Entergy Corporation (ETR) Q3 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Entergy Corporation Third Quarter 2012 Earnings Release Conference Call. As a reminder, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Vice President of Investor Relations, Paula Waters. Please go ahead.

Good afternoon, and thank you for joining us. We'll begin today with comments from Entergy's Chairman and CEO, Wayne Leonard; and then Leo Denault, our CFO, will review results. [Operator Instructions] As part of today's conference call, Entergy Corporation makes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties, and there are factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Additional information concerning these factors is included in the company's SEC filings. On September 25, 2012, ITC Holdings Corp. filed a registration statement on Form S-4 with the SEC, registering shares of ITC common stock to be issued to Entergy shareholders in connection with the proposed spin-merge of our transmission business with ITC. But this registration statement has not become effective. In addition, our subsidiary, Mid South TransCo, will file a registration statement with the SEC, registering TransCo common units to be issued to Entergy shareholders in connection with the proposed transactions. Entergy shareholders are urged to read the proxy statement prospectus included in the ITC registration statement and the prospectus to be included in the TransCo registration statement and other relevant documents, when available, because they contain important information about ITC, TransCo and the proposed transactions. These documents, when they are available, can be obtained, free of charge, from the SEC's website at www.sec.gov, and can also be obtained, free of charge, upon written request to Entergy or ITC. Now, I'll turn the call over to Wayne.

Thanks, Paula. Good afternoon, everyone. We are relieved for all of you that we can be here today to talk to you now that Hurricane Sandy is gone and the restoration is well underway. Entergy sent teams of more than 852 workers and support staff to assist in the restoration effort from Arkansas, Louisiana, Mississippi and Texas. The first wave, last Saturday, October 27. The second was requested and immediately assembled last Monday. As you know, we are well acquainted with major storms. We also know that every storm has its own unique challenges. That was the case for us, this last -- past quarter, when Hurricane Isaac made its way through our service territory in late August, and last week for many of you. For us, it was a low-level hurricane 1 that just wouldn't leave. It was unique in its lifespan, limiting restoration and dumping 20 inches of water on many parts of our territory. For many of you, it was another unique low-level hurricane at the end of the storm season colliding with the onset of the winter storm season. And more importantly, it was unique in its massive size. Both hurricanes remind us, it's not the peak intensity of the hurricane that matters most, but the amount of integrated kinetic energy, or what they call IKE. Because of its size, Sandy now ranks #2 of all time on the IKE measure in its cumulative destructive power that the Northeast endured. Actually, it lands right ahead of Katrina and right behind Isabel in 2003. Among other things, storm surge correlates most highly with IKE, not the Saffir-Simpson hurricane intensity scale. Most all deaths from hurricanes result from storm surge. Many in the country may not appreciate how a low-level hurricane can be so destructive. But in Louisiana,…

Thank you, Wayne, and good morning -- or afternoon, everyone. In my remarks today, I will cover third quarter 2012 financial results, cash performance for the quarter and earnings guidance and other forward looking financial updates. Starting with our financial results on Slide 2. Third quarter earnings were lower than a year ago. Third quarter as-reported earnings included a special item for expenses incurred in connection with the proposed spinoff and merger of Entergy's transmission business with ITC Holdings. Spending on our spin-merge initiative reduced the quarter's earnings per share by $0.06 at the utility. Now let's turn to operational results for the quarter. Slide 3 summarizes the major drivers for operational earnings. Utility results were lower than a year ago due primarily to higher income tax expense, higher non-fuel O&M and higher depreciation expense, which were partially offset by higher net revenue. Income tax expense was higher due primarily to the absence of the IRS settlement obtained in the third quarter of last year, which significantly reduced income tax expense in 2011. The reduction in income tax expense was partially offset by a reduction in net revenue or the regulatory charge recorded to reflect the agreement to share the tax benefit with Entergy Louisiana customers. The net effect of these 2 items quarter-over-quarter was $0.93 per share. Excluding the regulatory charge, utility net revenue was slightly lower than last year. The decrease was due to weather. Weather in the current quarter was positive but significantly lower than the extreme weather we experienced in 2011. Sales were also affected by power outages caused by Hurricane Isaac. These decreases were largely offset by the net effect of regulatory actions in several jurisdictions and increased net revenue from weather-adjusted sales growth. Although overall weather-adjusted sales growth was essentially flat, net revenue increased…

[Operator Instructions] We will take our first question from Dan Eggers of Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Wayne, first of all, congratulations on the retirement. I know we'll see you at EEI, but just publicly wanted to say that.

