Earnings Call Transcript - EMP Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Entergy Corporation Second Quarter 2021 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Abler, Vice President Investor Relations. Please go ahead.

Bill Abler, Vice President Investor Relations

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, CEO

Thank you, Bill, and good morning, everyone. I'm happy to report another solid quarter. Our adjusted earnings were $1.34 per share, including a negative impact from milder-than-normal weather. The underlying utility performance was strong, and our team successfully executed on multiple deliverables across the business. Our execution not only this year but over the last several years has resulted in strong growth and lower risk. This in turn has provided us more financial flexibility, which was most recently recognized by Moody's. The result is enhanced ability to manage risk and lower equity needs to fund our growth. The bottom line is we're on track to deliver on our commitments, including our financial results. We have a clear line of sight to achieving our 2021 guidance, as well as our longer-term financial outlooks. With the added financial flexibility from our lower business risk profile, we expect to be in the top half of those ranges. Our 3-year $12 billion capital plan is the foundation. It is designed to deliver important benefits to our customers and will result in 5% to 7% adjusted EPS and dividend growth. Our capital investments will improve customer outcomes along several dimensions, including reliability, resiliency, affordability, and sustainability. Our plan also supports our expectation of at least 5,000 megawatts of renewables by 2030, delivering on our environmental stewardship commitments. There is a great deal of certainty around the execution of our plan as over 90% of our investments today are tied to enhancing technology across our system to improve reliability and resiliency. 90% of our investments will be recovered through efficient and timely regulatory mechanisms, such as FRPs and riders. 90% of these investments are ready for execution from a regulatory standpoint. Additionally, we were able to manage our costs to provide certainty to our stakeholders through both our flex spending program and continuous improvement. These initiatives allow us to manage our customers' bills and keep them affordable while also providing steady predictable growth in earnings and dividends for owners. We have consistently maintained rates among the lowest in the country, and we have achieved 7% compound annual growth in adjusted EPS from 2016 to 2020. Our accomplishments so far this year keep us firmly on the path to meet our objectives. One important objective is increasing our renewable and clean energy resources. To that end, Entergy Texas began the process to seek approval to construct the Orange County Advanced Power Station, a large-scale hydrogen-capable facility that represents a significant milestone in our strategy to provide clean energy that also supports reliability. We received approval from the Arkansas Commission for the Walnut Bend Solar project. We will own this 100-megawatt facility, which is expected to be placed in service in 2022. It will provide clean energy for our customers in Arkansas and possibly provide capacity under a green tariff. We recently filed our proposed green promise tariff in Arkansas to allow for the sale of designated renewable energy to interested customers. Many customers have expressed interest in such an offer, and in fact, customers had input into the development of the proposal. We have received signed non-binding letters of interest from 20 customers, including Walmart, a global technology company, a major retail pharmacy company, nearly a dozen hospitals or hospital networks in Arkansas, and a number of large manufacturing customers. Our customers are telling us what they want, and we're listening. We're working to bring them offerings such as green promise to help them achieve their sustainability goals. We also continue to make progress on our annual FRPs, which provide for timely recovery of investments that benefit customers. Entergy Mississippi's FRP was approved, and the full rates are in effect. We submitted our annual filings in three jurisdictions: Arkansas, Louisiana, and New Orleans. Many of you are interested in our strong recovery filings, and they remain on track. Legislation to support off-balance-sheet securitization passed in Louisiana and Texas, and we expect to receive proceeds by mid-2022. In fact, Entergy Louisiana filed its request for securitization this past Friday. As I mentioned before, building greater resiliency into our system is an ongoing focus. Some of our resiliency improvements have been occurring as a normal course of business, as we replace aging transmission and distribution infrastructure with assets designed to the latest standards and able to handle higher wind-loading or flood levels. At times, these resiliency improvements are accelerated, like when we build back better after a major storm. However, we won't wait for another storm to continue to strengthen our system. We're conducting a review of our critical infrastructure. We are developing long-term plans to continue this progress on the path to greater resiliency. Customer