Ladies and gentlemen, thank you for standing by, and welcome to the Entergy Corporation First Quarter 2020 Earnings Release and Teleconference. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today's program is being recorded.

I would now like to introduce your host for today's program, David Borde, Vice President, Investor Relations. Please go ahead, sir.

David Borde - Vice President, Investor Relations

Good morning and thank you for joining us. We will begin today with comments from Entergy's Chairman and CEO, Leo Denault; and then Drew Marsh, our CFO will review results. In an effort to accommodate everyone who has questions, we request that each person to ask no more than one question and one follow-up. In today's call, management will make certain forward-looking statements. Actual results could differ materially from these forward-looking statements due to a number of factors which are set forth in our earnings release, our slide presentation, and our SEC filings. Entergy does not assume any obligation to update these forward-looking statements.

Management will also discuss non-GAAP financial information. Reconciliations to the applicable GAAP measures are included in today's press release and slide presentation, both of which can be found on the Investor Relations section of our website. I would also point out that our initial earnings release this morning contained a clerical error relating to the March 31, 2020 balance sheet, and we have since posted a corrected version of the release on our website.

And now, I will turn the call over to Leo.

Leo Denault - Chairman of the Board and Chief Executive Officer

Thank you, David and good morning, everyone. We appreciate you all joining our call today and I hope that you and your families are well. The past few months have presented extraordinary circumstances that have been difficult for everyone around the world. So many have stepped up to the play to help people, communities and our country in this time of need, and we truly appreciate all of their efforts. Providing safe and reliable power is essential, especially during times like these. That's why at Entergy, we plan and prepare for extraordinary events. Our robust, comprehensive, tried and tested incident response plan contemplates many, including storms, cyber attacks, emergency leadership succession and pandemics. To ensure preparedness, we run drills routinely so that everyone knows their roles and responsibilities, and when activated, the plan run smoothly.

In 2007, we developed our pandemic response plan specifically to address events like the one we are facing today. For COVID-19, we mobilized our teams on January 16 very early on. Our focus has been on four primary objectives: ensuring the safety and wellness of our employees; maintaining safe, reliable service for our customers; mitigating financial impacts; and ensuring our ability to continue to plan for the future. Informed by lessons learned from the events, not only challenges to normal operations, but also improvements that can be made. Our response is working as designed. We are meeting the needs and expectations of our customers and communities. Our major projects remain on track and our capital plan is unchanged. The actions of our employees in the midst of this pandemic have been exemplary. They have shown, once again, their dedication and resilience to work through hurdles to safely keep the power and gas flowing for our customers. I cannot express how proud I'm of our Entergy family.

Entergy has a critical role to play, and this is the time that we must step forward, not back. Our customers and communities are depending on us more than ever to power their homes as many work remotely or have responsibilities to care for children and loved ones at home. Businesses like grocery stores and pharmacies require reliable power to continue to operate and address essential needs, and our health workers are relying on us to keep hospitals, clinics, and care facilities powered. In short, the services we provide are vital to helping our customers, our communities, our families, and our neighbors, successfully manage this crisis. It's a great responsibility that we do not take lightly.

Our capital investment plan is also a critical component for our economy and our communities. Our plan is designed to benefit our customers, while also creating jobs and stimulating the economies in the states where we operate. We have taken specific actions for each of our stakeholders. For employees still working at plants and in the field, we've implemented preventative measures, so they can focus on safety on and off the job. We're suspending disconnects for customers, which is important in times where many may not have a steady income. We are talking with regulators about the importance of keeping our capital plan on track to preserve the reliability and economic benefits for our customers and our communities. And we're talking to our largest customers to understand the issues they face and to determine how we can support them.

Our supply chain team is working diligently with suppliers to ensure we have what we need to keep our operations and major projects on track. We're working with regulators to support timely resolution of both special and routine matters. We have received accounting orders and deferred cost associated with COVID-19 in four of our jurisdictions, and we expect to receive a similar order for Entergy, New Orleans, in the near future. We're grateful for the leadership and partnership that our commissions have demonstrated. We are also supporting our communities through a COVID-19 response fund. Our charitable foundation, employees and executive team have already committed more than $1.3 million to help community non-profits and qualifying customers who are struggling with the financial impact of the pandemic.

Looking ahead, uncertainty remains as to the depth and length of this pandemic. But today, we are affirming our guidance and outlooks as we see a path to achieve those results. The foundation that supports the strength and sustainability of our business remains in place. We have among the lowest retail rates in the country. Our capital plan benefits our customers and our local economies. We have constructive and progressive regulatory mechanisms. We are a leader in critical measures of sustainability. We have one of the cleanest large-scale generation fleets. And while we've seen have seen some recent slowdown in industrial activity. Our industrial base is among the most economically advantaged in the world and we expect they will lead the recovery in their respective industries. The foundation that we've established over time remains firm and we are committed to our objectives and our resolve to be the premier utility. This is what makes Entergy a compelling long-term investment.

