Entergy Corporation (NYSE:ETR) Q3 2023 Earnings Call Transcript

Entergy Corporation (NYSE:ETR) Q3 2023 Earnings Call Transcript November 1, 2023

Entergy Corporation beats earnings expectations. Reported EPS is $3.27, expectations were $2.97.

Operator: Good morning. My name is Joel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Entergy Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Bill Abler, Vice President of Investor Relations for Entergy Corporation.

Bill Abler: Good morning and thank you for joining us. We will begin today with comments from Entergy’s Chairman and CEO, Drew Marsh; and then Kimberly Fontan, our CFO will review the results. In an effort to accommodate everyone who has questions, we request that each person ask no more than two questions. In today’s call, management will make certain forward-looking statements. Actual results could differ materially from 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.

A close-up of an electrical power line with a bright blue sky in the background, highlighting the company’s selection of electricity and natural gas services.

Drew Marsh: Thank you, Bill, and good morning, everyone. Today we are reporting very strong financial results for the quarter, as well as important progress with a few recent announcements, including a settlement in principle with the Arkansas Public Service Commission on SERI litigation and an agreement to sell our gas distribution business. Starting with our quarterly financial results. Our adjusted earnings per share was $3.27. We experienced record temperatures with an estimated impact of $0.64, which has given us the opportunity to flex our spending plans to invest in key areas that benefit our customers, derisk 2024 and support our goal to deliver steady predictable results. With our results to-date and our biggest quarter behind us, we are raising the bottom of the guidance range by $0.10 per share.

We remain well-positioned to achieve our long-term 6% to 8% growth outlooks. Our goal to deliver steady predictable growth includes our dividend. Consistent with expectations, our Board of Directors once again raised our quarterly dividend by 6% to $1.13 per share or $4.52 annually. Turning to the business update. Our system faced extreme heat and we saw record demand through July and August. In fact, they were 13 days that surpassed previous peak demand records. Despite the challenging weather, our system met our customer’s high expectations. Our power delivery team withstood June storms as the summer turned hot and dry for most of our service territory. Our generation portfolio covered our customer demand and we operated well within our reserve margins and our nuclear fleet was online throughout the quarter with a fleet capability factor of 99%.

We continue to invest in our nuclear assets with the goal to operate safely and reliably well into the future. Two of our plants are currently planned outages to complete work along these lines. Waterford 3 is an extended planned refueling outage that includes significant investments to drive plant longevity. In addition, we advanced in a planned outage to complete minor repairs to improve reliability going forward. We are also investing in power delivery to improve reliability and resiliency. These investments not only benefit existing customers but also attract new economic development through our region. Through the first three quarters of this year, we replaced approximately 21,000 distribution poles placed nearly 1,500 new transmission structures in service and completed 15 new substations.

Our past investments in modern efficient generation units, our nuclear fleet and our power delivery system helped us meet this summer’s number of demands. We continue to see signs of strong customer growth that helps affordability by spreading fixed costs over a larger customer base. For example, First Solar announced plans to invest up to $1.1 billion to build the solar manufacturing facility, CF Industries is proposing a $2 billion low-carbon clean ammonia production facility and Cora is proposing an $800 million investment in two electric vehicle battery supply-chain projects. These are just a few of the projects to support our expectation for strong growth in the coming years. We have made meaningful progress on important regulatory matters which support the credit required to meet customer’s growing needs and to drive improved customer outcomes.

First, System Energy reached a $142 million global settlement in principle with the Arkansas Public Service Commission to resolve all current SERI claims. Entergy Arkansas has already received some funds and the remaining amount will be refunded by SERI once FERC approves the settlement. This agreement is consistent with SERI’s settlement with Mississippi which was approved by FERC. It is also consistent with the reserve recorded last year. With this latest settlement, SERI has now resolved nearly two-thirds of its litigation risk. The SERI settlement follows FERC’s August order on rehearing for the sale leaseback renewal and uncertain tax position case. In that order, FERC agreed with System Energy’s arguments on the sale leaseback and depreciation refund calculations and denied rehearing requests on the uncertain tax positions.

Accordingly, we submitted our compliance report on the sale leaseback and SERI has recouped $40 million of the amount previously paid to Entergy New Orleans and Entergy Louisiana. Shortly after 1st August order, the LPSC filed for rehearing and clarification. FERC denied the rehearing by operation of law and indicated intends to issue an additional order on this matter. We believe that the August order and settlement with Arkansas provides important clarity that will help guide constructive discussions to resolve the remaining SERI litigation matters. A fair and reasonable settlement can provide meaningful refunds to customers in the near-term and eliminate uncertainty which itself brings further benefits to customers. Turning to retail matters.

