Earnings Call Transcript
ENTERGY MISSISSIPPI, LLC (EMP)
Earnings Call Transcript - EMP Q3 2022
Operator, Operator
Thank you for standing by. And welcome to the Third Quarter 2022 Entergy Corporation Earnings Release. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Mr. Bill Abler, Vice President, Investor Relations. Please go ahead, sir.
Bill Abler, VP, Investor Relations
Good morning and thank you for joining us. We will begin today with comments from Entergy’s CEO, Drew Marsh; and then Kimberly Fontan, our CFO, will review results. In an effort to accommodate everyone who has questions, we request that each person has no more than two questions. 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 Drew.
Drew Marsh, CEO
Thank you, Bill, and good morning, everyone. Yesterday, the planned leadership succession that we announced in August took effect. While I am honored to have the opportunity to lead this great company, I am not alone. Leo remains as the Executive Chair for the next few months and we will continue to execute at a high level on our strategic path. Leo built a strong bench of talented leaders. Kimberly Fontan takes over as Chief Financial Officer, and Kimberly Cook-Nelson assumes the role of Chief Nuclear Officer. Meanwhile, Chris Bakken will serve as the Executive Vice President of Entergy Infrastructure to provide leadership and mentorship to both Pete Norgeot, who was recently promoted to Chief Operating Officer; and Kimberly Cook-Nelson as they settle into our top operational roles. While the new senior leadership team is in place, Entergy has a bright future and we expect to deliver on the commitments that we have made to our key stakeholders. Today, we are reporting strong quarterly adjusted earnings of $2.84 per share. This is another solid quarter that keeps us on track for the year. In fact, with our biggest quarter behind us, we are narrowing our 2022 guidance by raising the bottom of the range by $0.10 per share and we are affirming our longer-term outlook for 6% to 8% annual growth through 2025. Last week, our Board of Directors raised our quarterly dividend by 6%. The annualized amount is now $4.28 per share, consistent with our target payout ratio of 60% to 65%. During the quarter, we continued to execute on many important fronts. Steady predictable growth depends on steady predictable regulatory mechanisms. Four of our operating companies have annual formula rate plans to provide timely recovery of our investments to benefit customers. Mississippi’s FRP filing was approved in July. Entergy New Orleans and Entergy Louisiana’s FRP rate changes were effective on September 1st. And we expect Entergy Arkansas’ annual review to wrap up in December. Entergy Texas filed a base rate case this year and it is proceeding on schedule with hearings planned in December. Absent the settlement, we expect a decision in the second quarter of next year. New Orleans City Council approved a $206 million securitization financing for storm cost recovery and replenishment of Entergy New Orleans storm escrow. While the prudent review of Ida cost is ongoing, moving forward with the financing will benefit customers by reducing interest rate risk. Louisiana’s review of Ida cost is also ongoing. Staff recently filed supportive testimony and recommended full cost recovery. Hearings are scheduled for December and we expect to receive securitization funds early next year. These developments are an important step in moving our credit metrics back to targeted levels. In September, we received an ALJ recommendation on our proposed Orange County Advanced Power Station or OCAPS. It was very encouraging that the presiding judges recommended approval of the project and they recognize the significant economic and reliability benefits that this facility would bring to our customers in Texas. The ALJ did not support the hydrogen capability for the plant though we continue to believe that day one hydrogen co-firing capability for OCAPS is in the best interest of our customers. I will note that the Governor of Texas has indicated his support for the plant, including its hydrogen capability. OCAPS hydrogen capability is less than 5% of the total investment and it provides a critically important option for fuel diversity and ensures the plant’s continued value in a low carbon future. Also, an economically viable hydrogen economy is no longer decades away. The passage of the Inflation Reduction Act promises to improve hydrogen economics and further accelerate clean hydrogen production. As we have said, Entergy’s region is uniquely positioned to take advantage of this opportunity and we expect the Gulf Coast to lead the way, bringing jobs and economic benefits to our communities. The decision on Orange County ultimately lies with the commission and it is on the agenda for tomorrow’s meeting. If approved, OCAPS will be our first unit capable of burning up to 30% hydrogen on day one1 with plans to eventually be 100% hydrogen capable. The Gulf region remains a prime target for onshoring growth opportunities. As we laid out at Analyst Day, our industrial customers have many inherent advantages that make them low-cost producers on the global stage. This is enhanced by recent supply chain and geopolitical conditions. Commodity spreads important to our customers remain positive and continue to support the outlooks we laid out at Analyst Day. We continue to see announcements for new projects in our service area. For example, Entergy Texas and New Fortress Energy signed an MOU for collaboration on developing renewable energy and hydrogen infrastructure. The partnership will help accelerate the green hydrogen economy in Southeast Texas. New Fortress Energy’s project will leverage industry-leading electrolysis technology from Plug Power for the