In April, our Board of Directors declared a quarterly dividend as planned. As part of that decision, the Board considered our response to the current situation, scenario analysis regarding future uncertainty, and the strength of our business going forward. We are committed to creating sustainable value for all of our stakeholders, including our owners and the dividend declaration is consistent with that objective.

Now I'll turn to our strategic execution. Today, we are reporting solid first quarter adjusted earnings per share of $1.14. And while the pandemic has affected the way we do business, it hasn't stopped us from making progress against our key deliverables. We placed Lake Charles Power Station in service in March, well ahead of schedule and on budget. This new resource is another milestone in our portfolio transformation strategy to replace older generation with cleaner, more efficient assets, and it will provide important benefits to our customers. We've also made good progress at the New Orleans Power Station. Commissioning of the plant is in progress and we recently synchronized the units to the grid for the first time. We expect that project to come online in June.

Our other major generation projects remain on track. We are not experiencing any significant equipment or staffing issues. This is a testament to the experience of our capital projects management team, and the strength of our relationships with our suppliers and contractors. We continue to deploy automated meters as planned. We're more than one-third of the way through our AMI project with 1.3 million meters installed. We are leveraging the data from these meters to understand changes in usage among our various customer segments.

In April, we received approval for sunflower solar in Mississippi and Searcy solar in Arkansas. These 100 megawatt resources will be the largest utility on solar projects in their states. Large-scale solar facilities provide the most cost effective solar powered for all customers, keeping rates low while delivering the best value for renewables. Both facilities are expected to be in service in 2021. As part of our firm commitment to provide our customers with greater renewable power options, we expect to meet even more of our supply planning needs with renewables, as technology and economics continue to improve.

Since our last earnings call, we announced two new request for proposals for generation assets. Entergy Texas is seeking proposals for 1,000 megawatt to 1,200 megawatt combined cycle gas turbine in mid-2025 to mid-2026. Entergy Texas will include a self-build option and submissions are due in August. Entergy Louisiana is speaking 250 megawatts of new build solar resources. The RFP will accept proposals for owned and contracted projects with target in-service dates of no later than the end of 2023. We continue to implement rate changes through our formula rate plans and riders. New rates recently were implemented in Mississippi, and these included a new vegetation management rider.

In Texas, we filed a new distribution rider. Entergy Louisiana plans to request renewal or extension of its formula rate plan and we will make our final - or annual FRP filing in Arkansas this coming July. In April, we received an initial decision from the Administrative Law Judge in one of system Entergy's open dockets at FERC. I won't go through all the details. Feel free to call David, if you need additional explanations. The bottom line is that we disagree with much of the initial decision and we believe that it incorrectly seeks to resolve the important policy issues that FERC ultimately must opine on. The actions we've taken create significant benefits for our retail customers and we feel strongly that our positions on the law and the facts are correct.

We will file our brief on exceptions in June asking FERC to reject the adverse rulings in the initial decision, and we look forward to the FERC's review. There is no mandated deadline for the commission's decision. At EWC, Indian Point Unit 2 was shut down on April 30. This milestone brings us one step closer to fully exiting the merchant business. We remain committed to our employees and all qualified employees who are willing to relocate have been offered positions. We look forward to them starting the next phase of their careers with us.

As you can see, it's already been a very active and productive start to the year. COVID-19 is a global pandemic that is affecting lives around the world. At Entergy, we activated our response plan early, which positions us well to face the challenges head on. We were prepared and we will remain diligent, focused and flexible to ensure we make the right decisions at the right times to mitigate the impacts as best we can. While uncertainty remains for all of us, we've made progress against our key strategic deliverables while meeting the needs and expectations of our customers and communities in this critical time.

Our major projects remain on track. Our capital plan is unchanged, and the foundation that supports the long-term strength of our business it makes Entergy a compelling investments, remains in place. We are stepping forward, not back, to be leaders in our communities at a time when they need us the most. Recent events have not changed our objective to create sustainable value for our stakeholders or weakened our result to be the premier utility that can deliver on its commitments through economic cycles.

Before I turn it over to Drew, I encourage you to read our recently released 2019 integrated report building the premier utility. Report outlines what we believe it takes to be the premier utility and why we're well on our way. I'm also happy to confirm that we still plan to host an Analyst Day this year, because the situation of COVID-19 continues to be fluid, the event will be virtual. We also plan to delay the event until later in the year, most likely in late October. We look forward to continuing our conversation with you about our strategy to continue to grow our business for the long-term. Stay tuned for more details.

I will now turn the call over to Drew, who will review our first quarter results, as well as our outlooks.