Entergy New Orleans’ new formula rates were approved by the City Council and went into effect in September. This is the last rate change under E-NO’s current FRP. In addition, the Council also approved Entergy New Orleans’ request to extend its FRP for another three years. The outcome provides regulatory clarity for Entergy New Orleans and includes enhancements that will support the company’s credit and by extension, its ability to make important investments for its customers. Entergy Louisiana, likewise, has new formula rates effective in September, it’s last rate change under its current FRP. In the third quarter, Entergy Louisiana also filed its rate case and alternatively proposed to extend its FRP with some revisions to provide an opportunity to earn a fair improved return on investment that is critical to support the Louisiana growth.

The proposal also includes new customer and community programs to support those in need. We prefer the proposed FRP renewal to the rate case as it better supports the strong growth that is important to Louisiana. Regardless of the past, our goal is to maintain the current cadence with new rates effective next September. In late breaking news at the LPSC yesterday afternoon, we filed an unopposed stipulated settlement to resolve outstanding 2017 to 2019 formula rate plan filings and certain issues in the 2020 and 2021 filings. This settlement, which requires LPSC review is consistent with our outlooks and it represents continued work with our stakeholders to provide clarity on our path forward. Separately, Louisiana’s docket to implement a streamlined process for certification of up to 3,000 megawatts of new solar is also progressing.

Staff testimony is supportive of enhancing the process and we will work with them to incorporate the perspective. It is still relatively early in the process and we are hopeful that we will ultimately reach a constructive settlement as part of our ongoing efforts to work collaboratively with our regulators to bring clean energy solutions for our customers. In Texas, the PUCT approved our rate case settlement. New rates, as well as new depreciation and amortizations are effective retroactive to December 2022. And also just yesterday, Entergy Arkansas filed the unanimous settlement with its annual FRP. That allowance for a rate change with a 4% cap. We expect the commission to take up the matter before year-end and new rates will be effective in January.

Last week, Entergy Arkansas agreed to forego cost recovery from the state or incidents in 2013. As a result, this quarter, Entergy Arkansas wrote off replacement power costs for an underappreciated plant through on its balance sheet. This has been a long-standing issue and this resolution provides clarity moving forward. Finally, regarding resilience. We continue to move forward in the processes to review our accelerated resilience proposals. In New Orleans, we are holding town hall meetings to listen to our stakeholder’s inputs and answer their questions. We are targeting a City Council decision by year-end. In Louisiana, we received input from a staff engineer, as well as staff and interveners. All parties agree that accelerated resilience would benefit customers.

There are however varying opinions on how much we should pursue right now and the timing, as we work together to manage customer affordability. Our focus remains on bringing as much value to customers as we can while maintaining the credit of the business. We have significant capital needs to meet our customer’s growing demand for reliable, resilient and clean energy. To that end, we are pursuing opportunities to source that capital at lower costs. On Monday, we announced an agreement to sell our gas distribution business for $484 million. We will use the proceeds to reduce debt and support our capital needs. The sale is expected to be essentially neutral to earnings. While the gas business is a relatively small piece of our overall utility business, the more than 200 employees in that business are an important part of Entergy’s community and culture as they have been for over 100 years.

We have reached agreement with Bernhard Capital Partners, a Louisiana-based group and part because they understand that these employees are critical stakeholders in the gas business. In addition, our customers will continue to receive the high level of service that they have come to expect. The transaction is contingent on regulatory approvals and we anticipate closing around the third quarter of 2025. Federal programs are another cost effective way to source capital. We are pursuing both grants and loans through various programs. For example, under the Grid Resilience and Innovation Partnerships or GRIP program, each of our operating companies submitted applications. We are pleased to report that the proposal from Entergy New Orleans was selected in the federal share of the $110 million system hardening and battery microgrid project will be $55 million.

While four of our projects were not selected, they did receive encouragement letters and we are able to reapply for future funding rounds. We are also preparing to apply for federal loans through the DOE titled 17 Clean Energy Financing Program. Our application will include projects that we are already planning, including renewable generation, battery storage and transmission projects. Beyond federal financing directly for our customers, we are working with our community partners to attract other federal support for investment in our region. A good example is Louisiana’s Hero Project that unites public-private and philanthropic sectors to accelerate more affordable, reliable and clean energy to protect residents of Louisiana from climate change threats.

Entergy Louisiana and Entergy New Orleans were both critical team members in helping Louisiana secure the $500 million award. Another example is Entergy Texas’ participation in the high velocity hydrogen hub, which was selected by the deal with DOE for $1.2 billion award. This funding will help jumpstart additional clean energy production transportation and end-use opportunities which in turn will create jobs and economic activity and our communities. Entergy Texas could see additional load from blue and green hydrogen customers as a result. Most of our community work is local boots on the ground, including economic developments. Our teams work alongside our state and local governments to attract new business, jobs and tax base to our service area.

