Earnings Call Transcript
ENTERGY MISSISSIPPI, LLC (EMP)
Earnings Call Transcript - EMP Q2 2020
Operator, Operator
Ladies and gentlemen, thank you for joining us. Welcome to the Entergy Corporation Second Quarter 2020 Earnings Release and Teleconference. Currently, all participant lines are set to listen-only mode. Following the presentations, we will have a question-and-answer session. I will now turn the conference over to David Borde, Vice President of Investor Relations. Thank you, and please proceed.
David Borde, Vice President, Investor Relations
Thank you. Good morning and thank you for joining us. We will begin today with comments from Entergy’s Chairman and CEO, Leo Denault; and then, Drew Marsh, our CFO, will review results. In an effort to accommodate everyone who has questions, we request that each person ask no more than one question and one follow-up. In today’s call, management will make certain forward-looking statements. Actual results could differ materially from these forward-looking statements due to a number of factors, which are set forth in our earnings release, our slide presentation and our SEC filings. Entergy 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 Leo.
Leo Denault, Chairman and CEO
Thank you, David, and good morning, everyone. Thank you for joining us. Today, we are reporting strong second quarter results of $1.37 adjusted earnings per share. Sales in the quarter were better than we expected. We are on track to achieve our $100 million O&M cost savings target for the year. And our capital plan is unchanged. With these results, we are affirming our full year guidance, our longer term outlooks and our dividend growth aspirations. As you all know, the COVID-19 pandemic has placed a burden on our customers, employees and communities. We believe, it is part of our mission, empowering life, to do all that we can to support our stakeholders as we all work to recover from its effects. Despite these extraordinary times, 2020 is on pace to be another year of significant accomplishments for Entergy. This quarter, we’ve made progress on multiple fronts, all of which will benefit our stakeholders. We completed Phase 2 of the Western Region economic transmission project. The New Orleans Power Station came online. The Public Utility Commission of Texas finalized its rulemaking for generation rider. The Mississippi Public Service Commission approved Entergy Mississippi’s formula rate plan filing. Entergy Arkansas and Entergy Louisiana each filed their annual formula rate plans and requested extensions of these mechanisms. And Entergy Louisiana issued a request for proposal for up to 300 megawatts of new renewable resources. And more importantly, we continue to successfully manage the effects of our investment on customer rates. According to an S&P Global Market Intelligence study published earlier this month, in 2019, Entergy provided power to retail customers at the second lowest average price of the major investor-owned utilities in the United States, something we are very proud of. The COVID-19 pandemic continues to affect all of us across the country. As we discussed last quarter, we were well-prepared from the outset and we continued to effectively manage our response. We are taking precautions for our employees and our customers. Those who can are working from home. And we have procedures in place to keep our employees in the plants and in the field safe. We are also creating innovative solutions to help our customers and our communities. For example, our social responsibility and automation employees worked together to develop a bot that proactively informs customers in need about the Low Income Home Energy Assistance Program or LIHEAP. This project also won second place in the global contest for innovative ways to reduce COVID-19’s impact on the economy and communities. Students and faculty at Southern University are using 3D printers in their Entergy-sponsored lab to make parts for reusable N95 masks for healthcare professionals. With our community partners, Entergy has helped to prepare more than 2 million meals, provided crisis grants for more than 5,000 households and delivered personal protective equipment to first responders, individuals, and families in need. Through the first half of the year, Entergy has donated almost $9 million in charitable contributions to support our communities, including almost $3 million in COVID relief efforts and Entergy’s The Power to Care program, which helps customers who need financial assistance to pay their bills. In parallel to our COVID-19 relief efforts, we continued to execute on our major projects across our service area to modernize our utility infrastructure and enhance its efficiency and reliability for the benefit of our customers. We placed New Orleans Power Station in service in May, in time for the summer peak period and hurricane season. Since entering service, this highly flexible and efficient peaking unit is being dispatched frequently. We completed Phase 2 of the Western Region economic transmission project. This $115 million investment supports economic growth in Southeast Texas and enhances reliability for existing and future customers. The Public Utility Commission of Texas also approved our certificate for convenience and necessity for the Timberland transmission line, a $57 million project expected to be completed in 2022. We reached an important energy milestone with the 100th customer signing up for the ReNEWable Orleans Residential Rooftop Solar program. The program offers a cost-effective way for low-income customers to participate in the benefits of renewable energy without having to make an upfront capital investment. Entergy New Orleans installs, owns, and maintains the rooftop solar systems and customers get a bill credit for their participation. ReNEWable Orleans is a good example of the innovative programs we are implementing to deliver renewable energy solutions to our customers. We will continue to engage with our regulators and stakeholders to expand the use of renewables under a framework that ensures we build the most economic system balancing reliability, cost, and sustainability. In addition to providing meaningful customer benefits, our three-year capital plan has significant certainty. We’ve talked to you before about the 90-90 framework by which you should view the certainty of our capital plan that our capital plan is 90% ready for execution from a regulatory approval standpoint, and that more than 90% will be recovered through timely mechanisms. Today, we’re adding a third 90 to further emphasize the strength of the plan. That 90% of the capital plan is based on the need for system modernization and not dependent on customer growth. These three statistics mean that our customer-centric capital plan is necessary, the majority will not require a special regulatory review, and we expect timely recovery. We benefit from constructive and progressive regulatory mechanisms that provide clarity to our plan and give us confidence in meeting our financial commitments. Recently, the Public Utility Commission of Texas finalized the generation rider, which will provide