions, we request that each person ask no more than two questions. In today's call, management will make certain forward-looking statements, Actual results could differ materially from those forward-looking statements due to a number of factors which are set forth in our earnings release, our slide presentation, and our SEC filings. Anchor D does not assume any obligation to update these forward-looking statements. Management will also discuss non-GAAP financial information. Reconciliations to the applicable GAAP measures are included in today's press release and slide presentation, both of which can be found on the investor relations section of our website. And now, I will turn the call over to Drew. Thank you, Bill. Thank you, Bill, and good morning, everyone. Today, we are reporting second quarter adjusted earnings per share of $1.84. Our progress through the first half of the year keeps us firmly on track to achieve 2023 results in line with our guidance, and we remain well positioned to achieve our long-term 6% to 8% growth outlooks. Creating sustainable value for our customers, employees, communities, and owners is at the center of everything we do. I'll start today with our work to meet our customers' demands. We're investing in resilience and reliability in working to expand our clean energy footprint. This work helps our current customers meet their goals while also attracting new customers to Entergy's service area. To that end, our power delivery team continues to upgrade legacy assets to new, more robust wind and flooding standards through new construction projects, storm restoration, and asset renewal. For example, in the second quarter, our new deployments included roughly 600 transmission structures, approximately 8,000 distribution poles, more than 200 miles of new distribution conductor, and seven new substations. In addition, These improvements will support more than 120 megawatts of growth. Safe and effective nuclear operations are also important for our stakeholders. Our nuclear units continue to provide clean, reliable baseload power to our customers. Two of our plants, River Bend and ANO Unit 2, recently completed successful refueling outages, which included major projects to support long-term operational excellence. Overall, our nuclear plants are running very well. Outside of refueling outages, our fleet achieved a 99% capability factor for the first half of 2023. While our customers demand more reliability and clean energy from us, our unique and sizable long-term industrial sales growth opportunity continues to improve. Growing businesses support our communities, provide employment opportunities, and help with affordability. The inherent advantages of our geographic footprint remain solidly intact. We continue to see evidence of these advantages through recent project announcements in our service area. For example, ExxonMobil announced a transformative CCUS project that will capture, transport, and store up to 800,000 metric tons of CO2 per year from a new core iron plant in Convent, Louisiana. The project is expected to start up in 2026. Paired with the recently announced acquisition of Denberry, ExxonMobil's actions clearly highlight the opportunities around CCUS in our region. Also, Shell Catalysts and Technologies announced its final investment decision on a $120 million expansion project in Port Allen, Louisiana. The facility is already the largest refining catalyst plant in the world, and the expansion will create even more manufacturing capacity. These are just a couple of the projects that have the potential to increase and extend our long-term growth rate. We're currently updating our annual industrial sales forecast, and we are counting for recent trends. As many of you have noted, there has been some weakness in national industrial output indicators, like the ISM Manufacturing Index. Despite this, we are seeing strength in our Gulf region. In the quarter, our total industrial sales declined, which had been expected due to higher cogeneration sales last year. Adjusting for cogen, our industrial sales were up about 1%. For some highlights, sales to small industrial customers, which are typically more exposed to broader U.S. economic factors, grew nearly 90 gigawatt hours over last year. Sales to large, new, and expanding industrial customers grew nearly 100 gigawatt hours over last year. As we look forward, a few large industrial projects have adjusted their in-service dates from 2024 to 2025, which could lower our 2024 industrial growth expectation, but not to a degree that affects our outlooks. Overall, our pipeline for projects continues to grow, supported by favorable commodity spreads and the IRA legislation. Early indications show demand at 2025 and beyond shaping up even stronger than our last forecast. As we typically do, we'll provide an update to our industrial growth expectations at EEI. To support this growth and to help our customers meet their sustainability needs, we are expanding our clean energy portfolio. Through 2026, we plan to add nearly 6,000 megawatts of renewable capacity. 