Andrew Marsh - Executive Vice President and Chief Financial Officer

Thank you, Leo. Good morning, everyone. Similar to Leo's sentiment, I'd like to express my appreciation for all those helping the people and communities affected by COVID-19. The extraordinary efforts of so many are inspiring, that includes our employees who have quickly adapted to changing working conditions. They have once again risen to the challenge as they have so many times in the past. I will review the quarter results and then move the guidance in the longer-term outlook.

Before I get to that, I want to highlight the bottom line for Entergy. After a solid first quarter, we are affirming our adjusted EPS guidance and outlook. We expect revenue to be $120 million to $140 million lower as a result of COVID-19. We are implementing $100 million of identified spending reductions for 2020. We received constructive regulatory accounting orders to defer COVID-19 costs. Our capital plan remains the same. Our liquidity remain strong, and we still do not see a need for equity until 2021. Those are the key takeaway.

Our first quarter results were solid as stay-at-home orders did not begin until very late in the quarter. As you can see on Slide 8, on a per share basis, Entergy adjusted earnings were $1.14, $0.32 higher than first quarter 2019 due to increased earnings at the utility.

On Slide 19 [Phonetic], you'll see the primary drivers of the utilities part of the quarter were straightforward. We saw the positive effects of rate actions in Arkansas, Louisiana, Mississippi and Texas. O&M was lower as we took action to reduce spending in response to mild weather, which was apparent early in the quarter. And we had favorable tax benefits, a portion of which was shared with our customers. You also see a higher effective tax rate at parent and other, which partially offset this. Higher depreciation and interest expenses resulting from our continued growth also partially offset the increase as did the higher share count.

On Slide 11, EWC's as reported loss was $0.55 compared to positive earnings of $0.50 a year ago. Losses on decommissioning trust investments and lower revenue, primarily due to the shutdown of Pilgrim were the main drivers. Partially offsetting the decline was lower O&M, lower impairment charges, and a tax item recorded in the first quarter of 2019.

Slide 12 shows a nearly $160 million increase in operating cash flow. The main drivers were higher collections for fuel and purchase power costs, and a roughly $65 million reduction in the unprotected excess ADIT return to customers. The first quarter also benefited from higher nuclear insurance refunds and lower nuclear refueling outage spending at EWC. Unfavorable weather and higher pension contributions partially offset the increase.

Now I'd like to talk about our 2020 guidance and our longer-term outlooks. On Slide 13, we are affirming our 2020 adjusted EPS guidance range of $5.45 to $5.75, and our 2021 and 2022 outlooks remain unchanged.

We've laid out the path to achieve our results on Slide 14, so that you can better understand our current expectations. I'd like to give you some context. In 2020, we expect sales to be lower due to the unfavorable weather we experienced in the first quarter, and the impact of COVID-19.

On Slide 15, we developed a point of view on sales for the remainder of 2020, based on extensive discussions with our industrial and commercial customers, and analysis of data available from our advanced meters. On a weather adjusted basis, we expect commercial and industrial sales to be lower than the original guidance assumption. Commercial sales are expected to have the largest decline at 9.5% for the full year. The most impacted are schools, restaurants, movie theaters, and churches as stay-at-home orders have shuttered many of these institutions temporarily.

Industrial sales are expected to be 7% lower, and our refinery and steel customers have been the most impacted. Although refiners in our region have been less affected than in other parts of the country. This is partially offset by residential sales about 2% higher, as usage per customer increases due to stay-at-home orders. As you can see, we expect second quarter to be the most impacted, assuming stay-at-home orders start to phase out in mid-May to early June. We then expect slow improvement through the year as the economy recovers.

We will work to mitigate the impact of lost sales. This includes a $100 million reduction in O&M spending for 2020 on Slide 16, that will not affect safety or reliability. We've already identified where we will achieve these savings. We are reducing employee expenses, reducing contractor and consulting work, prioritizing when vacancies are filled, and adjusting the timing and scope of power generation outages. These are extraordinary times for our customers and communities, and extraordinary times demand extraordinary measures. While we are taking these one-time measures to compensate for the lower sales we anticipate this year, we continue to look for efficiencies in our business to drive long-term value for all of our stakeholders.

Our work over the last few years to improve our regulatory frameworks also helps further mitigate impacts, and we are utilizing efficient regulatory mechanisms available to us. We have formula rate plans in four of our five jurisdictions, and three have forward-looking features. These plans reset rates annually. In addition two jurisdictions, Arkansas and Mississippi have look-back provisions to take into account under or over earnings from the previous year. And as Leo mentioned, we've received accounting orders in Texas, Mississippi, Arkansas, and Louisiana for the deferral of costs resulting from COVID-19.