for full and timely recovery of capital costs associated with a new generation facility. We’re grateful for the Commission’s leadership in developing this new rule, more timely recovery to help us create value for our stakeholders in Texas and ensure that the communities we serve remain economically competitive. We plan to make a filing later this year, using this mechanism to request recovery of Montgomery County Power Station when it comes online in 2021. Entergy Mississippi received approval of its formula rate plan filing, rates were implemented in April. Entergy Arkansas and Entergy Louisiana each submitted their annual FRP filings. Summaries of the requests are included in the appendix of our webcast presentation. Both of these operating companies are in the last year of their FRP cycles and both are requesting extensions. Entergy Louisiana’s request includes a midpoint reset and a new distribution rider similar to the transmission rider that is currently in effect. In New Orleans, we continue to work with the City Council on the appropriate timing to begin the filing cycle for the recently approved three-year formula rate plan. At SERI, we filed our brief on exceptions to the ALJ’s initial decision issued in April. As you know, we disagree with most of the initial decision because it incorrectly seeks to resolve important policy issues of first impressions that FERC ultimately must decide. The actions we’ve taken seek to create significant benefits for our customers who consistently experience some of the lowest rates in the country, year after year. Our customers have not been harmed by our actions, and in fact, stand to benefit greatly from them. Our tax planning practices have created more than $900 million in direct customer benefits, $550 million of which has already been credited to customer bills. The April initial decision, if it is affirmed by the FERC, would discourage utilities like ourselves from pursuing such prudent innovative strategies to lower customer bills. The sale-leaseback arrangement also produced significant savings for our customers, and an ALJ’s recommendations would similarly discourage utilities from entering into such transactions. We feel strongly that our positions on the law and the facts are correct. To be very clear, we believe that our actions have been prudent and for the benefit of customers, and that there should be no refunds or disallowances, except for the small depreciation correction that we agreed to. While we will vigorously defend our position at the FERC, the timeframe for pursuing SERI’s uncertain tax position any further is lengthy and the outcome is uncertain. This leaves us no choice but to mitigate risk for our owners. In the next few weeks, we will give up SERI’s uncertain tax position with the IRS. This will effectively cap the principle of any potential historical refunds, eliminate the basis for any reduction in SERI’s rate base going forward, and eliminate the basis for the $147 million excess ADIT customer credit raised in the July ALJ initial decision. Drew will provide additional thoughts on this matter, and I encourage you to review our brief on exceptions. At Entergy, we play a vital role in every region where we operate, and our core values are reflected in our efforts on behalf of our stakeholders. Entergy is consistently recognized for its corporate citizenship, climate leadership, and commitment as an employer of choice, which is a tremendous honor. For a fifth consecutive year, Entergy was named a 2020 honoree of the Civic 50 by Points of Light, the world’s largest organization dedicated to volunteer service. This award recognizes Entergy as one of the 50 most community-minded companies in the United States. Additionally, 3BL Media has named Entergy to its annual 100 Best Corporate Citizens ranking, which recognizes outstanding environmental, social and governance transparency and performance among the 1,000 largest U.S. public companies. This is the eighth year Entergy has been included in this prestigious ranking. We were also named the winner of a Bronze Stevie award for our 2019 climate report where we outline steps that we are taking to deliver cleaner energy solutions and promote a lower carbon future for all of our stakeholders. Finally, like many of you, I have been saddened and upset by recent events that have laid bare yet again, the deep social inequalities and injustices so many in our country continue to face. As our human rights statement outlines, Entergy respects the human rights of all individuals. With a workforce of close to 14,000, we leave no room in Entergy for racism, discrimination or intolerance, but rather seek to achieve our vision and mission through diversity and inclusion of all people and their unique ideas, backgrounds, and perspectives. We will continue to move forward in our mission, and you as owners, including our employees who are a top 10 owner of the Company, have my and the entire Entergy leadership team’s commitment that we won’t retreat from our obligations personally or professionally. We know that our actions towards creating real and meaningful change speak much louder than words. As I said at the outset, we delivered yet another strong quarter. Even though COVID-19 has had an impact, 2020 has already been a year of significant accomplishments that keep us on track to meet our strategic, operational and financial objectives. We are committed to those objectives and our resolved to be the premier utility. The foundation of our business remains strong and sustainable. We have among the lowest retail rates in the country. Our capital plan remains on track and will modernize our system, benefit our customers and our local economies. We have constructive and progressive regulatory mechanisms. We are an industry leader in critical measures of sustainability. We have one of the cleanest large-scale power generation fleets. And while we have seen some slowdown in industrial activity, our industrial base is among the most economically advantaged in the world. We expect that they will lead the region’s recovery in their respective industries. We create innovative solutions to help our customers, and we’re prepared to overcome headwinds through a disciplined cost management program as evidenced in our response to both last year’s unfavorable weather and this year’s COVID-19 impacts. It should not surprise you that we are affirming our longer-term outlooks, given our commitment to create permanent cost savings through continuous improvement efforts. These efforts strengthen and when possible will improve our delivery of steady, predictable earnings growth, as we demonstrated on this call just last year. This is what makes Entergy a compelling long-term investment. This is the foundation on which we will grow, innovate, and expand our investment profile to continue to deliver on our commitments tomorrow. Before I turn the call over to Drew, I want to confirm that our virtual Analyst Day will be held on September 24th. These are exciting times for Entergy. And we look forward to continuing the conversation with you then about what we’re doing to build the premier utility.