affordability continues to be a cornerstone of our plan. We're starting at a great place. Looking ahead, even after accounting for storm recovery, we will still expect our rates to be well below the national average. The annual growth rate for average bills from 2021 to 2024 is slightly above 2%. Bottom line, we have a solid plan with significant certainty and a strong growth outlook. We consistently execute on our key deliverables that underlie our commitments. We have a proven track record of delivering on those commitments. We're confident we will be successful, but we're not stopping there. We aspire to do even better. Over the last several years, we've been highlighting the opportunity we see in customer solutions. We've begun to commercialize some of those solutions such as Power Through, our backup generator solution, and Shore Power, electrification of ships while in ports. We are also developing other products to further electrification of industrial processes to accelerate the development of EV infrastructure. We are expanding our product and service offerings to help our commercial and industrial customers meet their sustainability objectives. We are actively working to reduce our carbon emissions, and that will help all of our customers reduce their Scope 2 emissions. To further support our customers' aggressive decarbonization goals, we will leverage green tariffs to provide carbon-free resources to further reduce their Scope 2 emissions. As you all know, Entergy has a large industrial base with about 40% of our demand coming from industrial customers. Some have viewed this as a risk, but we disagree. We see continued opportunity in this sector, and here's why. Our industrial customers are efficient, diverse producers with infrastructure and labor competitive advantages. Our Gulf Coast refineries produce a wide variety of feedstocks and finished products highly integrated into the value chain. This is not going away. Even as products like cars evolve toward more sustainable options, the components of these products will still be needed. For example, cars and trucks will still have tires, frames, and dashboards, all things created from feedstocks produced by Entergy's industrial customers. Additionally, in a carbon-constrained world, we see the opportunity for additional growth in demand from our industrial customers. Talking about green tariffs is one way to help them meet sustainability goals, but that only addresses Scope 2 emissions that come from their power purchases. The lion's share of our industrial carbon emissions comes from Scope 1 emissions from fossil fuels that they use on-site. Again, we're developing ways to help customers reduce their Scope 1 emissions through electrification, including electrification with green options. Substantial opportunity exists for us to help them electrify processes, such as compression for LNG or product pipelines, cogeneration replacing a fossil fuel process with an electric alternative, and process heat to convert on-site boilers to electric heating. As our customers adapt carbon-capture utilization and storage, we can provide green energy to maximize the benefit of that technology. As we discussed, Entergy's geographic positioning in the heart of hydrogen producers' pipeline, storage, and consumers represents another unique opportunity. We have the ability to help our hydrogen customers, both producers and consumers, convert to carbon-friendly hydrogen alternatives. The bottom line is that we believe our large industrial base is a unique advantage and growth opportunity in a rapidly decarbonizing world. Turning to our efforts around hydrogen, which we see as a key part of a clean energy future, we're working with Mitsubishi Power to advance technologies and expertise in hydrogen for the benefit of our customers. Part of our collaboration involves the hydrogen-capable Orange County Advanced Power Station, which I mentioned earlier. We're also continuing our work on the Montgomery County Innovation Center, a 25-megawatt electrolysis facility to demonstrate green and clean hydrogen production capabilities. Finally, we recently participated in the DOE's Hydrogen Energy Earthshots initiative. Our goal is to secure federal funding to help jumpstart hydrogen demonstration projects in our region in a manner that mitigates impacts on our customers' bills. We expect to see a request for proposal notice from the DOE later this year or early next year. At Entergy, we have a solid strategy to achieve our objectives. We are an industry leader in sustainability. We have one of the cleanest large-scale generation fleets in the country, and we're working to make it even cleaner. We have a robust capital plan to meet our customers' evolving needs or low rates position as well. We're committed to continuous improvement for the benefit of our stakeholders. We have a clear line of sight to 5% to 7% earnings and dividend growth. We have a unique advantage with our customer base to provide sustainability solutions that could result in incremental sales growth. Even with our excellent positioning today, our goal is to do more. These are exciting times, and we're working to create a very bright future for our company. I'll now turn the call over to Drew, who will review our financial results for the quarter as well as our outlooks.