We are aware that there are - that these are very difficult times for our customers and their families. Therefore, we are implementing new customer payment plans to help make bills more manageable. In addition, we are developing new tools such as accelerating regulatory liabilities to reduce customer bills now versus in the future. We are also cognizant of the economic impact COVID-19 is having on our communities, and we're working to keep our capital plan on track while using local workforces so that our customers and our communities can reap the benefits from those investments, such as economic stimulus and improved reliability.

Looking ahead to 2021 and 2022, we expect some of the economic effects of COVID-19 to linger, and sales are projected to be slightly below what we previously planned. Our current regulatory mechanism will help and we will be ready to manage O&M as necessary. For industrial sales, our long-term expectations for growth remain largely intact. None of our planned, new or expansion projects have been canceled, although a few have announced delays. Long-term forward commodity spreads remain supportive of key industries in our region. And while there is uncertainty around the COVID-19 recovery in future oil prices, our industrial base remains among the most economically advantaged in the world due to low cost feedstock, highly flexible modern facilities, economies of scale, world-class infrastructure, a highly productive workforce, supportive communities, and easy to access domestic and global markets. We expect they will lead recovery in their respective industries.

This is our plan today, but obviously uncertainty remains for all of us, as to the depth and length of the COVID-19 impact going forward. And the event things turn out differently, there would be a number of factors to consider. Near-term, there is timing as the seasonality of sales could result in different outcome, and we would look to O&M to help to the extent possible without affecting safety and reliability. Longer-term, regulatory processes would address revenue deficiencies over time, and we would look to continuous improvement to help offset customer impacts.

Our liquidity position remains strong as you can see on Slide 17. As of March 31, our net liquidity, including storm reserves, was over $3.2 billion. We've had success accessing capital markets despite market volatility, and we've issued nearly $1.1 billion in new long-term debt so far this year all at the operating companies. This covers the operating company maturities and helps fund our capital plan. In addition, we have renewed the lines of credit at two of the operating companies, which also provides liquidity in times of need. We still plan to access the debt market to fund $450 million of parent bonds that mature later this year.

Our credit metrics are outlined on Slide 18. Our parent debt to total debt is 22.2% and our FFO to debt is 14.3%. The FFO metric includes the effects of returning $236 million of unprotected excess ADIT to customers over the last 12 months. Excluding this giveback and certain items related to our exit of EWC, FFO to debt would have been 16%. While we remain committed to achieving FFO to debt at or above 15%, our customer support to offset COVID-19 impacts will push our timing to fourth quarter 2021. We've had conversations with the rating agencies on this, and they've publicly expressed their intent to take a long-term view regarding COVID-19 impacts. Finally, we still do not see a need for equity until 2021.

Another topic that may be on your mind is pension. As of March 31, our pension asset balance is $5.4 billion, and through April, this had improved to $5.7 billion. The March 31 pension asset balance is incorporated into our outlooks. As we have stated, these are extraordinary times for everyone, and we have a vital role to play to help our customers and our communities to successfully manage this crisis. We are well positioned to manage these challenges head on. At this time, although economic uncertainty remains, we have a path to achieve our financial objectives. And as Leo said, we will continue to monitor the economy and remain diligent, focused, and flexible to mitigate impacts as best we can.

And now, the Entergy team is available to answer questions.

Question & Answers

Operator

[Operator Instructions] Our first question comes from the line of Shar Pourreza from Guggenheim Partners. Your question please.

Shar Pourreza - Guggenheim Partners - Analyst

Hey. Good morning, guys.

Leo Denault - Chairman of the Board and Chief Executive Officer

Good morning, Shar.

Andrew Marsh - Executive Vice President and Chief Financial Officer

Good morning, Shar.

Shar Pourreza - Guggenheim Partners - Analyst

Just a couple of questions here. So first, thinking about the headwinds, you're calling out at this point, the $100 million to $120 million. You mentioned some relief for COVID costs, can you just be specific what those costs are or how we should think about ultimate recovery? How long you can kind of differ them? And then, thinking about the cost reductions you report today to offset the COVID impact. Are these one-time in nature or could we sort of think about them as being somewhat perpetual ongoing benefits? And I've a follow-up.

Andrew Marsh - Executive Vice President and Chief Financial Officer

Yeah. So I'll address the cost so far. So I think there is kind of two buckets of costs that we're looking at, some are incident response costs, and those include things like, more PP&E, hand sanitizer, masks, and things like that. There is also cleaning costs associated with that, and then costs associated with moving people around and things like that. Those types of dollars at this point are fairly limited. We expect them to - for the year to be somewhere in the $15 million range right now, and we've incurred less than half of that so far. We're anticipating as we get back to work there'll be more cleaning costs, for example, and more PP&E that we have to provide over the course of the year.