Drew Marsh, CFO
Thank you, Leo. Good morning, everyone. As Leo noted, our second quarter results were strong. Sales were better than we expected on our last call. We are well on track to achieve our cost savings for the year, and our capital plan remains unchanged. We’re affirming our guidance on longer-term outlooks as we stay focused on becoming the premier utility. Entergy adjusted earnings for the quarter were $1.37 and drivers were straightforward. Starting with utility on slide 6, we saw positive effects of regulatory actions associated with our customer-centric investments in Arkansas, Louisiana, Mississippi, and Texas, including the Lake Charles Power Station, which came online a few months early. We experienced lower sales volume due to impact from COVID-19 and unfavorable weather. Lower O&M reflected our cost reduction initiatives, as well as the timing and scope of non-nuclear generation outages and lower nuclear generation expenses. Depreciation and interest were higher as a result of our continued growth, and earnings on a per share basis also reflected a higher share count. At EWC, on slide 7, as-reported earnings were $0.55 higher than a year ago. The key driver was strong market performance for EWC’s nuclear decommissioning trust funds. The quarter’s results also reflected lower revenue and lower O&M, primarily due to the shutdown of Pilgrim and Indian Point 2. Slide 8 shows operating cash flow increased approximately $240 million. The main drivers were higher collections for fuel and purchase power costs and a $45 million reduction in the unprotected excess to ADIT returned to customers. The second quarter also benefited from lower nuclear refueling outage spending and lower severance and retention payments at EWC. Lower collections from utility customers partially offset the increase. Now, turning to slide 9, we are affirming our 2020 adjusted EPS guidance range of $5.45 to $5.75, and our 2021 and 2022 outlooks remain unchanged. As I mentioned in my introduction, our sales came in higher than we discussed last quarter, when we initially estimated the effects of COVID-19, and we’re well on track to achieve our cost savings for the year. Sales were better than expected in all classes and our overall 2020 expectation has improved slightly. For O&M, to date, we’ve achieved nearly 40% of our $100 million spending reduction, and remain on track to achieve the remainder by year-end. While our year-to-date variance is very positive, a portion of that is due to planned projects that were shifted to the second half of the year in response to COVID-19. As a result, we expect the third and fourth quarters to reflect spending for these delayed projects, as well as the balance of our identified cost savings initiatives. Our credit metrics and liquidity position are outlined on slide 10. Our parent debt to total debt was 22% and our FFO to debt was 14.6%. The FFO metric includes the effects of returning $189 million of unprotected excess ADIT to customers over the last 12 months. Excluding this giveback and certain items related to our exit of EWC, FFO to debt would have been 16%. As we noted last quarter, we remain committed to achieving FFO to debt at or above 15% by fourth quarter 2021. Our liquidity position remains strong. And you can see that as of June 30th, our net liquidity including storm reserves of $3.5 billion. Following up on Leo’s comments regarding SERI, we estimate that if the FERC were to agree with the conclusions in the ALJ’s initial decision without modification, the ongoing adjusted EPS impact could be $0.15 to $0.20. This includes approximately $0.06 for the sale leaseback issue and the remainder is from financing refunds to customers. This also reflects that we will give up SERI’s uncertain tax position with the IRS to mitigate risks to our owners and it does not reflect any actions we would take elsewhere in the Company to mitigate the impact. This estimate should not be interpreted as an acknowledgment on our part of the merits of the initial decision, or our expectation of the potential outcome on this matter. As Leo mentioned, we disagreed with the initial decision, we clearly laid out in our filings in this case, and we don’t believe there should be any material impact to EPS. Before closing, our Analyst Day is scheduled for September 24th. We’ll share with you our longer-term growth strategy, including our customer-centric investments and continuous improvement efforts. We will provide five-year views of our EPS outlooks and credit expectations, as well as details on the key drivers that support our path to achieve our objectives. We’re excited to share our plans with you. We had a strong second quarter, we achieved a number of significant accomplishments, and we remain on track to meet our strategic, operational and financial objectives. We’re committed to these objectives, as well as our goal to be the premier utility. And we look forward to continuing this conversation at Analysts Day. And now, the Entergy team is available to answer questions.