Andrew Marsh, CFO

Thank you, Leo. Good morning, everyone. Today, we are reporting results for another solid quarter. As you can see on Slide 5, we have experienced robust sales as we recover from the impact of COVID-19, and we continue to execute on our key deliverables. We're well on our way to achieving our goals for the year, and we are affirming our strong guidance and longer-term outlooks while pointing to the upper end of the range for each. Turning to Slide 6, you'll see the primary drivers for earnings in the quarter were straightforward. We continue to see the effects of our investments to improve customer outcomes, green rate changes to recover those investments. We also saw effects of the COVID-19 recovery. Sales were higher than last year, despite negative weather in the quarter. Our industrial sales improved 7.1% year-over-year driven by economic recovery and growth. Our industrial customers are now running at levels exceeding 2019. Commercial sales are also continuing to recover as businesses reopen, and residential sales are beginning to taper as workers return to their offices. On Slide 7, you'll see a little more detail on key sector indicators for our industrial customers. These four sectors collectively represent nearly half of our industrial sales. As you can see, the economic indicators are healthy and at or near multi-year high points. Inventories are back in alignment, commodity spreads have improved, and volumes and margins are doing better across the board. Overall, our industrial base has rebounded nicely from the challenges of 2020. You are fortunate to have a resilient and competitively advantaged industrial base. Turning back to the earnings drivers, our spending increased as we return to more normal business conditions. This increase is expected, as we significantly reduced costs last year to offset the effects of COVID-19. The spending includes increased scope of work in our generating plants including outages differed from the past year. You also have incremental spending for new plants, service, and in our focus areas of reliability and improving the customer experience. Our O&M expectation for the full year remains at $2.7 billion, and we will continue to utilize our flexible spending tools to achieve steady predictable results. Moving to EWC on Slide 8, you'll see the results were lower than the prior year. The key driver was the sale of Indian Point to Holtec. The sale resulted in a pre-tax charge of $340 million, driven primarily by the nuclear decommissioning trust exceeding the decommissioning liability. The sale of Indian Point is a significant accomplishment and an important milestone in our exit of EWC, and one which further improves our business risk profile, the impact of which I will address shortly. Operating cash flow for the quarter is shown on Slide 9. The quarter's result is slightly higher than last year's operating cash flow, returning to more normal levels. This change is due primarily to improved collections from customers, which are offset by a few items. Fuel prices increased compared to last year, and we saw a negative cash flow impact from the tightening of fuel and purchase power cost recovery. Severance and retention payments were higher at EWC relating to the closure and sale of Indian Point. We also had some remaining payments for non-capital 2020 storm costs. Our current credit metrics are shown on Slide 10. Our parent debt to total debt is 22.4%, and our FFO to debt is 8.3%. Our FFO to debt remains suppressed in large part due to the financial impacts from storms. As we mentioned in the past few quarters, we expect the metric to return to targeted levels in 2022 after we receive securitization proceeds and pay down the incremental debt. We've made our storm recovery filings in Louisiana, Texas, and New Orleans. As Leo noted, both Louisiana and Texas passed legislation to support off-balance sheet treatment for securitization. Last week, Entergy Louisiana made its securitization filing. Recovering storm cost through securitized debt is the best alternative for customers to help strengthen our balance sheet. As we communicated, we have several options to meet our equity needs. In this past quarter, we utilized the at-the-market equity program. As of the end of June, we had sold approximately $73 million of common stock, of which approximately two-thirds were forward sales, which could settle as late as next fall. Finally, I'd like to discuss the Moody's advisory that was issued this past week. Moody's affirmed series investment grade ratings but placed SERI on negative outlook, citing the currently pending cases filed against SERI at FERC by Retail Utility Commissions. Moody's indicated that these cases have the potential to erode series earnings power and cost recovery. While we are disappointed by this change, we recognize that the level of claims brought against SERI approaches the value of Grand Gulf, and the regulatory environment in which SERI is operating is far from constructive. In the same advisory, Moody's affirmed the parent investment grade rating and outlook, recognizing that Entergy's larger size and diversity could withstand adverse outcomes at SERI. In addition, Moody's recognized our improved business risk profile, which is a result of our successful multi-year strategy to wind down EWC merchant business and grow our utility business. They reduced the cash flow from operations minus working capital to debt threshold from 15% to 14% for Entergy Corporation. We are pleased with the recognition of the de-risking that we've accomplished in our business, and combined with S&P's recognition last fall, we are excited about the enhanced financial flexibility that our work has unlocked. Moving to Slide 11, the recent recognition of our de-risking efforts and incremental balance sheet capacity, we are early in the process of determining its full impact on our plans and outlook. There are some early takeaways. First, the incremental capacity significantly increases our confidence in our ability to execute the current business plan. Second, we will not need as much equity to fund our utility growth. While we are affirming our 2021 adjusted EPS guidance range of $5.80 to $6.10, as well as our longer-term outlook for 5% to 7% adjusted earnings per share growth. The combination of the improved confidence and lower equity need places us in the top half of our guidance and outlook ranges. We have a clear line of sight on our capital plans to benefit customers and a robust balance sheet to support that investment, both underpinned by a strong continuous improvement program and disciplined flexible spending plans. We plan to invest for the benefit of our customers in projects designed to improve reliability, sustainability, resiliency, and customer experience. These investments and programs further support community economic development and employee development while keeping our focus on low rates. Finally, the incremental balance sheet capacity resulting from our de-risking efforts will enhance our ability to unlock significant investment opportunities that will flow from working alongside our commercial and industrial customers that Leo described to help them lower their Scope 1 and Scope 2 emissions. Today, we are executing on our key deliverables and we are firmly on track to meet or exceed our financial objectives. We are investing in customer solutions to enhance our customer experience. Our investments in renewables and hydrogen technology will continue to support our sustainability efforts and those of our customers to provide new opportunities in the future. We are very excited about the growth opportunities ahead. Now, the Entergy team is available to answer questions.