The other bucket of costs is related to potential bad debt expense, and that is - we haven't incurred anything of that nature to date, and we probably won't for a while, but those are the kind - those costs we would expect to incur as well. In terms of the magnitude of that, historically, we've seen about $25 million of bad debt expense, and we have past experiences like 2008-2009 financial crisis or Katrina, Rita, that kind of environment. We've seen anywhere from $10 million to $20 million of incremental bad debt expense in a year. Of course, this could be a little bit worse than that and we're working hard to make sure that we mitigate that.

Leo mentioned, new payment plans. We're working to make sure that our customers have access to light [Phonetic] funds and information on how to access the paycheck protection program. And as I also mentioned in my remarks, we're trying to accelerate some future regulatory liability payments through today to try and mitigate some of those impacts on customer bills. So all of that plays into trying to make sure that customer bills are as low as possible to mitigate what the bad debt expense might ultimately be as well.

Shar Pourreza - Guggenheim Partners - Analyst

Got it. Thank you. And then just, you guys - last question, you guys always have some really good insight into your customer trends, right. How much growth do you see being deferred from '20, the new assumptions call out '21 and beyond this potential economic impact as a headwind. Are you quantifying '21 versus just being slightly lower and assuming this backdrop is more protracted versus kind of your own internal planning assumptions.

Do you have these incremental levers like today's cost cuts to mitigate or could that start to pressure your growth guide maybe through capex referrals that may become secondary in nature? I mean, it sounded like from Leo's comments, you guys are very confident around the plan. So I just want to - under the assumption, this is more protracted. Do you see any kind of concerns around growth capex, 5% to 7%, or you have enough levers at your disposal, I guess?

Andrew Marsh - Executive Vice President and Chief Financial Officer

All right. There was a lot in that. I will start with the customer trends piece and then talk about O&M and then finish with capex. So on the customer trends fees, the expectation in our outlook right now is that our sales will be about 1% below what we were planning in '21 and '22. Obviously there's a lot of uncertainty associated with that. So we are also running scenarios to think about what it might be if something lower than that. Once we get out a couple of years, we should have gone through regulatory processes in each jurisdiction and that should help us, but at the same time, we are also working on, okay, so what other O&M management tools might we have at our disposal to work our way through that.

And the further we get out, the more sustainable we really need these cost changes to be unlike this year. This year, as we mentioned, there is a lot of one-time items, and we're trying to look for additional continuous improvement in the O&M category that is more sustainable, but we really need to rely on our skills to develop that - those opportunities as we go forward to manage that a little bit more. There always be one-time levers within a given year that we have, but we will - on a long-term basis we want to rely on continuous improvement.

And then finally, in regards to growth capex. We currently don't have any plans to change our growth capital or our capital at all for that matter, and we think it's important for our communities and our customers and for us to continue to make those investments. We think we have the capacity and liquidity to do that, there is no concerns there. If for some reason, it was lower for longer from a sales perspective, it might start to shift around the nature of that capital. So for example, if we no longer needed some transmission capital to meet NERC reliability standards, there may be other capital that we think would be very important for our customers in the distribution space. So there is a lot of levers still to manage things going forward, but hopefully that answers all of the nuances of your one question.

Shar Pourreza - Guggenheim Partners - Analyst

You got it guys. Yeah.

Leo Denault - Chairman of the Board and Chief Executive Officer

Shar [Indecipherable] please. This is Leo. Let me just - I just want to add from the standpoint of pulling the levers, the process that we are utilizing right now while it's kind of accelerate a little bit is same process we are using last year, for example, to flex up and down. So the process had actually as you noticed in the first quarter, the process has already begun, because we knew we were going to be challenged by a traditional headwind which was weather in the first quarter. So those processes year-on-year are going to be the same ones that we have kind of developed as part of the culture and the DNA of the company and just the planning process.

And the continuous improvement that Drew mentioned is something that we were working through as well. And obviously, we'll even find some continuous improvement I think out of response to the event that will help us going forward. And then, I just wanted to really jump in on the capital plan. Obviously, the capital plan is a major reliability improvement to our customers is what it's been about, and with 90% of this - greater than 90% of the capital plan, all being about technological improvement and reliability in the service level that we provide our customers, whether it's through AMI or even replacing old generation with new gas-fired generation as renewables that we're adding to the footprint. So all of it is customer enhancing.

And as Drew mentioned, and as we've talked about before, we have a significant amount of opportunity within the distribution and customer solutions space that could step up and take the place in any - for example, transmission investment that might get shifted around. But an important aspect of where we sit today and this has been the extent of the dialog that we've had with the states, whether it'd be at the administration level or at the regular regulatory level. The biggest problem that the United States has at the moment is unemployment, in addition, outside of, obviously, the virus. And we are in a position to step forward with the capital plan to make sure that we keep people working.