Operator, Operator
Our first question comes from James Thalacker from BMO Capital Markets. Your line is now open.
James Thalacker, Analyst
I have two quick questions. Your previous guidance indicated a 2.5% decline for the full year 2020, and now you’re at 2%. Can you provide a breakdown of your expectations for the rest of the year? Also, do you think there is some conservatism reflected in your outlook on the industrial side as you consider the recovery through the end of 2020?
Drew Marsh, CFO
Yes. James, this is Drew. Yes. So, we haven’t changed our outlook for sales actually for the third and fourth quarter from what we described in May, even though we did see a little bit better outcome in the second quarter than what we were anticipating. It is possible that we could do better. But, given the spike in cases around the country and our service territory, we thought we should just keep it about where it is for right now. We do continue to see the phased reopening, even though it’s paused in certain municipalities right now. So, there is opportunity perhaps over the balance of the year. But, for the time, we’ve elected to keep our outlook for sales where we had it for the second half.
James Thalacker, Analyst
So, basically, the improved outlook really comes from just the second quarter and whether you’ve seen the sales sort of quarter-to-date?
Drew Marsh, CFO
That’s correct.
James Thalacker, Analyst
Okay. And then, the other question, I guess just comes back to sort of credit is, are you still comfortable with the equity guidance that you’ve given before where you’re looking, I think for the high end of the 5% to 10% of the planned CapEx? Is that still sort of how you’re looking at things, and do you still feel like you’re on target for the end of the year to get to 15% FFO to debt, which I think is where you guys were sort of targeting last time we spoke?
Drew Marsh, CFO
That’s right. We are still targeting that, we still expect to make that by fourth quarter next year. And our equity outlook is in that same range that we’ve talked about previously. We have continued to think about timing. And we think it’s probably the latter half of next year when the need will actually arise. And we continue to think about the method in which we would deliver that. In the past we’ve talked about block rate. That’s what we did a few years ago. So that’s still on the table. But, we’ve also added other options to the table, including an ATM possibility and even perhaps preferred equity. Right now, we don’t have authorization for preferred equity within our charts. So, we would need a proxy vote to ensure that that would be shareholder friendly, but we’re considering that as well.
James Thalacker, Analyst
And just a follow-up on the preferred equity, I’m assuming that’d be like a mandatory convert.
Drew Marsh, CFO
Yes.
James Thalacker, Analyst
Is that from a rating agency standpoint? I know that you’ll get anywhere from 25% to 50% credit for something like that. Does that kind of limit I guess how much of the funding you can do through the convert, just considering it’s a little bit farther out and you don’t get as much equity credit as you would versus say a block sale or through an ATM?
Drew Marsh, CFO
So, that’s why the preferred equity gets you actually I think up to 100%. There are options around preferred debt, other versions of convertibles that will give you various credit depending on the rating agency. And we have authorization for all of those. What we don’t have authorization for is the preferred equity that would allow you to get 100% credit.
Operator, Operator
Our next question comes from the line of Shahriar Pourreza from Guggenheim Partners.
Shahriar Pourreza, Analyst
So, good to see that the $100 million cost savings program is on target. Is there any plans to hold recurring savings into ‘21? Any sort of rough numbers to think about, I mean, what could be recurring with the 2020 savings, anything perpetual? And I have follow-up.
Drew Marsh, CFO
So, obviously, at this point in the year, we are also thinking about 2021 and what that might mean. And we have started to think about opportunities for savings in 2021. So, that is actually well underway. Currently, we are monitoring everything that’s going on in the world and making sure that there isn’t any other risks that may be out there that we will need to apply those two. But that network that you’re referring to is well underway. But, we’re not prepared to talk about specific numbers at this point.
Shahriar Pourreza, Analyst
It has clearly been a strong start to the year. Could you share where you are currently tracking within your 2020 earnings band? It appears that based on rough modeling, you might be approaching the upper limit, especially if the third quarter weather plays out as expected. Could you provide some insights from a trend perspective about your position in that band?
Drew Marsh, CFO
We’re still tracking towards the middle of the band. There are opportunities potentially out there for us. But, we continue to track towards the middle at this point.
