Entergy Corporation (NYSE:ETR) Q1 2024 Earnings Call Transcript

Entergy Corporation (NYSE:ETR) Q1 2024 Earnings Call Transcript April 24, 2024

Entergy Corporation misses on earnings expectations. Reported EPS is $0.52 EPS, expectations were $1.44. ETR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Alex and I will be your conference operator today. At this time, I would like to welcome everyone to Entergy’s First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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 Chair and 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 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.

Drew Marsh: Thank you, Bill and good morning everyone. We had a very productive start to the year with progress on activities that support our near and long-term objectives. That includes continued progress towards our growth opportunity as well as important achievements in our risk reduction efforts that will benefit our key stakeholders. Starting with our financial results for the quarter. Today, we are reporting adjusted earnings per share of $1.8. This result for the quarter is below our expectations, yet we remain firmly on track to deliver on our annual commitments. I’m confident because of actions we have already taken, our team’s track record on flexible spending, and our demonstrated ability to deliver steady, predictable results.

Kimberly will go over the details. Now I’ll cover the business updates from the quarter. Everything we do starts with the customer, because that is the key need to create value for all our stakeholders, customers, employees, communities and owners. Our efforts on that front were recently recognized by EEI’s Outstanding National Key Accounts Customer Engagement Award, which is determined by customers. Validating our customer-centric progress, hundreds of the nation’s leading chain and multi-site businesses voted to recognize Entergy for delivering exceptional service. We still have more work to do, but we are grateful for this milestone. Additional evidence of progress comes from the execution of 8 new electric service agreements with industrial customers signed in the quarter, including the data center in Mississippi that we announced earlier this year.

These contracts represent approximately 1.1 gigawatts of new load and more than $150 million of annual adjusted gross margin. As a reminder, our conservative planning practices assume that most rather than all volumes will come to fruition. Customer affordability remains a key focus area. Last quarter, I outlined our efforts to secure federal support for projects that would benefit our customers. Our utilities received 6 letters of encouragement from the GRIP application submitted late last year. Full applications for all 6 projects will be submitted to the Department of Energy by the end of May. We also continue to advance our $4.5 billion Part 2 application for the DOE loan program, which, if successful, will lower capital costs for our customers.

Our nuclear fleet continues to make progress. And all our nuclear plants are now in Column 1 of the NRC Action Matrix. However, operational excellence must be earned every day. Waterford 3 is currently working to recover from a shutdown following a transformer failure. At approximately 20 years old, the transformer was only halfway through its expected life. And early indications point to equipment failure as the cause. We have an interim solution with a spare transformer that can support up to 90% capacity until the replacement transformer arrives. We’re working diligently to bring the plant back online in the coming weeks. In Mississippi, Grand Gulf wrapped up its 28-day refueling outage in March. This is the plant’s shortest refueling outage since 2007.

This outcome is a result of the team’s intense focus on safety and operational excellence. We and most importantly, our customers appreciate the work they put in to achieve this outcome. Stakeholder engagement remains a focus area, and important way to assess progress is through our regulatory outcomes. Starting at the federal level, System Energy reached a $116 million agreement in principle with the New Orleans City Council to resolve all current SERI claims. Several New Orleans City Council members cited near and long-term benefits to customers through the settlement. This agreement is consistent with SERI settlements with Mississippi and Arkansas, both of which were approved by FERC and determined to be fair and reasonable. It is also consistent with the reserve recorded in 2022.

With the addition of New Orleans, SERI has resolved roughly 85% of its litigation risk. Turning to the retail level. Last week, the Louisiana Public Service Commission approved the first phase of Entergy Louisiana’s resilience and grid hardening plan. The plan includes 2,100 projects totaling $1.9 billion of investments over 5 years. The projects will provide important resilience benefits to customers and communities. A more resilient grid will also serve as a catalyst for growth as it bolsters confidence for customers seeking to locate or expand in our service area. The approval includes a forward-looking recovery mechanism with semiannual true-ups, which will provide a solid foundation for our continued customer investment in Louisiana.