production of more than 50 tons per day of green hydrogen. Entergy Texas will supply 120 megawatts of green power to serve this facility, which is expected to be one of the largest of its kind in North America. In Louisiana, Olin and Plug Power announced plans to produce green hydrogen from a 15-ton per day plant. Both of these projects are good examples of how the hydrogen economy is coming to life in our service territory. CF Industries announced a $2 billion carbon capture ammonia complex in Ascension Parish, which will create more than 400 jobs. This is another great example of customer growth tied to decarbonization. As I said, we have seen a lot of progress in the last few months. We continue to monitor the significant pipeline of opportunities for signs of impacts from broader economic uncertainty. We have not seen a noticeable pause or pull back. As we said at Analyst Day, the fundamentals of our region uniquely position the Gulf Coast for substantial growth even in a challenging economy. We also continue to make progress on expanding our renewables footprint. We received approval for the 250-megawatt driver solar acquisition in Arkansas. This facility is being constructed near U.S. Steel’s expansion in Osceola and it is expected to be completed in 2024, and U.S. Steel received the facility’s clean energy attributes. This illustrates how we work collaboratively with our customers and our regulators to support growth, jobs and sustainability in our region. In September, the Louisiana Commission approved four solar projects totaling 475 megawatts. They also approved our new Geaux Green tariff, which began taking reservations from large commercial and industrial customers yesterday. Based on inquiries to date, we are expecting strong demand and it arrived. The 365 megawatts allocated to the tariff were fully reserved in just a few minutes, indicating strong faster demand for sustainability products. We also announced plans for two new renewable RFPs. Entergy Texas is seeking 2,000 megawatts of clean energy and Entergy Mississippi is seeking 500 megawatts. We now have eight active RFPs totaling 7,000 megawatts. We have made selections in four of those RFPs and are negotiating with counterparties. We will announce specific projects once agreements are reached. In addition to clean energy, resilience is important for our customers who depend more than ever on reliable electricity supply. Since Hurricane Ida, we have invested in new infrastructure built to higher standards that will improve the system’s resilience, including more than 22,000 distribution poles, more than 2,200 transmission structures and eight fuel stations. Execution on our resilience investment is ongoing and our base plan includes investments that will continue to upgrade our system. At Analyst Day, we laid out our $15 billion 10-year accelerated resilience plan. We expect our proposed investments to significantly reduce physical and financial storm risk, and we are engaging with stakeholders to make our case. We made our first filing in New Orleans. We plan to file in Louisiana before year end and in Texas by mid-next year. We did our homework and the accelerated resilience plan is heavily informed by our neighbors in Florida, knowing that their hardened assets performed well during Hurricane Ian along with the strong performance of our own hardened infrastructure over the past couple of years gives us confidence that we can substantially reduce our exposure to storms and provide meaningful benefits to customers. Affordability remains a top priority and we announced several initiatives last quarter to help our customers when they saw higher bills from both warmer temperatures and higher natural gas prices. As part of our recent customer affordability initiatives, we have helped more than 35,000 customers with more than $5 million in bill credits. We have held energy fairs in 48 communities to provide helpful information to our customers about how to manage their bills and benefit from energy efficiency. We have also weatherized many low-income customers’ homes and installed energy-efficient appliances including new heat pumps and tankless water heaters. These efforts are only a part of what we are doing to help with affordability. Many of our past actions are mitigating the impacts of high natural gas prices for our customers today. The investments we made over the last eight years in more efficient generation and renewable resources are reducing fuel costs. Based on 2022 gas prices, these modern assets are reducing fuel costs by an estimated $400 million compared to what it would have otherwise been. Our nearly decade-long participation in MISO has also produced customer savings, which totaled more than $2 billion through 2021. Support for economic development and growth in our service areas also helps with customer affordability. Not only does it spread fixed costs over a growing customer base, it also provides economic growth and jobs that are critical for our communities. Another lever for affordability is continuous improvement, which is more important than ever. We are using CI to find efficiencies that will offset inflationary pressures and create headroom for new investments to help customers. We have a robust growth story at Entergy. We are seeing significant industrial growth as economic indicators for businesses in the Gulf South continue to be positive. Besides driving investments and growth for our owners, that industrial growth is important for our communities, especially in today’s economic environment. This opportunity is unique to Entergy and it will benefit each of our key stakeholders. We see our growth continuing for years to come as our customers need our help to achieve their decarbonization goals. It starts with growing our clean