We are honored that Site Selection magazine has once again recognized Entergy as a top utility for economic development. We also have programs to directly help our customers in need. With the extreme heat this past quarter, we stepped up our efforts to provide resources for bill assistance, provide education on energy efficiency, a range of payment plans and encourage customers to transition to levelize billing. We also hosted our first Power Your Future Summit with education and workforce partners across our service area to create pathways to employment for individuals from underrepresented communities. These are just a few examples of the tremendous work our utility companies and employees put toward our community stakeholders every day. The EEI Financial Conference is just a couple of weeks away.

The fundamentals underpinned — underpinning our growth and value creation for each of our key stakeholders remains intact. Our long-term sales growth outlook is robust, bolstered by the IRA. Our investment plan includes incremental capital to support the growth and other customer objectives including reliability, resilience and clean energy investments. Customer affordability remains a priority and we are actively pursuing continuous improvement efforts to expand our employee skills and capabilities, and using technologies like artificial intelligence and robotic process automation to help us maintain a generally flat O&M trajectory despite the inflationary environment and our incremental investments. While our capital plan is increasing, we have a plan to manage within the current financing environment that meets our credit objectives with the same level of equity we laid out at Analyst Day.

With all of that, we are on track to deliver steady, predictable earnings and dividend growth and steadily working to build the premier utility. We look forward to continuing this conversation with you at the EEI Financial Conference in a couple of weeks. Now I will turn the call over to Kimberly, who will review our financial results for the quarter.

Kimberly Fontan: Thank you, Drew, and good morning, everyone. As Drew said, we have had a very strong quarter with results to keep us on track to meet our financial commitments. Summarized on slide three, our adjusted earnings were $3.27 per share, with results to-date, we are narrowing our guidance range. We are also affirming our 6% to 8% adjusted EPS growth through 2026. Slide four details the quarter’s variances by line items. As Drew mentioned, weather this quarter was one of the hottest on record. Excluding weather, retail sales volume declined roughly 1%. For industrial, sales to new and expansion customers increased mainly in the primary metal, industrial gases and petrochemical sectors. Sales to Cogent customers were lower in the quarter.

You may recall that Cogent sales were elevated last year. Sales to existing large industrial customers often have declined, primarily in the petrochemicals, pulp and paper and agricultural chemical sectors, largely due to outage timing. We continue to expect strong industrial sales in the fourth quarter from new and expansion customers, which will bring the full-year industrial growth to close to 2%. Regulatory actions positively affected results. Entergy Texas implemented new base rates and new formula rates were in effect at the other operating companies. O&M was $0.12 lower compared to last year. Drivers for the decrease were nuclear expense, including lower outage costs and compensation and benefits, comps. MISO ancillary generator service costs were also lower.

This was largely offset by the lower generated ancillary revenues. Other drivers for the quarter results included expense increases that result from our customer-centric investments, primarily higher interest cost and depreciation on new assets. New depreciation rates for Entergy Texas also contributed. Operating cash flow is shown on slide five. The quarter’s results is $1.4 billion, which is $412 million higher than last year. Key drivers included the timing of fuel and purchase power payments, lower O&M spending and last year’s EWC severance and retention payments. These were partially offset by lower utility customer receipts due to lower fuel revenue and the timing of pension contributions. Turning to credit and liquidity on slide six.

Net liquidity remained strong at $4.9 billion. With less than a quarter left, we remain squarely on track to achieve credit metrics at or above target ranges by the end of this year. Key drivers include debt repayments in the fourth quarter and the roll-off of FFO items from fourth quarter of 2022. Looking at slide seven, our equity needs through 2024 are unchanged. We have a small amount remaining for that period that is well within the capacity of our ATM program. Slide eight summarizes our adjusted EPS outlook. As I mentioned earlier, we are once again narrowing our guidance range and affirming our long-term 6% to 8% growth outlook through 2026. As we move into the last quarter of the year, I’d like to highlight a few updates for the balance of the year.

Higher than planned revenue from weather gives us the ability to flex up spending in areas that benefit our customers and derisk future periods. Our full year O&M estimate reflects the impact of these flex spending levers. For example, our 2023 spending now includes additional maintenance expense as a result of our generating units running at very high capacity, incremental vegetation management to improve reliability, supplemental maintenance for transmission and distribution assets to improve reliability and bill assistance to help customers who need it. Our FLEX program helps us ensure that we deliver steady, predictable, adjusted EPS growth, year-in and year-out. The Entergy management team will be in Phoenix in less than three weeks, where we will discuss the progress we have made on our long-term growth strategy and provide preliminary three-year capital and financing plans.