Operator, Operator
Our next question comes from the line of Jonathan Arnold from Vertical Research.
Jonathan Arnold, Analyst
I would like to return to the sales discussion and ask where there were significant deviations, either positive or negative, in the second quarter. I noticed that the slide you presented compares it to guidance rather than year-over-year data. I'm curious if that decline of 1% in industrial during Q2 reflects where the favorable changes occurred or if it was more evident on the residential side.
Rod West, CEO
This is Rod. Good morning. I think the storyline remains consistent with what we expected back in May, where the growth was driven by residential, because so much of the shelter-in-place was showing up in our residential sector. And you had some volatility in the commercial sector because you had so many different levels of uncertainty with schools and churches and restaurants and the like. And I think the clarity we had in the industrial sector sort of played out, although it was a little bit better than expected. So, the fundamentals have not changed dramatically when you think about sort of this cross sector contribution to growth. So, residential is really showing up for us and offsetting a large part, a lot of the volatility we’re seeing elsewhere.
Drew Marsh, CFO
And I’ll just add to that it pretty much was across all three quadrants, where we were a little bit ahead of expectations. It wasn’t one or the other that completely dominated.
Jonathan Arnold, Analyst
Can you provide some insight on the increase in uncollectibles, which rose from around 7 million to about 43 million? Is this trend leveling off or continuing to rise, and how should we consider these variables moving forward?
Drew Marsh, CFO
Jonathan, that's a good question. We are currently seeing an increase in uncollectibles. As you mentioned, we recorded approximately $30 million in bad debt expense this quarter, which was offset by regulatory assets from orders in our retail jurisdictions. There isn't any significant impact on the bottom line since we anticipate recovering those costs. Historically, our bad debt expenses have been about a third of our typical arrears. Normally, we maintain arrears of about $75 million and recently saw around $25 million in bad debt expense. Currently, our arrears are roughly $100 million higher, which is why we accounted for the $30 million. This aligns with our usual ratio. We believe some individuals who can pay are taking advantage of the situation, and we expect that trend to increase slightly. We have not activated our dunning programs yet, and we anticipate that balance will continue to rise through the summer, although we feel it will remain manageable. This growth is factored into our strong liquidity expectations, which we are carefully monitoring. It’s essential for us to keep working with our customers to support them during this time.
Operator, Operator
Our next question comes from the line of Julien Dumoulin-Smith from Bank of America.
Julien Dumoulin-Smith, Analyst
If I can, I first want to say that I appreciate the understanding regarding the technical difficulty.
Leo Denault, Chairman and CEO
Julien, we’re having trouble hearing you.
Julien Dumoulin-Smith, Analyst
I apologize. Hey, guys, apologies. On the merits of your argument with SERI and just understanding just the financial implication, Drew, you specifically said that there were some mitigating factors, but didn’t quantify or specify what they were. Can you help walk through what they might be, be it from a reduction in financing needs or otherwise? Just help us understand what reserves you might have already taken and/or other mitigating circumstances?
Leo Denault, Chairman and CEO
Julien, I will begin by discussing the mitigating circumstances before handing it over to Drew. My primary expectation is that no matter the impact we face, we will overcome it and still meet our expectations. This is our starting position, and we believe we can achieve the objectives we've set. In relation to the SERI case, there are previous factors we've discussed that could help mitigate the situation, including interest costs with the IRS and other related aspects. Additionally, there might be some financing that will align with whatever plan Drew has in place. Ultimately, our key expectation is to successfully navigate any challenges that arise.
Drew Marsh, CFO
Right. And I would say that the opportunity within our business is embedded within our continuous improvement program. And so, as you know, we’ve been working hard to continue to develop that. And we feel like it’s continued to grow and mature. And that is where that opportunity would come from. So, not all of it clearly has been identified at this point. But, as we clearly just articulated, there is an expectation about how we would be expected to operate within the Company. And just like we have in the past, I have 100% confidence that the Company is going to figure out how to make that work.
Leo Denault, Chairman and CEO
And of course, Julien, our perspective is that there won’t be an impact, because of our position in the case. So, I just want to make that clear too?
Julien Dumoulin-Smith, Analyst
Absolutely, I appreciate the merits of the arguments there as well. They sound sound. But, if I can ask you to down on this, as you obviously have a $100 million in cost that you are well on track, at least for this year. When you say you’ll find ways to offset that, does that include leveraging or offsetting it with continuation of this $100 million in cost cuts? And maybe even more broadly, actually, I know the last quarter and at the outset of COVID, we’ve been talking about the sustainability of these cost reductions. How do you think about that now, given the plans for the back half of the year and how that might impact ‘21, and also considering potential timing in ‘21 of resolution to the sales basis when you say...