Okay, thanks, Dan. Dan Eggers - Crédit Suisse AG, Research Division: When we look at the '13 guidance you guys provided, I guess, question number one is, when you look at kind of the breadth of the band at this point in time, the $0.80, given how much smaller the generation business is as a total percentage of the mix and how much you've hedged, how -- where do you see the big variability points as you look at that number for next year? Based on what you guys have now and based on conditions to date, do you think you're falling at the midpoint of that range or somewhere higher or lower than that?

Well, the big drivers are pretty consistent with what they've been in the past. The big driver part of the range is what happens in -- from an EWC point of view, with pricing. And as you can see, with the sensitivities associated with what we've got on Slide 6 or in Table 7 in the release, there is some variability associated with price movements at EWC, and that's really still the biggest driver that we see there. In the Utility, we do have some major rate actions as part of where we see them going forward. So if you look at what happens with the Grand Gulf, with Waterford 3, Hinds, Hot Springs, there is certainly significant amount of variability around those rate actions as well and, as I mentioned and as we've seen in the past, things like pension expense depending on where the discount rate is, where the market performance is for the year, those all have an impact. So really, there's, I guess, more variability in there, Dan, than you think based on some of those open items as it relates to pricing, pension expense, as well as those rate actions. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And I know, this year, there's been a lot of weather variability year-to-year in the last couple of years. The 1.5% growth or the normalized growth for next year at the Utilities, how is that going to compare to the full year this year once you back out some of the unique weather events?

Dan, this is Theo. I -- it's going to compare fairly close. It will be probably -- I think, our guidance for this year had a rate of about 1.6 or so. And we're on track for that, so it's going to compare fairly -- favorably fairly close to what we're seeing this year.

We'll take our next question from Julien Dumoulin-Smith of UBS.

And Leo, once again, congratulations on the new role. Wayne, congratulations on moving on up.

Where?

Bigger and better things, right?

Oh, yes, I guess. Yes.

Anyway, going back to the guidance. First, on the subject of O&M, could you maybe elaborate a little bit? Just EWC has a sort of litany of various things driving costs up. Could you perhaps just have -- or provide a little bit more of a sense for next year, as well as going forward into '14 and '15? What's kind of the trajectory, if you will?

Well, some of the things -- as far as normal O&M, we've got increases associated with merit and compensation expense such as that. Also we do have -- at EWC, we've got higher maintenance expense because of the outage at RISEC next year. Those go into that picture as well. In terms of normal O&M as it relates to what you see in the nuclear business, obviously, what we look at is any kind of costs that are associated with regulatory requirements and the like, which have driven costs in the past. And those are kind of the primary drivers of what we see next year and going forward, plus the timing of refueling outages and amortization. And we did have some changes this year because of what happened at Vermont Yankee as well because of the impairment.

Got you. Is there a percentage number that you'd want to throw out there just for us on a modeling purpose basis?

From a long-term point of view?

Right.

Yes, not particularly at the moment, no.

Okay. And then maybe on the second half there, EWC again. The economics in nuclear obviously have sort of come up of late following Dominion's announcement. I'd be curious if you could just talk about your portfolio and, I suppose, VY, in light of certain taxes that have been raised in Vermont potentially.

Julien, this is Rick. I mean, we still think it's a good plan. I mean, we're pursuing it through the court, and it -- in the Northeast market. We're bullish going forward where market prices are. And the taxes is not a big item that's going to determine for us whether or not we continue to operate that plan or not. So -- and we're going to pursue additional fuel settlement taxes. So at the end of the day, we're still confident on our position on the taxes in Vermont.

We'll take our next question from Jonathan Arnold of Deutsche Bank.

Yes, my congratulations, Wayne, and Leo too. Thank you for everything, Wayne, over the years. A quick question on dividend policy for the ongoing -- the sort of post-spin-merge company. I remember the -- I think the assumption was that you were going to leave the dividend the same, and the comments on the last quarterly call that you'd maybe have a higher payout and then grow into it over a period of time, but obviously, subject to the board. Is that -- any -- is that still how we should think about this? Any change in sort of thinking around that? And then what type of payout would you be willing to weather for a period under that strategy?

Jonathan, it's Leo. Wayne's looking at me. He's looking at the wrong guy here. Usually, Wayne handles that question, but I guess he is pushing that one off to me as -- this is part of transition. The -- our thinking around the dividend post the ITC transaction hasn't changed. The bottom line is the Utility sizes the dividend, always has. And buybacks come out of transaction-based items or out of the EWC or commodity-based businesses, depending on what we're doing at any point in time. What we've indicated all along as it relates to the dividend is that, one, it is a board decision; two, you're going to be getting a dividend from both Entergy and ITC once the transaction occurs. And when we look at the dividend post-transaction, we'll be looking to size that dividend accordingly based on the prospects of the Utility business. And when we looked at it originally, we were looking at we have the potential to be able to grow into that dividend that we have today, the $3.32, as the Utility continues to grow. As far as overall payout ratio, obviously, do -- things do change and we're going to have to pay attention to not only what happens to EWC pricing and overall earnings and what that payout ratio looks like, but also new investment opportunities at the Utility. And so the thinking hasn't changed. It's consistent with what we've been saying all along, but we'll just have to look at where we stand when the time comes, when we close on the transaction; what our dividend level is, what the ITC dividend level is because you'll, again, be getting a dividend from both of us at that point in time; what our capital program looks like; and what overall earnings look like at that time as well.