energy capacity, which will reduce our customers’ indirect emissions and continues through electrification of industrial processes to reduce their direct emissions. We are very excited about our near-term and long-term prospects, and we look forward to continuing this conversation with you at the EEI financial conference in a few weeks. Before I wrap up, I’d like to say a few words about Leo Denault. He yesterday retired from his role as our Chief Executive Officer after a long and successful career. While we won’t see him day-to-day, the impacts of his tireless dedication to our four key stakeholders remain. Under Leo’s leadership, we simplified our business to our core utilities. We turned around our nuclear operations. We redefined our customer focus. We have progressed and broadened our ESG commitments. We raised diversity, inclusion and belonging as a strategic pillar. We emerged as a national leader in corporate citizenship. Without missing a beat, we navigated through the pandemic and storms of the last couple of years. And we established a clear vision of our future opportunities. As part of his distinguished career, Leo completed 74 earnings calls over the past 19 years and he has been a steady presence for our key stakeholders. We will work with him as Executive Chairman for the next several months, as we continue to make progress on the vision and strategy that he established. As I turn the call over to our new Chief Financial Officer, Kimberly Fontan. Most recently, Kimberly served as our Chief Accounting Officer and she also has senior leadership experience in operations and regulatory roles. Kimberly brings a broad experience and perspective, and she’s a great addition to Entergy’s senior leadership team. Now I will turn the call over to our Chief Financial Officer, Kimberly Fontan.
Kimberly Fontan, CFO
Thank you, Drew, for that introduction. I am honored to join the leadership team and I am pleased to join you all on the call today. I am looking forward to working with all of you in the financial community. As Drew said, we have had another strong quarter, with results to keep us on track to meet our financial commitments. Summarized on slide three, our adjusted earnings were $2.84 per share. Consistent with comments on guidance last quarter, we are narrowing our guidance range by raising the bottom end by $0.10. This result is consistent with our objective of steady, predictable earnings growth. We are also affirming our outlooks through 2025. On slide four, you will see the adjusted EPS drivers for the quarter; higher retail sales were the primary driver as last year was impacted by Hurricane Ida. Weather this year was also warmer than normal. Excluding weather, sales growth in the quarter was 5.7%. Industrial sales were up 7%. We continue to see growth from new and expansion projects in line with our expectations. The primary contributors to the industrial growth were chlor alkali and transportation customers. Sales to small industrial and cogeneration customers were also higher than last year. O&M increased for the quarter due to several factors. Power delivery expenses increased, including higher vegetation costs in part driven by inflation. We also had increased costs for transmission maintenance and nuclear operations. Bad debt expense rose on the heels of higher bills this past summer. Other drivers for the quarter results include higher depreciation and interest expense from investments we continue to make to serve customers. You can see on slides five and six that the fundamentals underlying our industrial sales and growth remained strong and we have not seen signs of a pullback. Industrial commodity spreads continued to support positive margins and robust Gulf Coast operational levels; refining remains highly profitable with low product inventory supporting high operational rates, and record commodity spreads continue to drive Gulf LNG exports to Europe today and expansion of this capacity in the future. The U.S. Gulf ammonia producers are running at high rates to help fill the global supply gap. Beyond supportive commodity spreads, the Gulf Coast region continues to offer industrial customers inherent labor, infrastructure, and global shipping advantages. As we discussed at Analyst Day, this next wave of our industrial growth is being accelerated due to onshoring trends. These trends are caused by broken supply chains globally, manufacturers needing reduced geopolitical investment risk, as well as global customers who need energy security. The results for EWC are summarized on slide seven. The shutdown and sale of our merchant nuclear plants continue to be the main drivers for that business. Operating cash flow is shown on slide eight. The quarter’s result is $993 million, a decline compared to last year. Key variances include the timing of fuel and purchase power payments, the wind down of EWC, and increased O&M, offset partially by higher utility customer receipts. Turning to credit and liquidity on slide nine, we continue to work towards achieving in range or better credit metrics by the end of 2023. We continue to monitor our deferred fuel position, and in the third quarter, our balance increased approximately $150 million. We continue to work with our retail regulators to manage the impact of high fuel costs on customer bills. The forward curve for natural gas continues to decline, which helps with customer bills as well. As deferred fuel balances are recovered, our credit metrics should improve. We continue to make progress on the securitization front. A credit positive development in the quarter was the City Council’s approval for Entergy New Orleans to issue securitization bonds to establish a new storm reserve and recover Ida storm costs. This, of course, is subject to the City Council’s