Leo Denault, Chairman and CEO
I’ll explain that a bit, Julien, and I’ll ask my colleagues to chime in if I miss any key points. I appreciate your question because there are a few factors to consider. The $100 million primarily relates to our flex program and our strategies for managing the effects of COVID and weather. We've experienced negative weather this year as well as last, impacting our performance. The intra-year funds we mentioned earlier are largely tied to our adjustments due to weather, which we increased in response to COVID’s effects on sales. Additionally, we have a continuous improvement program, similar to what we discussed last year, which has led to permanent cost reductions. These reductions enable us to invest more in our system to enhance reliability and customer experience, as well as to support our charitable foundation and employee benefits through the added capacity. Looking ahead, we will combine both strategies. We are identifying certain cost impacts related to our COVID response that may become permanent. We’re currently working to distinguish between annual and permanent changes. I’m sure many of you have also found more efficient ways of doing things that you will likely maintain. I hope this clarifies things. Essentially, we’re focusing on two parallel initiatives: a typical flex within each department’s annual budget and the permanent continuous improvement everyone is addressing. Last year in Q2, we adjusted our forecasts based on continuous improvement, while this year we are maintaining our outlooks due to flex. Does that make sense?
Julien Dumoulin-Smith, Analyst
Right. And that’s the offset, potentially the impact next year too?
Leo Denault, Chairman and CEO
Yes, yes. But, I would say, impact next year, depending on what it is, whether it is weather, whatever, it would be a flex sort of thing. We were just talking about SERI. That’d be more of a continuous improvement sort of thing.
Julien Dumoulin-Smith, Analyst
Got it. All right. Excellent. Thanks for the clarity.
Leo Denault, Chairman and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Jeremy Tonet from JP Morgan. Your line is now open.
Jeremy Tonet, Analyst
I was just wondering if you could speak a little bit more on the 90% of CapEx not dependent on customer growth. And is this kind of like a shift in planning and strategy or is it kind of just more reflective of current system investment levels that are needed?
Leo Denault, Chairman and CEO
That’s a great question, Jeremy. It aligns with the capital plan we've had for the last decade. I thought it was essential to introduce a metric that keeps this focus for everyone because it's crucial to our plan. If you consider what we are doing in the generation sector, we are replacing outdated generation with new systems. The lower heat rate results in significant production cost improvements for the plant, and emissions are 40% lower while using less water. All these factors highlight the advantages of new plants. Over the years, we have been adding new generation and retiring old ones, addressing the system's needs with modern solutions rather than outdated ones. The same applies to our investments in the distribution system. For instance, with AMI, we are swapping out old meters for new ones. While there are new customers receiving new meters, the majority of this initiative is driven by technological advancements. Our distribution automation and asset management strategies aim to enhance service levels for our customers by investing in technologies that reduce costs or provide previously unavailable services. About 90% of our focus remains on the necessity to modernize the system. The growth in our customer base has helped create a lower rate path for everyone by expanding the usage of the assets we employ to modernize the system, which has historically allowed us to offer some of the lowest rates in the United States. I wanted to emphasize, especially considering the impact of COVID-19 on the economy and sales, that our capital plan to modernize the system remains intact, and COVID-19 has not diminished the need for that modernization. In fact, it has heightened the urgency for system upgrades, particularly at the distribution level. While 90% of our current focus is on technological enhancements, there are additional improvements we can pursue as we identify opportunities. I hope this answers your question.
Jeremy Tonet, Analyst
That was very helpful. Thank you for that. One more if I could. Just wondering if you could talk a bit on how your position in MISO impacts Entergy’s renewable planning. And do you see opportunities here changing over the next five years from MISO level planning and changes?
Leo Denault, Chairman and CEO
We conduct our resource planning in alignment with the resource adequacy requirements for MISO, but our planning is primarily done at the state level. The resource plans we develop and the type of generation we need take into account our involvement with MISO, but our choices regarding resources are not dictated by MISO.
Operator, Operator
Thank you. Our next question comes from the line of Steve Fleishman from Wolfe Research. Your line is now open.
Steve Fleishman, Analyst
One very brief clarification on the SERI, because of this change you’re going to make to the uncertain tax position. Does that cause the earnings impact to occur kind of temporarily until you get the final decision?
Drew Marsh, CFO
No, there shouldn't be any real earnings impact associated with that, other than the expectation that we would have been successful, which would have reduced future rate base and subsequent earnings. However, that's not what we're referring to when discussing maintaining our expectations. It would need to come from other means.
Steve Fleishman, Analyst
Okay. Just the FRPs, the extensions, I think Louisiana, you filed and then, are you doing Arkansas?
Drew Marsh, CFO
Yes, both jurisdictions...
Steve Fleishman, Analyst
Yes. Just how much do we need to kind of worry about these as more like normal rate cases as opposed to these like annual reviews, like can you just explain the issues in the multi-year extensions versus the annual?