There are also reporting requirements to provide transparency to our stakeholders on our progress. While the investments will take place over the next 5 years, we are getting underway immediately. For those of you attending our Analyst Day in person, we will show you some examples of the future of our system through recently installed resilience projects. Entergy Louisiana is also in settlement discussions on 2 other proceedings. The FRP renewal or alternatively a base rate case and the streamlined and enhanced renewable RFP process to add up to 3,000 megawatts of solar. Given solid progress thus far, the hearing dates for these dockets have been extended to allow time to reach settlement in these cases. Entergy Louisiana also filed for approval of Bayou Power Station, a $411 million 112-megawatt quick-start non-baseload natural gas power station.

It is an innovative solution to meet the power needs in a challenging area on the edge of the Eastern Interconnect. To enhance local resilience and storm restoration speed, the unit would be situated at the top of barge in Southern Louisiana. This is an area that is critical to our nation’s energy security and Louisiana’s economy. Entergy New Orleans filed an updated resilience and grid hardening plan, which requests approval of Phase 1, a series of investments totaling $168 million over 3 years. This is in addition to the grid resilience project that was approved by the City Council earlier this year. We are requesting to expedite the technical conference on May 1, and we are seeking a decision around midyear, so we can get started on this important work for customers.

Our gas LDC sale continues to move along smoothly. The stakeholder engagement process has been going well, and we remain on track to close the transaction by the third quarter of 2025. And lastly, Entergy Mississippi filed its annual FRP in March. Mississippi’s efficient mechanism enables continued customer-centric investments, while providing appropriate credit support for Entergy Mississippi, as it makes these investments. Interim rates became effective on April 1. Finally, we are very excited about our upcoming Analyst Day in June. We’ll use that opportunity to show off New Orleans, give you a look at our resilience investment, provide a more detailed dive into our multiyear strategy and outlook. That includes a significant customer growth opportunity before us, the plans to expand our clean energy portfolio and to advance reliability and resilience, and our efforts to help support customer affordability, while maintaining our credit strength and earnings growth.

We’ve had a productive start to 2024 with solid progress and execution across key customer, operational, regulatory, and financial front. And by continuing to put our customers first, we will deliver premium value to each of our key stakeholders. I’ll now turn the call over to Kimberly, who will review our financial results for the quarter.

Kimberly Fontan: Thank you, Drew. Good morning, everyone. Today, we are reporting first quarter adjusted earnings per share of $1.08. Several items affected the quarter results, including mild weather, the timing of operating expenses, including planned generator maintenance outages, and the acceleration of education spending and lower sales to cogeneration customers. With the first quarter results under our belt, we remain firmly on track to achieve 2024 results in line with our guidance, and we are well positioned to achieve our long-term 6% to 8% growth outlook. I’ll review all of this in detail. In the quarter, we had 2 items that were considered adjustments and excluded from adjusted earnings that I’d like to mention.

First, Entergy Arkansas received a decision from the U.S. District Court in a long-standing case around opportunity sales. The decision resulted in Entergy Arkansas recording a $0.46 impairment of a regulatory asset in the quarter. Second, Entergy New Orleans recorded a $0.27 regulatory charge to share incremental income tax benefits from the 2016 to 2018 IRS audit resolution. Our first quarter adjusted EPS drivers are laid out on Slide 4. Our results reflect regulatory actions that include recovery of the investments that we are making to benefit our customers. Depreciation expense is also higher as a result of those investments. For retail sales, as I noted earlier, weather was mild this year, but not as mild as 2023. Excluding weather, sales volume was not a big driver for earnings, as higher sales to residential was largely offset by lower sales to commercial.

Industrial sales were down 0.6% quarter-over-quarter, driven by lower sales to cogeneration customers. We continually monitor fundamentals important to our industrial customers. As you can see in the appendix of our presentation, the metrics remain supportive, giving us confidence in our industrial growth outlook. Utility other O&M was higher this quarter than first quarter last year due to several drivers, some of which have variability throughout the year. For example, healthcare claims were higher and we had more planned maintenance outages at non-nuclear plants. We also accelerated vegetation management in advance of storm season. Compared to our guidance assumptions, other O&M in the quarter was higher than initially planned. However, we fully expect O&M to balance out over the year and ultimately be roughly in line with our original guidance assumptions.