prudence review. Last quarter, we gave our early take on the impact of the Inflation Reduction Act for our customers and for Entergy’s cash and credit position. After additional analysis, we continue to be optimistic about the benefits from this legislation. Slide 10 provides highlights on the cash and credit impacts of the IRA. One important note is that we do not expect to be subject to the minimum tax provisions until 2026. The chart illustrates the relationship between gas and power prices and the resulting nuclear production tax credits at various commodity prices. We expect to see meaningful value for our customers, though, as you can see, the value is dependent on volatile commodity prices. We will work with our retail regulators to flow the value of the production tax credits to customers in a manner that mitigates volatility on their bills. We see meaningful value from the solar PTCs as well. The PTCs increase the competitiveness of utility-owned solar, and the value for customers will increase over time as we grow our renewables portfolio. We remain encouraged about the prospects for the IRA to create value for our key stakeholders. Slide 11 summarizes the progress against our equity plan. To date, of the $1.2 billion expected need through 2024, we have issued nearly $1.1 billion, most of which are equity forwards. We plan to exercise the equity forwards and receive the cash proceeds by the end of the year. Moving to slide 12, given the added clarity from 3 quarters of actuals, we are narrowing our adjusted EPS guidance range and affirming our long-term 6% to 8% growth outlook through 2025. For the full year, we once again raised our expectation on sales growth. This is largely due to higher than planned sales to cogeneration customers. While a positive for 2022 going forward, we will continue to plan conservatively for this customer group as electric demand from these customers varies. Commercial sales also have been higher than we expected - a positive sign for economic health. The higher than planned revenue from weather and sales gives us the ability to spend in areas that benefit our customers and de-risk future periods. Our O&M estimate for the year reflects flex spending, including initiatives to improve customer call response time and the enhanced customer assistance programs that we have discussed. We are also able to absorb some higher than expected expenses like vegetation management and ammonia used to reduce NOX emissions at our power generation plants without having to reduce other costs. Actions like these help us ensure that we deliver steady, predictable adjusted EPS growth year in and year out. The Entergy management team will be in Florida in less than two weeks and we will provide our preliminary three-year capital plan and high level drivers for 2023’s earnings expectations. Additionally, we will discuss Entergy’s long-term growth story, including our unique industrial growth opportunity, our accelerated resilience program, renewables expansion, IRA opportunities, and our role in the hydrogen economy. Entergy has great opportunities ahead for our key stakeholders. We have a strong base plan to meet our strategic objectives and we look forward to talking to you about our plans at EEI. And now the Entergy team is available to answer questions.
Operator, Operator
Thanks. And our first question comes from Jeremy Tonet from JPMorgan. Please go ahead with your question.
Jeremy Tonet, Analyst
Hi. Good morning.
Drew Marsh, CEO
Good morning, Jeremy.
Jeremy Tonet, Analyst
Thanks. Just want to start off with the 2,500 megawatts add in RFPs. Just what is your expectation for utility owned opportunities there versus PPAs?
Kimberly Fontan, CFO
Hey. Thanks for the question, Jeremy. Good question. Our current expectation is at least 50% or better from an owned perspective and that’s what’s assumed in our outlook.
Drew Marsh, CEO
It’s consistent with where we were. Sorry, Jeremy, this is Drew. It’s consistent with where we were at Analyst Day.
Jeremy Tonet, Analyst
Got it. Does IRA present the opportunity that this could be a bit higher?
Kimberly Fontan, CFO
Sure. That’s certainly something that we are looking at. Recall that a lot of our investments on renewables are in the back half of the decade. So we certainly expect to see benefits from IRA in that period and we will talk more about that at Analyst Day. But we do think that the IRA provides upside, as well as reducing the need for tax equity partnerships on that front.
Jeremy Tonet, Analyst
Got it. That’s helpful. And just if I could ask about U.S. Gulf Coast industrial activity expansion, just wondering what cadence do you see for that growth as far as LNG export capacity and other factors? What time frame do you see that ramping up and how do you think about the secondary impact where you bring kind of more and better jobs into the area and what that does for your residential customers?
Drew Marsh, CEO
I think that’s a great question, Jeremy. This is Drew. I will start off and then Kimberly or Rod can add to that. What we presented at Analyst Day was a 6% compound annual growth over the five-year period. A significant portion of that is around 24%, which I believe represents the most substantial increase in our forecast. However, it remains consistent with our previous projections, and we expect it to continue being strong. In terms of jobs, it will definitely benefit employment in our area and help our residential and commercial customer bases expand. It's not as large as it was 30 years ago due to the level of automation and other factors in modern industrial facilities. However, this also allows us to be more competitive globally. I see some trade-offs in these aspects, but they contribute to the appeal of our region. Rod, do you have anything to add?