2,400 of those megawatts are currently in construction, permitting, regulatory review, or negotiations. Approximately 30% of the 2,400 megawatts will be owned by Entergy. Last quarter, I mentioned that we are continuing to work on our self-build capabilities. Our recent self-build submissions have been extremely competitive in the RFP process. However, we have been limited by a smaller development pipeline. I'm pleased to report that we are making progress on that front, and going forward, I would expect Introduce to achieve at least 50% ownership through our competitive RFPs. Moving to regulatory items, we continue to make meaningful progress on important regulatory matters which support the credit required to meet customers' growing needs and drive improved customer outcomes. Beginning with Mississippi, the Public Service Commission approved Intergy Mississippi's formula rate plan settlement, providing for recovery of substantially all costs. Meanwhile, Intergy Louisiana, Intergy New Orleans, and Intergy Arkansas each filed their annual formula rate plans. New rates for Louisiana and New Orleans are expected to be effective in September, and Arkansas are expected to be effective at the first of next year. As we've discussed, Entergy Louisiana plans to file a base rate case this month, including a request for a new three-year formula rate plan. We like the clarity and certainty that an FRP provides, which helps us make investments to benefit our customers. However, in recent years, Entergy Louisiana's earned returns have materially lagged its allowed returns. We are making significant investments to support customer growth and demands for greater resilience and cleaner energy in Louisiana. This investment is critical for the state as well as our local communities. It is important to have an opportunity for fair and timely recovery, which allows us to maintain Entergy Louisiana's credit and cost-effectively source capital to meet customers' expectations. Turning to Texas, Entergy Texas has an unopposed settlement before the Commission. and we expect a decision at tomorrow's open meeting. Interim rates were implemented in June, and once the Commission makes its decision, any change in revenue and depreciation expense will be retroactive to December of last year. In addition, the Texas legislative session wrapped up at the end of May, and the governor signed new bills into law that are important to Texas customers and communities, as well as to Intergy. I'll highlight a few. The Texas Resiliency Act allows utilities to submit a storm resiliency plan to improve customer outcomes. We expect the Commission to complete their initial rulemaking in 180 days, which sets a deadline to establish a regulatory framework in mid-December. Entergy Texas will then file its resilience plan shortly after the rulemaking is complete, and the Commission will have 180 days to review and act on the filings. Based on this, Entergy Texas currently expects to have clarity on its resilience plan near the middle of next year. The distribution cost recovery factor legislation allows for two annual filings, which will provide more timely recovery of the significant distribution investment that we plan to make in Texas to support customer growth and reliability. And the expedited transmission CCM will reduce the time for commission approval by half to approximately six months. This will enable Entry Detected to complete projects that support customer growth and resilience sooner and with lower risk. Turning to federal matters. In May, we received an initial decision on the unit power sales agreement complaint against CERI. The ALJ ruled against the complainants on several issues, but recommended approximately $250 million in refunds, which is mostly interest, primarily associated with accumulated deferred tax issues going as far back as 1996. We disagree with the ALJ's conclusions on ADIT, and we continue to believe that Siri's positions on the law and the facts are correct, and that its actions were prudent and taken for the benefit of customers. CERI filed its briefs on exception in July, and the next step is a ruling from FERC. There is not a statutory deadline for FERC to issue an order. More broadly on CERI, I would note that we are still awaiting FERC's response to our compliance filing related to the December 23rd order on the sale, leaseback, and uncertain tax position case. While there is not a procedural deadline, we expect to see this clarification soon, and we expect FERC to affirm that no additional refunds are due. FERC's response will provide clarity and will be an important step towards resolving the broader set of CERI litigation. Our communities are one of our key stakeholders, and actively supporting them is an important part of our strategy. The Civic 50, an initiative of Points of Light, named Entergy a top 50 most community-minded company and this year's leader for the utility sector. Another example of our community commitment is our Beat the Heat campaign. In May, we launched a series of measures to help low-income and senior customers save on their utility bills during hot summer months. $4 million in contributions will support thousands of vulnerable customers through bill payment assistance, weatherization events, fan distribution, and energy efficiency kits. I'm also proud that Forbes magazine, has named Entergy as one of America's best employers for diversity. They recognized our commitment to fostering a diverse and inclusive workplace where employees feel valued and respected. Such confirmation is critical as we compete for talent from all corners of our community to best serve the diverse interests of our 3 million customers. Together, our employees are doing a great job of living our vision statement of We Power Life by meeting today's challenges, and ensuring that we will create value for our stakeholders well into the future. As you can see, we continue to make progress on our strategy to deliver for all our key stakeholders. We are laser focused on meeting our customers' demands through operational excellence, resilience, and clean energy investment. Meanwhile, we continue to maintain our financial discipline and work closely with our stakeholders to ensure we have the financial strength to drive economic development in our communities. Successfully executing across these dimensions will keep us on track to deliver steady, predictable earnings and dividend growth and move us toward our goal to be the premier utility. I'll now turn the call over to Kimberly, who will review our financial results for the quarter.