And I'm just going to give you a couple of statistics that might be useful for you to think about. During the storms that we had overused to weekend in Arkansas, we obviously had to restore power and that was a pretty significant event. But as we restored power, we had about 2,000 people in Arkansas, staying in hotel rooms that otherwise they wouldn't have stayed in, eating meals that otherwise wouldn't been eaten. So there was an effective 14,000 nights in hotel rooms that occurred only because Entergy was there. There was an effective 40,000 meals that were served only because Entergy was there. That is the kind of economic impact that we have, not just in the people we hire, whether it be our employees or contractors.

But as we go into the community, and that is those multiplier effects that we talked about quite often that are significant that usually are put up thereby, an economist at LSU or something like that, but these are real people serving real meals to our employees that were probably working that week but not the week before or the week after. So the capital plan is important for more than just improving the reliability of the system and the service level that we provide to our customers. It's important to those communities as well.

Shar Pourreza - Guggenheim Partners - Analyst

Got it. Congrats, Leo and Drew on this execution. Stay safe. See you soon.

Leo Denault - Chairman of the Board and Chief Executive Officer

Thanks, Shar. You too.

Operator

Thank you. Our next question comes from the line of Julien Dumoulin-Smith from Bank of America. Your question please.

Julien Dumoulin-Smith - Bank of America - Analyst

Yeah. Hi. How are you guys? Thanks for the time. Just wanted to follow-up on the last set of questions. I'll throw in a quick follow-up. But starting with the last set. How do you think about your FRPs across various states in those rate caps against the need to ensure earning at your returns, and at the same time, recognizing the consistency commitment to invest capital? I imagine, obviously twin goals, it seems like you had a little bit more latitude than you had historically in those annual filing, first off? And then the second one is just, if you can quantify the potential impact of that theory decision from the ALJ? That's a quick one.

Rod West - Group President, Utility Operations

All right. It's Rod. Good morning. I'll start on the FRPs, and perhaps Drew will follow-up. In Louisiana and Arkansas, Mississippi, and New Orleans, we've just mentioned that four of our five jurisdictions had FRPs in effect, where those FRPs are working as designed, and to the extent that the COVID cost might operate beyond the FRPs we have the accounting orders that would just reference. We are seeking to renew the FRPs in Louisiana and Arkansas, because in Mississippi we don't have a sunset provision, but those FRPs are working as designed to address many of the changes in sales as we are forecasting.

So from an FRP perspective, the efficient recovery mechanism we have in each of the state is giving us the relative confidence we have around what we are forecast and its incorporating the various puts and takes with O&M and projected sales. So it's working as designed. It is certainly part of the case we're making to renew them in Arkansas and Louisiana. So from that vantage point, we think the FRPs are working as designed.

Andrew Marsh - Executive Vice President and Chief Financial Officer

And I'll just add. You asked about the rate path. Our expectation for the rate path is that we would still be at or below inflation. You have to take into account the excess ADIT that we have been given back last year if you reap off of 2019, but it's still a very low growth rate for our rates and our bill path. And then, you asked about ROEs. As Leo was talking about, we have an important role to play in the community right now in terms of putting capital to work to not only benefit our customers, but also to drive economic activity.

And in order to do that, we have to make sure that we maintain adequate credit and liquidity, and our retail regulators know that we've been in conversations with them about that. And so, they are also committed to make sure that we have the credit and liquidity we need to do the things that require to support our customers and our communities. So I think that's - I think that will help address some of the ROE question as well.

Operator

Thank you. Our next question - our next question comes from the line of Jeremy Tonet from JP Morgan. Your question please.

Jeremy Tonet - JP Morgan - Analyst

Good morning. Thanks for taking my question.

Leo Denault - Chairman of the Board and Chief Executive Officer

Good morning.

Jeremy Tonet - JP Morgan - Analyst

I just wanted to start up - I guess, what you guys are seeing across your footprint right now? In your different jurisdictions you start to see - certain areas start to open up and just wondering kind of maybe more real-time like what type of trends are you seeing from your larger customers ramping up and what kind of line of sight have you gleaned from that kind of informs your guidance here?

Rod West - Group President, Utility Operations

Yeah. And this is Rod, again. I think in the - across the customer segments, we alluded to it earlier, certainly in the residential segment, the stay-at-home orders have certainly driven the expected experience of high usage per customer in that segment. A lot of variability across the commercial customer segments, as Drew alluded to, where we saw schools and restaurants, movie theaters, and churches experiencing the brunt of the near-term demand erosion.

In the industrial sector, we've been in constant communication, aside from the AMI data that we're tracking on a day-to-day basis, we've been in constant communication with those larger industrial customers around their respective outlooks. We are paying as much attention to the various components of their value chain as perhaps they might and they've given us relative comfort that the data we are receiving from AMI is supportive of our point of view that about approximately 10% demand erosion that we are experiencing in the last several weeks is likely to be stable until such time as the economy recovers.