So, Leo, then maybe just to clarify: are you saying that the combination of the Entergy and ITC bands would kind of be where we are today? Or the Entergy dividend itself is likely to stay where it is today? Because I think, before, it was -- that the ITC piece was kind of not to be part of the equation.

The ITC piece is part of the equation. I'm not sure I'm -- I understand exactly what you mean by that...

By -- I thought, originally, the idea was that there would be a dividend that would be on the ITC piece, but that the dividend on the ongoing company would kind of remain the same as today's dividend is, and that -- you seem to be kind of linking the ITC piece to that now.

No. Well, originally, when we've been looking at this, certainly, our intention is that you end up with more dividends after the transaction than you would have had without the transaction. What we will be looking at when we make that decision is, again, the overall Entergy prospects, what the ITC dividend is, what our investment profile at the Utility looks like and what the overall payout ratio would be. And to the extent that, that supports $3.32 continuing, then we may be able to grow into that Utility dividend. The payout would be high relative to where we stand today on the Utility earnings piece. But if we can grow into it, that's something that we will consider at that time. And that's what we were talking about when we announced the transaction in December.

And we will take our next question from Steve Fleishman of Bank of America Merrill Lynch.

Wayne, we'll definitely miss you on these calls. And, Leo, congratulations. Just a quick, maybe a little bit technical question on -- in the release, it talks about moving a kind of allocation of earnings between EWC and the parent of about $0.40 a share. Could you be a little more explicit what that relates to? And is this some kind of ongoing allocation that'll stay this way? And I think this is the second time there's been a change in allocation between segments the last few years. I just want to make sure it's kind of representing it better going forward and why.

Well, the why is to better align EWC activities within EWC. We're actually moving a couple of legal entities, the names of which you wouldn't recognize, from the reporting segment that is Parent & Other to the reporting segment that is EWC. And what happens between those is you have some intercompany interest and you have some taxes that are really more closely aligned with the EWC business, and so we're lining that up better. And that's what that $0.40 is. And it's probably, I want to say, 70-30 in terms of tax and interest.

Okay. So is there better, kind of, if we match up the debt out of EWC -- I guess the question is, are you now allocating some of parent debt to EWC in this calculation, or not, or less of that?

No, no. It's actually some intercompany loans that we're matching up.

We have time for one final question. That will come from Greg Gordon of ISI Group.

So I just want to follow up on the question on the dividend. So are you saying that this current $3.32 dividend might, in fact, be resized post the spinoff of ITC, depending on the remaining earnings power and cash flow of the Utility? Or are you saying that you are going to maintain it?

Well, again, Greg, it -- we will make the decision at the time we close on the ITC transaction. And we've always said that we'll make the decision and we'll size it based on those factors that I mentioned, at the time of the transaction, when it closes. When we look at it where we -- when we were talking about sizing that up back in December when we announced the transaction, we mentioned that, as those things looked at the time, it was possible that the $3.32 could stay in place and we could grow into that dividend. So we're not really saying anything different right now, other than we'll make that call at the time based on what happens during the 18-month-plus time frame between when we announced it and when we actually close.

Okay. I guess I'll just -- in the context of you having lowered your net income growth aspiration for the core Utilities business from 6% to -- I think it was 6% to 8% or 6% to 9% to now 6%, I guess there's the question of whether or not that puts you at a payout ratio at which you're somewhat uncomfortable with the current dividend.

Well, again, those are the kinds of things that change, but it'll be more, not what happens between now and 2014, but what happens in 2014 and beyond that'll drive that decision on the dividend.

And this does concludes today's Q&A session. At this time, I'll turn the call back to Paula Waters for closing remarks.

Thank you, Albert. And thanks to all for participating. Before we close, we remind you to refer to our release and website for Safe Harbor and Regulation G compliance statements. Our call was recorded and can be accessed on our website or by dialing (719) 457-0820, replay code 5414008. The recording will be available as soon as practical after the transcript is filed with the U.S. Securities and Exchange Commission due to filing requirements associated with the proposed spinoff and merger of Entergy's transmission business with ITC. The telephone replay will be available through November 12, 2012. This concludes our call. Thank you.

And this does conclude today's conference call. We would like to thank everyone for your participation. And have a wonderful day.