Drew Marsh, CFO
The main issue regarding renewals is whether the FRP has achieved the goals we established five years ago in Arkansas and three years ago in Louisiana. Considering how we've outlined the capital plan and communicated our intentions to regulators, the critical question is whether we can meet these objectives related to reliability, sustainability, and maintaining affordable, competitive rates for customers. If we affirmatively answer that, as we suggested in our renewal filings, it aligns with our perspective. We anticipate that stakeholders will agree on continuing this initiative. This process is not viewed as a comprehensive rate case where we traditionally analyze past spending; rather, we do not expect that level of scrutiny. However, regulators have the authority to evaluate any aspect they choose. We believe that our interests are aligned. Historically, the way FRPs have functioned has been consistent with the commitments made five years ago in Arkansas. Also, in Louisiana, this renewal spans a series of three-year periods. Due to our capital plan's structure, we're not merely extending the FRP in Louisiana. For example, as Leo mentioned, we're focusing the capital plan on increased investments in distribution. This aspect of asset renewal will influence what we are requesting from the Louisiana jurisdiction regarding a distribution rider. Therefore, we are engaging with stakeholders on these policy considerations rather than conducting a typical rate case review.
Leo Denault, Chairman and CEO
Yes. Steve, Rod mentioned that to understand how it works in Louisiana, you can look back at the last few renewals. This is obviously the first time we’ve implemented it in Arkansas, but it’s clear that the Arkansas formula rate plan has functioned as intended. For example, in 2018, tax reform led to a different outcome than expected, yet we still earned our allowed rate of return and refunded money to customers in the subsequent formula rate plan filing. This approach has proven beneficial for customers as well. Louisiana has a long history of renewals, while this will be the first for Arkansas. However, it seems to be functioning exactly as all parties intended.
Operator, Operator
Thank you. Our next question comes from the line of Angie Storozynski from Seaport Global.
Angie Storozynski, Analyst
I wanted to revisit SERI. I appreciate your assessment of the downside case here regarding $0.20 and your capability to mitigate that potential earnings impact. However, it seems that might only account for half of the effect. There is another proceeding concerning the return on equity and likely the equity ratio for the asset, with the ALJ's recommendation expected in February next year. Could you explain if there are ongoing negotiations related to that? We have the MISO ROE decision from FERC and proposed adjustments to the calculation mechanism for the ROE, and I'm curious about how that could influence the earnings potential of Grand Gulf.
Drew Marsh, CFO
This is Drew. We have had expectations for ROE and capital structure established for about three years now. These expectations are reflected in our outlooks, which are based on the outcome of this proceeding. At this stage, we do not see any reason to alter those expectations based on the progress of the proceedings so far. Even if our outlooks are not fully realized from the perspective of ROE and capital structure, we believe that any difference would still be manageable within our current expectations.
Angie Storozynski, Analyst
Okay. Even if there were those overlapping impacts, right, with the reduction of the rate base and reduction of the ROE and the reduction in the equity layer?
Drew Marsh, CFO
That’s correct. Yes.
Leo Denault, Chairman and CEO
He was saying that we already reserved on the...
Drew Marsh, CFO
We have an expectation for that based on our outlooks. We don’t usually discuss it because we are still in the proceeding. However, we are comfortable with where that stands in our outlooks right now.
Angie Storozynski, Analyst
Great. And just one follow-up. So, what should we expect then going into your Analyst Day? I mean, do you plan on making any announcements, for instance regarding more renewable power spending or is this just an additional cost-cutting initiative? Again, I mean, just big picture expectations going into the Analyst Day?
Leo Denault, Chairman and CEO
Yes. In broad terms, I think we will provide more insight into our operations, our initiatives, and our capital plan strategies. The capital plan is quite stable at this point. As previously mentioned, we have a significant focus on renewables going forward, particularly between 2022 and 2030. There are numerous renewables we anticipate, and we are actively involved in various requests for proposals, as well as ongoing and completed construction projects. Overall, I believe our capital plan is in solid shape. We may share additional details and discuss our future endeavors, especially regarding customer solutions. We will delve deeper into aspects such as our capital plan, our strategies for reducing emissions, our customer solutions, our distribution efforts, and how we are implementing continuous improvement.
Operator, Operator
Thank you. Our next question comes from the line of Sophie Karp from KeyBanc.
Sophie Karp, Analyst
I wanted to revisit the volume situation. Examining the breakdown by class shows that the industrial sector is holding steady, showing minimal decline year-over-year when adjusted for weather. The commercial sector is understandably facing more challenges, while the residential sector is experiencing growth. My question is, could you provide further insights into the current situation on the ground? Should we expect this trend to persist? Additionally, with the changes in the mix, how might the sensitivities we observed before COVID adapt to this new environment?