Certainly, in the Refining and Primary Metals segment, we expected those segments to be harder hit in driving some of the downturn, and that's played out in a way that we expected, and that - I say that with all of the uncertainty that still remains around the timing of the economic recovery relative to our ability to get testing and tracing and things of that nature. And so the engagement - in addition to the AMI data, the engagement with customers has really reinforced what we're seeing, and certainly it plays out differently from state-to-state, but the significant presence of our industrial base in - is in Louisiana and Texas, and that's where we've seen the lion's share of volatility within a 10% range.

Jeremy Tonet - JP Morgan - Analyst

That makes sense. And then maybe just picking up on that last point for the longer-term for the industrial petchem load. It seems like the Brent Henry Hub spread kind of being a proxy for naphtha ethane spread. It has been the key determinant of the US Gulf Coast competitive advantage across the global cost curve given the favorable feedstock there. Do you worry that the dynamic of a tighter crude oil to nat gas spread narrows this competitive advantage and kind of adversely impact future low growth versus prior expectations?

Andrew Marsh - Executive Vice President and Chief Financial Officer

Yeah. This is Drew. So we are closely monitoring that spread. That's one of the ones that we pay close attention to as well for the very reason that you mentioned. And obviously, near-term, that spread is not as healthy as it has been historically, but we do expect it to return to where it was and continue to provide economic advantage for our Gulf Coast industrial customers going forward, and we do see those spreads and others like them being healthy if you look at on a long-term basis. But we recognize that near-term, they are a little bit more challenged. It does not change some of the other advantages that we do have that I listed off in my remarks, but that is one that we are paying close attention to.

Jeremy Tonet - JP Morgan - Analyst

Got it. That's helpful. Thank you.

Leo Denault - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Stephen Byrd from Morgan Stanley. Your question please.

Stephen Byrd - Morgan Stanley - Analyst

Hey. Good morning. Hope you all are doing well?

Leo Denault - Chairman of the Board and Chief Executive Officer

Good morning, Steve. Thank you. You too.

Stephen Byrd - Morgan Stanley - Analyst

Most of my questions have been addressed. I just wanted to go into tax in a little more detail. I think the change in guidance in terms of the tax is about a net improvement of around $0.18 a share, and I wonder if you could just give a little color around what the changes were. I guess, I see an IRS settlement and stock-based comp, could you sort of explain what the changes were in a little more detail?

Andrew Marsh - Executive Vice President and Chief Financial Officer

Sure, Stephen. The main one is the IRS settlement which we completed in the quarter. That settlement had to do with Isaac securitization costs for several years ago. And while there is a tax benefit on the tax line, much of that is offset in the revenue through customer givebacks, and that is net about $0.05 only. The other stuff is like the stock-based compensation, that's just annual true-ups that occur each year whenever stock vests, and we true up from a tax perspective. There is no true up from a GAAP perspective. That's why there is a difference there.

Stephen Byrd - Morgan Stanley - Analyst

Understood. And I understand the expectation is now for an 18% effective income tax rate this year. Longer-term, approximately, where do you see your effective income tax rate being, just so we're trying to think through your longer-term earnings power properly?

Andrew Marsh - Executive Vice President and Chief Financial Officer

It's similar where we had it previously, around the 22% range.

Stephen Byrd - Morgan Stanley - Analyst

Great. That's all I have. Thank you.

Leo Denault - Chairman of the Board and Chief Executive Officer

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Jonathan Arnold from Vertical Research Partners. Your question please.

Jonathan Arnold - Vertical Research Partners - Analyst

Good morning, guys.

Leo Denault - Chairman of the Board and Chief Executive Officer

Good morning.

Jonathan Arnold - Vertical Research Partners - Analyst

Just a quick question on - previously you said you thought that equity from 2021 would be on the order of 5% to 10% of utility investment. With some of this, if you're going to accelerate some of these regulatory liabilities and then maybe have a cash impact, is that still a good number or should we be thinking about re-calibrating that scale once we get after 2020?

Leo Denault - Chairman of the Board and Chief Executive Officer

That's - I think that's still a good number. We're very careful about the way that we are moving reg liabilities forward. They are either increasing rate base, because they are coming out or we are discounting them to make sure that we are economically neutral, such that we have more cash flow in the future. So that's the either way we should have the financing headroom to move some of those liabilities forward. It's going to - those kind of choices will impact the current year's FFO to debt ratio, but there should be a little bit better headroom in that ratio going forward as a result.

Jonathan Arnold - Vertical Research Partners - Analyst

Okay. Great. And then you mentioned, Drew, wanting to keep the rates - the rate below inflation. Have your views of inflation as you make in the plan changed and can you share what your number is that you're using for longer-term inflation?