Additionally, we will provide high-level consideration for 2024’s earnings expectations. We have a strong base plan consistent with our strategic objectives that support our growing customer base. We are excited about the opportunities before us and look forward to talking to you at EEI. And now, the Entergy team is available to answer questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Shar Pourreza of Guggenheim. Your line is open.

Shar Pourreza: Hey, guys. Good morning.

Drew Marsh: Good morning, Shar.

Shar Pourreza: Good morning. Hey, Drew. Just a question on the 2023 earnings and the 2024 assumptions building up. Obviously, you now have $0.48 of positive weather impact versus normal for the year moving up the bottom end of the range which you talked about by $0.10. I guess, what other offsets are you now embedding in the 2023 guidance and do you see any carry-forward benefits to 2024 specifically, maybe commenting on your O&M assumption going from $0.85 to $0.20 for year-over-year? How much of the difference quarter-over-quarter as reinvestment for the benefit of 2024? Thanks.

Kimberly Fontan: Sure, Shar. Thanks for the question. As you noted, we did have significant weather that enabled us to pull forward some O&M spending. Some of that is, as I noted, related to that vegetation management spending that is coming into 2023. There’s also been additional spending in the transmission and distribution space around maintenance on those assets. All of that does help derisk 2024. And then we did have this higher spending in 2023 in the third quarter and a flow a bit into the fourth quarter as we continue to maintain a unit for Drew mentioned that ran so well to support these higher volumes. So all those help contribute to that change in the O&M space and that’s help derisk future periods.

Shar Pourreza: Okay. Got it. And then just, I guess, in light of just the asset sale announcement you guys did on the gas side. I guess, why keep the reiterated equity need, especially as we are thinking about 2025 and 2026, and does a CapEx step up require incremental equity, there as we are heading into EEI? Thanks.

Kimberly Fontan: Sure. The gas sale does help support the incremental capital that Drew mentioned going into our 2025 and 2026 outlooks. We also have strong sales that support that and we do not have the incremental equity in that period and supported by those two items, and we will go through more details of the financing plan for that at EEI in a couple of weeks.

Shar Pourreza: Okay. Perfect. And then just lastly on this on the SERI complaints proceedings. I mean, obviously, you noted the settlement in principle in Arkansas, but the debate has been somewhat confrontational especially as we are thinking about Louisiana. What was the impetus of the settlement and for Arkansas and do you guys think it’s sort of repeatable with the other jurisdictions? Thanks.

Roderick West: Well, good morning. It’s Rod. The impetus…

Shar Pourreza: Hey, Rod.

Roderick West: The impetus. Good morning. The impetus for the timing of the settlement I think stemmed from the August FERC ruling that in our view lowered the risk of uncertainty around further refunds due from the uncertain tax position and sale leaseback. So it was an opportunity for us to revisit negotiations, given the clarity from an August — mid-August decision.

Shar Pourreza: Got it. And then just how do you think the read-through, I guess, to the didn’t — I guess, Louisiana for sure.

Roderick West: Yeah. From our advantage point. We view it as constructive. Obviously, we won’t talk about comment on specific timing or progress with Louisiana or New Orleans, but we are comfortable saying we remain inactive in pursuit of settlement under the — under similar terms with the point being, obviously, as long as we are able to reach constructive settlements that’s fair and reasonable and certainly consistent with the way in which we approach that Arkansas and Mississippi. We think we have a fair shot, but obviously, we did the counterparties to align with us and that’s the work that remains.

Shar Pourreza: Perfect. Thanks. Thanks, guys. Appreciate it. Thanks, Rod.

Operator: Our next question comes from the line of David Arcaro of Morgan Stanley. Your name — your line is open.

David Arcaro: Great. Good morning. Hey, Drew. Hey, Kimberly. Hey, Rod.

Roderick West: Good morning.

Drew Marsh: Good morning.

Kimberly Fontan: Good morning.

David Arcaro: Thanks for taking my questions. I am wondering if you could elaborate a bit on what you are seeing in the industrial sales backdrop. Just seeing the weather normal sales down for this quarter. What are you seeing in terms of activity around projects and major industrial customer expansions that they have been working on?

Kimberly Fontan: Yeah. Big picture, David. As I noted, we are seeing, we continue to see a strong pipeline around new and expansion customers and Rod can talk on that, more specifically. For the quarter, we had some outages in our existing customers that drove to what our results are our year-to-date and our pipeline continues to be strong.

Roderick West: Yeah. The short story there is that the pipeline of projects to your question has continued to grow. We will provide a little more insight around that at EEI, but our confidence in our growth prospects are reflecting the actual growing number of projects of customers coming into service territory. So robust is the operative word there.