Rod West, CRO
No. I think that makes the point. The message we sent at Analyst Day around the back half of the decade, representing the lion’s share of the growth, and even at Analyst Day, we showed what sectors we thought would populate that growth as well, tying in our industrial expansion with the electrification and ESG concerns of our customers. So we ought to leave it at that.
Drew Marsh, CEO
Okay.
Jeremy Tonet, Analyst
Got it. That’s helpful. I will leave it there. Thanks.
Drew Marsh, CEO
Thanks, Jeremy.
Operator, Operator
Thank you. One moment for our next question. Our next question comes from the line of Shar Pourreza from Guggenheim. Your question please.
Shar Pourreza, Analyst
Hey, guys. Good morning.
Drew Marsh, CEO
Good morning, Shar.
Shar Pourreza, Analyst
Drew, maybe just starting off around your earnings guidance, just, I guess, looking at your O&M run rate increase and interest rate headwinds for 2023, how are you sort of thinking about the contingency and plan levers on offset, et cetera? I guess how does sort of this inflationary environment kind of change your planning parameters versus the Analyst Day expectations, especially as we are looking to bridge into next year with a sort of a $0.30 band at the top and bottom end?
Kimberly Fontan, CFO
Thanks, Shar, for that question. I will start with your O&M question. The drivers for 2022 were really around our flex levers, which include both pull-forwards and one-time items like the enhanced customer assistance program that we talked about earlier this year. The pull-forwards give us ramp to pull-forward things from future years and de-risk future periods. The other impact from 2022 was inflation, as you noted, and we were able to cover that in 2022 through the increased weather and volume that we had in the first three quarters of the year. That said, we have included a level of inflation in our forecast for 2023 and we expect to meet our outlook as said, and we cover that with continuous improvement opportunities that we have been working on. As it relates to your interest rate question, I think, at Analyst Day, the outlook was about 5%, we have increased the interest rate expense to a little less than 6% on the long-term debt and about 5.25% on the shorter-term debt and that’s included in our outlook. That said, our treasury team has done a lot of work over the last few years to help mitigate exposure to potential rising interest rates by refinancing long-term debt in the periods of lower interest rates to help us offset in future periods.
Shar Pourreza, Analyst
Got it.
Drew Marsh, CEO
And Shar, I will just add one thing on that last piece. We have a lot of cash expected to come in. Kimberly mentioned that we are intending to exercise the equity forwards and then we have the securitizations, which we should be finishing up over the next several months. Those two things should alleviate some borrowing needs in the near-term, I should say.
Shar Pourreza, Analyst
Okay. Perfect. And then just to ask, maybe just shifting to financing, I mean, obviously, your capital growth opportunities are increasing with resiliency, hardening, green tariffs, et cetera. I guess, how are you sort of thinking about more accretive ways to finance this growth in this current really challenging capital markets environment? I mean there’s been some press sort of highlighting that you could be looking to raise about $2 billion through a minority sale of your utilities combined into a holding company, excluding Texas. I guess any sort of general comments here, any sense on timing, is there a process that started? I mean you certainly won’t be the first utility that’s looking to optimize an asset in lieu of traditional financing?
Drew Marsh, CEO
Yeah. So I will hand this over to Kimberly to address it first.
Kimberly Fontan, CFO
Yeah. Thanks, Shar. There’s no new news on this front. I know we had talked to you about the value difference between private capital and public capital markets, and to the extent that we can capitalize on that, and there’s a difference there, we would be compelled to do that. But there’s no new news on that front at this point.
Shar Pourreza, Analyst
Okay. Got it. Figured this is Drew’s first CEO call, I was going to try to put him on the spot. Thanks, guys.
Drew Marsh, CEO
And I hand it to Kimberly very softly.
Shar Pourreza, Analyst
But give you the flex. You did perfectly. Thanks.
Drew Marsh, CEO
Thank you.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of David Arcaro from Morgan Stanley. Your question please.
David Arcaro, Analyst
Hey. Good morning. Thanks very much for taking my question.
Drew Marsh, CEO
Good morning.
David Arcaro, Analyst
On the AMT, I just wanted to check, how much of an impact are you expecting once we reach 2026? I think you had in one of the slides in terms of when the corporate AMT would start impacting the business. And I was wondering in the interim over the next couple of years, just given that same slide, slide 10, we are currently seeing Henry Hub forward prices kind of in the 450 range or above over the next few years. Is there an AMT impact at all in like 2024, 2025 that’s offset by the nuclear PTC level? I am wondering if you could just compare those two impacts. Thanks.