Thank you, Drew. Good morning, everyone. As Drew mentioned, our results this quarter keep us firmly on track. and we are affirming our guidance and our longer-term outlooks and remain focused on delivering steady, predictable results. Slide three shows a high-level view of the quarter. Our adjusted earnings per share was $1.84, six cents higher than last year. We continue to see benefits from our customer-centric investments, including regulatory actions, along with higher depreciation, taxes other than income taxes, and interest expense. We also saw a significant reduction in other O&M, a portion of which was for items that do not have a bottom line impact. Slide 4 details the variances by line item. Regulatory actions support our investment program to benefit customers. There were a few updates in the quarter. Intergy Mississippi put its latest FRP rates into effect in April. In June, Entergy Texas implemented interim rates from its rate case settlement. The settlement is credit positive and largely neutral to earnings, as the rate case included new, higher depreciation rates. Rather, weather was 17 cents lower than last year. While weather was warmer than normal this year, you may recall that temperatures last year were significantly above average. Excluding the effects of weather, retail sales growth for the quarter was down 0.9%. The residential segment had a slightly positive contribution from customer growth, partially offset by lower usage per customer. Commercial and industrial sales were lower. For industrial, lower sales to Cogent customers was the primary driver as Cogent sales returned to more normal levels this year. This decline was partially offset by growth from small industrials and new and expansion large industrial customers. O&M was also a driver. We had lower spending for nuclear and non-nuclear generation, primarily due to reduced scope of work. Other drivers included higher rebates associated with our prescription drug program, lower MISO costs, and lower pension expense, which were each about five cents. MISO costs were lower as a result of MISO changing its ancillary services market structure. Because Entergy is a load-serving entity that owns generation, this change is largely neutral to earnings. Operating cash flow, summarized on slide 5, was $588 million higher than last year. The increase was primarily due to lower payments for fuel and purchase power, as natural gas prices were much higher last year. Moving to credit and liquidity on slide six, our net liquidity remains strong at $4.7 billion, which includes $411 million of storm escrows. We expect to utilize a portion of the storm escrows of Louisiana and Mississippi for the storms earlier this year. We remain on track for our credit outlooks, including achieving Moody's 14% FFO to debt metric by year end. During the quarter, both S&P and Moody's downgraded CERI. The ratings changes stem from CERI's pending litigation. Left unchecked, this could ultimately result in higher costs for customers. These actions also highlight the cost of CERI uncertainty and show that resolution would benefit multiple stakeholders. It is our goal to resolve all CERI litigation in an expeditious manner. Slide 7 summarizes our progress against our equity needs through 2024. We utilized the ATM program this quarter when market conditions were supportive, selling forward approximately 468,000 shares. Around 80 million remains in our equity plan through 2024. As shown on slide 8, we are affirming our guidance range and our longer-term adjusted EPS outlooks. We've updated a few of our key assumptions that I'd like to highlight. We saw warmer than normal temperatures in the quarter, which contributed 7 cents to EPS. Our plan included conservative assumptions in revenue, and we've now updated our estimates to account for several small, favorable items across our operating companies. We've updated our weather-adjusted sales growth estimates and now expect volume impacts on earnings per share to be neutral for the year. This is largely due to lower than expected residential sales in the back half of the year. We continue to see overall health in the residential space with increasing customer counts and declining usage per customer, both of which help affordability. We expect other O&M to be 85 cents lower than 2022 for the full year. This includes approximately 15 cents for the reduction in MISO cost that is offset by lower revenues. Excluding that, the full year O&M change would be closer to 70 cents, in line with our previous estimates. Our spending plans may adjust based on weather or other factors between now and the end of the year, as we continue to use our flex spending to deliver steady, predictable results. You may recall that the remaining EWC ownership interest in two non-nuclear generation facilities is included in parent and other. Power prices have been lower than planned due to low natural gas prices, which is driving the expected margin from those operations lower. Taking all of this into consideration, we are tracking to the midpoint of our guidance range. The bottom line is that we have a solid plan with good visibility, and we will continue to execute on the deliverables to achieve steady, predictable growth. And now, the Intergy team is available to answer questions.