Moving to Slide 5. Operating cash flow for the quarter was $521 million, which was lower than last year. The largest driver was customer receipts, which included significant deferred fuel collections in 2023. Deferred fuel costs within operating cash flow declined approximately $350 million compared to last year. Credit is summarized on Slide 6. We maintain a strong ongoing focus on our credit as it is an important element in executing on investments for our customers. For the quarter, our metrics were impacted by timing of debt issuances that will balance out through the course of the year. Our underlying business continues to generate strong FFO and our outlook support metrics in range or better than the rating agency expectations. On Monday, S&P issued a credit update for SERI, improving its outlook to positive, and affirming its rating followed the announced settlement with the City Council of New Orleans.

S&P further noted that they could raise SERI’s ratings by one notch if the settlement is approved by FERC. As we have said, settlement of system energy litigation provides certainty for all stakeholders. Consistent with this, S&P noted these settlements reduce uncertainty of potential future claims and support the company’s future cash flow stability and predictability. Turning to Slide 7. Our equity needs remain unchanged. We continue to make progress against our 2025 and 2026 equity needs. As of the end of the quarter, we’ve locked in more than 30% of our equity need for those years utilizing ATM forward. As shown on Slide 8, we are affirming our guidance and longer-term adjusted EPS outlook. Weather and lower sales to cogeneration customers have been a headwind to start the year.

For the full year, we are benefiting from sales to additional industrial customers. The impact of these sales offsets this headwind. We continue to be on track for our full year expectations. Regarding utility O&M, quarterly timing can vary significantly, especially when compared to a prior year where we deployed significant flex spending for the benefit of customers following a very hot summer. As we look to second quarter this year, we expect O&M to be higher than last year with the increase roughly in line with the first quarter variance. Key drivers of the timing of our spending in 2024 include the following: In 2023, all of our flex spending increases were in the back end of the year. So we expect corresponding reductions in spending this year in that same time frame.

In second quarter last year, we received significant prescription rebates covering multiple years, which we don’t expect to recur at that level or in the same time frame this year. I noted earlier that our first quarter variance includes accelerated vegetation spending. We expect that acceleration to continue in advance of storm season in 2024. This acceleration reduces spending in the back half of 2024, assuming normal weather. While we have variability in the quarters in spending, I want to reiterate that we fully expect O&M to balance out over the year, consistent with our outlook, and we are confident we will deliver on our financial commitments. We continue to prioritize the needs of our customers to create value for our key stakeholders.

We’re well positioned to execute and deliver successful customer, operational and regulatory outcomes along with steady, predictable financial results. As Drew said, we’re excited about our Analyst Day in June, where we’ll provide a long-term in-depth view of our plans for the future. And now the Entergy team is available to answer questions.

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Q&A Session

Operator: [Operator Instructions] We have our first question from Shar Pourreza from Guggenheim Partners. Your line is now open.

Constantine Lednev: Hi, good morning, team. It’s actually Constantine for Shar. Thanks for taking the questions.

Drew Marsh: Hi, good morning.

Constantine Lednev: Can we start on the updated thoughts around the CapEx plan given the data points around resiliency and additional industrial customers. You had about $900 million in plan with a bigger number now approved. Is that pushing CapEx higher in the near-term? And how should we think about the moving pieces there?

Kimberly Fontan: Thanks, Constantine. Yes. From a capital plan, we did get $1.9 million approved. We had $900 million through this outlook period. Of the $1.9 billion approved, about $1.5 million of that is in that same 3-year period. So that’s an increment of about $700 million for Louisiana. The Louisiana portion of that $900 million was $800 million. So that’s an incremental $700 million. How that rolls out through the capital plan, we’ll update all that at the Analyst Day along with the effects of the rider and any other changes to our capital and our financing plan.

Constantine Lednev: Okay. Perfect. And maybe can you help us reconcile some of the charges taken in the quarter and how the refunds may impact cash and financing needs in the near-term? Just do you anticipate any pull forward of equity issuance? Or are there offsetting factors that we should think about?