Drew Marsh, CFO
Yes. So, Sophie, the industrial piece in particular that you noted, we were expecting pretty solid growth this year, at the outset, in the 5% to 6% range for industrial. So, the fact that it’s 1% down is a pretty big drop relative. Even though year-over-year it’s 1% down, we were expecting it to be 5%-6% up. And on the balance of the year, I would say that we expect the residential to start to trend down as people return to work in different places than their home. And we’d expect the commercial and governmental to slowly begin to trend up and industrial to hopefully begin to improve. That’s all I think consistent with where we lined out our expectations in May. So, I think that we are continuing to expect to the phase reopening to support slow but steady improvement in these numbers.
Sophie Karp, Analyst
And then, lastly, maybe if you could give us a little bit of a sneak-peek into your Analyst Day. Things seem to go on track for the most part for your company. What topics or what areas do you plan to give us an update on?
Leo Denault, Chairman and CEO
As far as topics for the Analyst Day, probably just a little more depth and color around what’s in the capital plan, our trend to lower emissions and as well as continuous improvement, structure, and things like that will be subjects that we’ll talk about. We don’t want to talk too much about it today. We want you to tune in.
Operator, Operator
Thank you. Our last question comes from the line of Ryan Levine from Citi. Your line is now open.
Ryan Levine, Analyst
What projects are in your capital plan that are most sensitive to load outlook that was incorporated within that 10% that was highlighted in the prepared remarks?
Leo Denault, Chairman and CEO
There are likely a few instances where new customer connections are significant in the transmission distribution sector. For instance, if a large industrial customer is situated within our service area, we may need to construct substantial substations for them. Additionally, we regularly extend our distribution network with new residential constructions, which also contributes to our efforts. Some of the transmission infrastructure might fall into this category as well, particularly when we need to install transmission capacity due to existing or anticipated growth in demand. Ultimately, the focus is on reaching the last mile.
Ryan Levine, Analyst
Thanks. And then, in terms of the industrial load assumption in your guidance, what are your conversations with customers suggesting for that outlook and are there any big lumpy customers that you have color as to their plans or timing upon some of that industrial load can return throughout the remaining portion of the year?
Rod West, CEO
Hey Ryan, it’s Rod. I know, we’ll talk more in detail about the nuances of our industrial engagement perhaps at the Analyst Day. But, part of our confidence comes from in our growth observations comes from the fact that we’re actually talking to real customers and we can quantify and identify the existing projects. And so, what we’re paying attention to at the moment are not just sort of the macroeconomic commodity spreads and other indicators, we’re talking to those companies who’ve made final investment decisions. And whether they have delayed projects or ramping back up, we can point to specific companies and tie them to specific projects that are in our outlook. And as we’ve shared before, we probability weight not just the projects in the plan, but there are other projects that make up our economic development type of pipeline and that we’re also monitoring to determine whether or not we need to include those or exclude those as the case may be in the plan. We’ve not seen much movement in our existing plan with regard to projects that we’ve identified that for instance that were canceled. There might have been one or two here and there, but they were on the lower end of the spectrum in terms of impact. But, our confidence comes from the fact that we’re tying them to actual projects that are still in play.
Operator, Operator
Thank you. Our last question comes from the line of Durgesh Chopra from Evercore ISI.
Durgesh Chopra, Analyst
I just want to quickly clarify, Drew, regarding the $0.15 to $0.20 figure. I’m trying to connect that to slide 26 where you illustrate the rate base exposure. Am I correct in understanding that the $0.15 to $0.20 represents a worst-case scenario where you would lose the return on over $400 million of rate base? Is that the correct interpretation, or am I misunderstanding?
Drew Marsh, CFO
Yes. So, the $400 million plus the $100 million of interest that is part of the refund because they are saying that we owe the money. And it’s not actually really rate base. It’s refund. So, the rate base doesn’t really change in that regard. It would only change if we were successful in our outcome with the IRS because that would be a deferred tax and the rate base would go down, the net rate base would go down. So, really what we’re talking about is the $510 million that you see there. That total amount is the requested refund. And so, we’ve had to finance that. And then, the lease payments that are about the $17 million a year on an ongoing basis.
Operator, Operator
Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to David Borde for closing remarks.
David Borde, Vice President, Investor Relations
Thank you, Gigi, and thank you to everyone for participating this morning. Our annual report on Form 10-Q is due to the SEC on August 10th and provides more details and disclosures about our financial statements. Events that occur prior to the date of our 10-Q filing that provide additional evidence of conditions that existed at the date of the balance sheet would be reflected in our financial statements in accordance with Generally Accepted Accounting Principles. Also, as a reminder, we maintain a webpage as part of Entergy’s Investor Relations website called Regulatory and Other Information, which provides key updates of regulatory proceedings and important milestones on our strategic execution. While some of this information may be considered material information, you should not rely exclusively on this page for all relevant Company information. And this concludes our call. Thank you very much.
Operator, Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.