Operator, Operator

Thank you. Our first question comes from the line of Jeremy Tonet with J.P. Morgan. Your line is open. Please go ahead.

Unidentified Analyst, Analyst

Hi, good morning. It's actually Rich on for Jeremy. Thanks for taking our questions today.

Leo Denault, CEO

Good morning, Rich.

Unidentified Analyst, Analyst

Maybe just starting with the equity message, first, I realize you laid out some of the drivers behind this. But just wanted to drill down more specifically on the share-count aspects for 2021 as well as just the overall evaluations. Can you speak a little bit more just to the timing of updating for the new Moody's outlook? And what other considerations around business mix and where the plan stands now could factor into the lower equity needs?

Andrew Marsh, CFO

Sure. So I'll talk about the time. This is Drew. I'll talk about the timing first. We have been working on this a long time. But we just got the recognition from Moody's in the past week or so as I mentioned. So, we are still early in the assessment of what the overall impact means. I pointed to a couple of the early elements associated with it. We expect to complete that this fall. It could be sooner. I would say probably no later than EEI. It could be sooner than that. As it relates to something like the share count or specifics around size, I don't have those kinds of details available to give you today, other than to say we believe it'd be meaningful, it'll be a meaningful change. In terms of the evaluation, which I think is part of the question that you had in there, we still want to make sure that we are hitting our earnings and credit expectations. We will still need to issue a little bit of equity to do that. But the opportunity is much more robust in front of us now. We think it's been significantly de-risked. We have a lot more confidence, as I said, in our ability to execute. But we don't have specifics that we can give you today. A couple other sizing or I should say evaluation perspectives, one is that as we have talked about extensively, we have a significant growth opportunity ahead of us. We want to make sure that we have the capacity to invest into that opportunity as it materializes. Moody's specifically also talked about SERI and our ability to manage that risk as it's presented right now, specifically around the uncertain tax position case. Their perspective was that we should be able to manage that risk and still meet the expectations around earnings and credit. We want to make sure that we have that capacity built in as well. Of course, we still believe that we're going to be successful in SERI. I know that wasn't really a question. But if that doesn't materialize, that would be incremental opportunity for us to invest in the business.

Unidentified Analyst, Analyst

Got it. Thanks for the color there. And then, maybe just switching gears to the CCGT in Texas, what is the timeline for regulatory approval? And do you expect the hydrogen aspect to impact the approvals process at all?

Rod West, Executive

It's Rod. Good morning. From the procedural standpoint, the process will begin at the commission right around the Labor Day timeframe. We're zeroing in on that. The procedural schedule will be set by the PUCT, and that process could run 6 to 12 months if we're efficient in the way that we're pursuing it. But again, that's up to the PUCT in Texas. You asked the question around the hydrogen component. I want to make sure I heard the question correctly.

Unidentified Analyst, Analyst

Sure, just curious if, given the novel nature of the hydrogen component, if you expect that to impact the approvals process at all?

Rod West, Executive

No, the hydrogen component as it's currently configured represents approximately 5% of the overall cost. We believe we have a compelling case for why having that flexibility benefits our customers, and certainly would support the CCN. So it's novel, of course, and we're prepared to explain why it's beneficial. But more importantly, bringing our customer benefits along when we think about the industrial opportunity that we're - both Leo and Drew referenced. We think that also adds to the viability of hydrogen being part of the CCN process at this stage.

Leo Denault, CEO

Jeremy, I'll just add to what Rod said, there are two advantageous components to the hydrogen piece of this. One is certainly in the environmental space, that hydrogen is a cleaner fuel. The other is that what we are going to end up with at the end of the day is a dual-fuel unit. It'll be able to run on natural gas or hydrogen or any combination in between. If you think about resiliency, that optionality provides not only environmental benefits but an added level of resiliency, which we've all seen is something that we need as we start to deal with weather events.

Unidentified Analyst, Analyst

Understood. Thank you for the color there.

Leo Denault, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Julien Dumoulin-Smith with Bank of America. Your line is open. Please go ahead.