Kimberly Fontan: We don’t see any needed change in equity. We had already reserved a substantial portion of the income tax or the deferred tax effect for New Orleans. We did increase that, but the return period is a pretty long period, and so there’s no material effect on the outlook period.

Constantine Lednev: Perfect. And maybe just one last follow-up on some of your commentary around regulatory outcomes. Do you have any updated thoughts around the FRP process and rate case process in Louisiana? And is the period after the direct testimony of the make it right for the kind of more intense settlement discussions? Any kind of lessons learned that you can implement?

Rod West: Good morning. It’s Rod. I think I can say, look, 5 weeks ago, we suspended the procedural schedule to facilitate settlement. If you think about the date of May 21, when staff and intervenor testimonies do, in the next 3 weeks, I think it’s reasonable to assume that one of three things will happen. We’ll either announce the settlement, we’ll mutually agree to extend the dates procedurally to facilitate settlement, or pivot back to a procedural schedule. With the resiliency docket addressed last week, I think the next 3 weeks will be telling about the progress we’ll make. But we’re comfortable that the stakeholders in Louisiana are now focused on settlement discussions.

Constantine Lednev: Perfect. Thanks for that and appreciate taking the questions. Best of luck.

Drew Marsh: Thank you.

Operator: Our next question comes from Jeremy Tonet from JPMorgan. Your line is now open.

Jeremy Tonet: Hi, good morning.

Drew Marsh: Good morning, Jeremy.

Jeremy Tonet: I just wanted to dig in a little bit more on plus $0.15 revised weather-normal sales, just a stronger industrial sales outlook as you put out there. If you could kind of bucket whether that’s more the pet chems benefiting from cheap ethane and the outlook improving there, or chief methane benefiting ammonia or other industries, or whether that’s data centers? Just wondering which one of the industrial activities out there are you seeing, I guess, more upside?

Rod West: This is Rod. I can touch on that and certainly Kimberly can follow. But beyond the AWS transaction in Mississippi, we’re continuing to see significant interest in the data center sectors, both hyperscale as well as colocation in Arkansas, Louisiana and Mississippi. But we continue to see strong interest from the metal sector as well, specifically aluminum and steel. With projects in various stages of development, you can add in there with the RRA, developments showing up in blue ammonia in addition to the conversations around carbon capture. And that’s not to exclude what we would consider to be our traditional sectors of growth in the service territory around refining and petrochemicals. We plan to give more color, of course, at Analyst Day, but I didn’t want to suggest that there was one specific sector. There’s a fair amount of diversity in our backlog and growth outlook.

Kimberly Fontan: And Jeremy, just to add to that for the $0.15 for this year, you can think about that specifically as our historic industry along the Gulf Coast, and those industrial customers are online and taking power currently.

Jeremy Tonet: Got it. That makes sense. It’s very helpful there. That kind of leads into my next question. I was just wondering for the Analyst Day, obviously, you’re not going to give us all the details here, but just wondering any broad parameters of what we should expect on that day.

Drew Marsh: Well, I mentioned a few of them in my remarks earlier around some of the things that Rod just discussed and the opportunities that we see for growth from a sales perspective and where that’s coming from. So more color and depth to that conversation. Certainly, more clarity around the kinds of investments that we plan to make. And that includes the generation side as well as the golden wire side, we’re talking about reliability and resilience. Some of the work that we are doing to drive productivity internally. From a data perspective, we’ll be giving a more robust outlook that goes out to 5 years. That will include capital and earnings, and we’ll make clear, as Kimberly just mentioned, about our expectations from a financing perspective.

And also, since we’ll be in New Orleans, we’ll have a number of our leaders here with us, and you’ll get the ability to access the broader segments of our management and leadership team that you normally do when you just see Rod and Kimberly and Bill Abler and myself out on the road. So you’ll get to see what we are seeing in our various jurisdictions and getting more boots on the ground view of how things are progressing.

Jeremy Tonet: Got it. Sounds great there. And if I could, I just want to finish with SERI real quick. It seems like a lot of meaningful progress over the past year or so. And just wondering your thoughts on, I guess, the prospects for continued positive momentum here in settlements given all the ground that’s been covered so far.