Kimberly Fontan, CFO
Sure. Good question. As the slide indicates, we don’t expect the corporate minimum tax until 2026. That’s not being offset in 2024, 2025. If you think about how that’s being calculated, it’s a 3-year historical average and then we can replace book with tax depreciation. So that enables us to not expect to have a minimum tax until 2026. That said, to your point on the graph on the right, we do think that we have significant opportunity on the nuclear PTCs. But it is dependent on the gas and the power prices and where those are at the time. But those do start coming in, in 2023 and 2024 and so we would expect those to come in earlier than that corporate minimum tax. And we will work with our regulators to provide benefits to our customers, but also offset the effects of that corporate minimum tax when we do have exposure to that.
David Arcaro, Analyst
Okay. Great. Thanks. That’s helpful. And then on the upcoming Louisiana Resilience filing, I was just wondering if there’s any feedback or initial conversations from relevant stakeholders in the state around the importance, the priority of kicking off this work and what the appetite might be?
Rod West, CRO
Hi. It’s Rod. The short answer is that stakeholders in Louisiana have shown a keen interest in resiliency. They certainly recognize the need after several discussions regarding the balance between reliability and resiliency. The commission will always be focused on how we manage this, especially considering the current economic conditions and their impact on customer bills. As mentioned in Drew’s opening remarks, it’s evident that the insights we've gained from NextEra are further emphasizing our efforts to align on the need for increased resiliency investment. Ultimately, the decision will unfold during the resiliency filing when the LPSC establishes a procedural timeline. The groundwork we’ve completed, including the latest lessons from our colleagues in Florida, strongly supports our positive outlook on this need. While we can’t disclose specifics in advance or preempt our regulators, we believe we are making significant strides in achieving alignment within our stakeholder group.
David Arcaro, Analyst
Okay. Great. Thanks so much.
Drew Marsh, CEO
Thanks, Dave.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Durgesh Chopra from Evercore ISI. Your question please.
Durgesh Chopra, Analyst
Hey, team. Good morning and congrats Drew your first call and Kimberly to you as well.
Drew Marsh, CEO
Thank you.
Kimberly Fontan, CFO
Thank you.
Durgesh Chopra, Analyst
Yes. Of course. All my other questions have been answered. I was just wondering if you could update if there’s an update to share on the SERI settlement. I know you had this settlement with Mississippi, but anything there that we should focus on as we get into the year-end or next step there?
Rod West, CRO
It’s Rod again. No new news that I can communicate publicly. I can share affirmatively that we are actively engaged with relevant stakeholders and trying to contact a settlement and find common ground, and I can only report that that work is ongoing, but nothing public.
Durgesh Chopra, Analyst
Okay. That’s helpful, guys. Thank you.
Drew Marsh, CEO
Thank you.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Paul Zimbardo from Bank of America. Your question please.
Paul Zimbardo, Analyst
Hi. Good morning. Thank you.
Drew Marsh, CEO
Good morning, Paul.
Paul Zimbardo, Analyst
If I could just follow up on Shar’s question a little bit and thanks for the details on the O&M. If you could just break down that, I believe it’s $0.60 higher than the original guidance, basically how much is that acceleration versus more the inflation and kind of organic pieces of that?
Kimberly Fontan, CFO
There are several factors at play, including pull-forwards and inflationary impacts, making it challenging to pinpoint an exact figure. From an inflation standpoint, we're noticing increases primarily in fuel and chemical costs, along with capital expenses, but not as much in labor costs. We've accounted for a consistent level of inflation. Additionally, we've frequently mentioned our strategy to increase flexibility when there are opportunities arising from weather conditions or other business developments. This is reflected in our ability to invest in supporting our customers and stakeholders.
Drew Marsh, CEO
Yeah. And Paul, this is Drew. I will add that the inflation effects, they are touching us. We are not immune to that, like the rest of the industry. The places where we are seeing it start to creep in on the labor side or Kimberly mentioned the commodity type effects. And so we are also seeing, what I would say, in commodity services area. So vegetation is a big area where we have seen inflation and so we have been ramping up, as you mentioned, our continuous improvement efforts to offset that, because the inflation piece doesn’t go away easily and so there are continuous improvement efforts ramping up to offset that over the next however long we need it. And we are finding actually good success in the offset. So we are very comfortable that we are going to be able to manage through the inflation effects that we have seen so far.
Paul Zimbardo, Analyst
Okay. Great. Understand there. And staying on the hot topic of inflation, just as you think about the next Arkansas FRP filing, do you think that this is probably another one that’s going to be at the rate change cap or do you think you can manage a little bit below that level?
Kimberly Fontan, CFO
We have been working in the Arkansas area. The continuous improvement will help us reduce costs there. We are focused on staying under the rate change caps to ensure we manage affordability for customers while also creating value for our stakeholders. We believe we will continue to navigate inflation through continuous improvement. The specific number we will file in Arkansas next year is still being developed, but it will certainly account for inflation.
Drew Marsh, CEO
And we are a little over the cap for what’s coming for the formula plan this year. So we are above the cap already there.
Paul Zimbardo, Analyst
Yeah. Yeah. Okay. Understood. Thank you both and see you soon.
Drew Marsh, CEO
All right. Thanks, Paul.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Michael Lapides from Goldman Sachs. Your question please.
Michael Lapides, Analyst
Hey, guys. Thank you for taking my question, and again, congrats, not just to Drew and Kimberly, but obviously, Leo. It has been a long time since coming over from Indiana. I have a couple of easy questions. One is your demand growth, especially on the C&I side has been really, really healthy, not just this year but last couple of years, and this quarter, we saw a turn in residential demand growth. You have proposed Orange County in Texas, but just curious, even though you are adding a lot of renewable in lots of the jurisdictions, what your thoughts are around in some of the other jurisdictions to any need for any more conventional generation?
Drew Marsh, CEO
Yeah.
Kimberly Fontan, CFO
We do plan for the long term and are looking for growth, monitoring the growth that is happening. Our plans include significant investments in renewable energy, with expectations of 14 to 17 gigawatt hours over an extended period. We will incorporate baseload generation and smaller units as necessary to maintain reliability and meet customer needs. In the near term, the project in Orange County is currently on our agenda.
Drew Marsh, CEO
Orange County exemplifies our approach to incorporating hydrogen capabilities, reflecting our long-term goal of transitioning to clean energy in line with customer demand. In the short term, we don't require additional capacity to meet this need. However, if energy demand increases, we will need to reassess that situation. Currently, we foresee the need for extra capacity emerging toward the end of this decade, which could involve storage solutions or transitioning natural gas to hydrogen in the long run.
Michael Lapides, Analyst
Got it. And then one related follow-up, there are many positive developments happening in Louisiana. The securitization appears to be progressing smoothly. I don't have the last step or two there. It will be interesting to monitor the grid resiliency docket. However, can you remind us what your revenue request was for the formula rate plan compared to what has been authorized in the formula rate plan? Additionally, in general, what are your thoughts on bringing Louisiana closer to earning authorized rates of return?
Drew Marsh, CEO
Yeah. So you are referring to the fact that we have sort of been at the bottom of our band in the formula rate plan. Is that what you are referring to, Michael?
Michael Lapides, Analyst
Either the bottom or in some periods not at the bottom, depends how long you look?
Drew Marsh, CEO
We are continuing to collaborate with retail regulators on options for more efficient recovery, especially as we start to enhance our resilience efforts. In our resilience filing, we have requested more timely cost recovery. We have implemented more effective riders for transmission and distribution investments in Louisiana, and we will need to have those extended. These are the types of tools we are utilizing to address the delays we have experienced in Louisiana specifically.
Michael Lapides, Analyst
So if I look at your EPS guidance over the next couple of years, does this assume that Louisiana at some point in that timeframe that it kind of how far out gets closer to the midpoint of the range?
Kimberly Fontan, CFO
It certainly appears that the last year of the FRP will be next year's filing, and we will need to go through either a new rate case or a renewal of that FRP. We will collaborate with the commission to achieve outcomes that support the business's needs, and that is what we are planning for in our outlook.
Michael Lapides, Analyst
Meaning your outlook assumes you are not at the low end of the band, you are back towards the middle or does it assume kind of what you have delivered over the last couple of years?
Kimberly Fontan, CFO
I think I’d have to look specifically what it assumes, but it certainly assumes that we work constructively with our regulator in order to move us further up in that band.
Drew Marsh, CEO
And I don’t think it’s assuming...
Michael Lapides, Analyst
Makes sense.
Drew Marsh, CEO
We are expecting that the current mechanisms will remain in place, but we will need to improve these mechanisms to meet all our financial targets, especially the credit metrics we are aiming for moving forward.
Michael Lapides, Analyst
Understood and thank you. A lot of things improving in Louisiana over the last five to seven years in terms of regulation and look forward to seeing this on a go-forward basis as well. Thanks, Drew.
Drew Marsh, CEO
Thank you, Michael.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Ross Fowler from UBS. Your question please.
Ross Fowler, Analyst
Good morning, Drew. Good morning, Kimberly. How are you?
Drew Marsh, CEO
Good morning.
Ross Fowler, Analyst
Congratulations on the official new roles, I guess, as of yesterday. Most of my questions have been asked, but just a couple for me. So going back to Rod’s comments on the Louisiana resiliency filing and lessons learned from Hurricane Ian. I guess one of the lessons learned was the system did very well. But there were parts of it, obviously, that didn’t perform as well, and there’s been some discussions, I guess, in Florida around undergrounding those portions of the system that are higher risk. Has that entered sort of the conversation in Louisiana yet or can you provide some color or context around that?
Rod West, CRO
Sure, it's Rod again. The short answer is yes. All of the above is part of the analysis. You wouldn’t be surprised to hear us say that we expect the discussion to focus on cost benefits and risk rewards. When considering the risk associated with high winds versus high water, the impact varies depending on the specific area of the region. In Louisiana, they are certainly weighing the advantages of undergrounding, which has historically reduced the frequency of outages. However, when a disruption occurs, the duration tends to be longer, and overcoming the initial high cost of undergrounding has been a challenge in our service territory. What’s different now, due to some positive recent experiences with storms, as well as potential cost improvements and benefits of undergrounding, is that it has become part of the conversation.
Ross Fowler, Analyst
All right. That’s fantastic. Thank you. And then maybe one just on LNG expansion. We have seen some softening in LNG prices. I think that probably has more to do with weather in Europe than anything else. But I know it’s days, are you still seeing a lot of interest there, obviously, you touched on this a little bit, but what interest specifically are you seeing around maybe use of electric drives for future projects and putting renewable energy into those electric drives to the extent possible to sort of make the profile of future projects green.
Rod West, CRO
Yeah. Yeah. It’s at the core of most of the conversations we are actually having with our LNG customers. We noted the recent earnings call for Energy Transfer on the Lake Charles LNG project where they are spending the gamut in consideration of the electric drives, gas compression, as well as carbon capture. But across the landscape, we are seeing the expected acceleration of development of the LNG projects in the service territory. And we remain bullish as are our customers, notwithstanding the current economic environment. I think Drew alluded to some of the structural benefits or advantages that those customers have, and that’s continuing to show up, not just in the expansion, but also in the ESG components of the LNG expansion as well.
Drew Marsh, CEO
And Ross, I will just add that that theme around the LNG with electric drives and having a cleaner product is not unique to LNG. We are seeing that in other industrial processes where folks are trying to electrify as much as possible. Some of the existing facilities will electrify over top of it. If anybody is putting anything new, whether it’s in metals or LNG or petrochem or whatever, they are looking to see if they can electrify those industrial processes that normally, probably, would have been handled through fossil fuels. So that’s an ongoing thing that we are seeing across a broad spectrum of industrial processes.
Ross Fowler, Analyst
Yeah. That’s fantastic, Drew. Thank you and see you all in a couple of weeks.
Drew Marsh, CEO
Great. Thanks, Ross.
Operator, Operator
Thank you. One moment for our next question. And our final question for today comes from the line of Sophie Karp from KeyBanc. Your question please.
Sophie Karp, Analyst
Hi, good morning, and thank you for taking my questions. I wanted to revisit the topic of SERI from a different perspective, as it's now represented by three or four slides in your presentation. Have you considered a more strategic approach to the situation regarding these assets instead of just addressing each docket individually? Perhaps a broader strategic or regulatory solution, such as a global settlement? Are there any ideas you might be able to share on this?
Drew Marsh, CEO
Sure. Sophie, this is Drew. I will address that. Certainly, the settlement that Rod mentioned pertains to the agreements we have in Mississippi, and we are in discussions with others to explore the possibility of a global solution. Before our current efforts at FERC and the various proceedings, we experienced a couple of decades without significant litigation concerning SERI. I would anticipate that once we resolve this, things will return to a more typical state. However, that remains to be seen. A strategic alternative in this regard is something we are contemplating, but we wouldn't consider any options until we finalize the litigated settlement. If we can successfully navigate the litigation, then we could explore such alternatives. But if we revert to a normal operating rate, I don’t believe that would be the best approach for us. We'll have to monitor how this unfolds, but for now, until we complete our discussions at FERC, we can't move forward with any strategic initiatives.
Sophie Karp, Analyst
All right. Thanks for the color. That’s all for me.
Drew Marsh, CEO
Thank you.
Operator, Operator
Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Bill Abler for any further remarks.
Bill Abler, VP, Investor Relations
Thank you, Jonathan, and thanks to everyone for participating this morning. Our quarterly report on Form 10-Q is due to the SEC on November 9th 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 on 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
Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.