Andrew Marsh - Executive Vice President and Chief Financial Officer

That's an excellent question, Jonathan. I wish I knew what inflation was going to be. We use 2% as a rule of thumb for that, kind of the benchmark that we look at, you know adding $3 trillion of fiscal stimulus. We don't really know what that will do for inflation.

Jonathan Arnold - Vertical Research Partners - Analyst

Fair enough. Okay. That's good to know what your - what your number is. And then, I think that was - and just one thing. I was trying to reconcile the Slide 15 on retail sales which shows, I think that shows what you're expecting industrial to be down 7% for the year. And then Slide 41, how that 1.5% number on industrial, is that - is that just a typo or is a different basis of what you're telling us there?

Andrew Marsh - Executive Vice President and Chief Financial Officer

Yeah. They are two different basis. The one on Slide 15 is versus our original guidance. And as you will recall, we were planning to be up about 6% or 5%, 5.5%, 6%, 6.5%. I can't remember the exact number, but - and you subtract out the 7% you're getting to the [Indecipherable]…

Jonathan Arnold - Vertical Research Partners - Analyst

I got it. okay. The one - so the guidance had the uptick and that's it. Thank you.

Leo Denault - Chairman of the Board and Chief Executive Officer

Thank you, Jon.

Andrew Marsh - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Steve Fleishman from Wolfe. Your question please.

Steve Fleishman - Wolfe - Analyst

Hi. Good morning. Hope everyone is well. And just…

Leo Denault - Chairman of the Board and Chief Executive Officer

Good morning, Steve.

Steve Fleishman - Wolfe - Analyst

Good morning, Leo. Just wanted to do to re-ask the question that was asked earlier about the CRE decision on the ALJ and if that were finalized, you don't think it will be, what the impact would be?

Andrew Marsh - Executive Vice President and Chief Financial Officer

So this is Drew. And yes, thanks Steve, for picking that up. We didn't quite get to it on Julien's question. So we appreciate you re-asking it. The impact is laid out in the queue. As Leo mentioned, there are a lot of details. There's two components to the ruling that came through associated with lease payments and uncertain tax positions and the amounts are in there. The lease payments is a little bit unclear, because the calculation from the ALJ wasn't provided specifically. So we don't - the bottom line is, we don't think that will be a very large impact there. The larger one is the uncertain tax positions. And as the ALJ laid it out, if you include the refund and the interest, it looks like it's close to about $600 million.

As Leo mentioned, we believe that we have the right policy perspective, and that the ALJ's ruling is interim into the FERC is the one that would drive policy decisions. And we would also note that in that calculation, even though the ALJ wrote about it, ALJ did not include offsets that are included - that you might included in there, like, interest that we've been paying to the IRS for the position over time, and that would reduce that $600 million down - down to a little less than - probably a little bit more than half of what that - what the ALJ put out. And of course, the overall impact of that would basically be the financing costs of whatever that number would ultimately be.

Steve Fleishman - Wolfe - Analyst

Okay. And just - so that would be obviously a one-time refund, just is there any aside from financing that as a risk, would there be any other ongoing earnings impact or just the one-time?

Leo Denault - Chairman of the Board and Chief Executive Officer

Well, the lease payments, they indicated that - they indicated that the lease payment will not be able to continue. That's what the ALJ wrote, which is about $17 million a year. And then, of course, the one-time would be a change in our rate base on an ongoing basis for the deferred tax position. So there we have that as well.

Steve Fleishman - Wolfe - Analyst

Okay. One other question. Just the - you probably said this, but I'm - maybe I'm still just not clear on it. Just in terms of the base assumptions you're using for your kind of sales forecast now. How would we track kind of progress or reopening soon, and then slow recovery, and that's kind of - how to think about kind of the base economic - something that you're using?

Rod West - Group President, Utility Operations

Yeah. This is Rod. I'll start the - the base assumption is that, sometime in the early summer that is later this month, into June, we'll begin to see a change in the stay-at-home order orders and that dynamic will begin the upswing in the economy. The outlook through 2020, particularly from an industrial growth perspective is essentially that 10% reduction in industrial demand, that's driving the overall growth for the utility would then begin to see a slower up uptick. And then as Drew laid out, in '21 and '22, we expect the drivers of our growth to still be driven by industrials as the commercial and residential sort of normalizes to our pre-COVID point of view.

Andrew Marsh - Executive Vice President and Chief Financial Officer

And Steve, I'll just add that the timing of all that matters a lot. So if the current economic environment lingers through the summer, and there people are more at home than what we're planning, because they're not working, that could be sales improvement for us because of the higher residential load that we typically experience in the summer time. So if that - if they were to linger all the way through the end of the year, of course, the summer would end and it would fall back into what we kind of expecting on the second quarter, which would not be as positive, but the timing of it all does matter.

Steve Fleishman - Wolfe - Analyst

Got it. Okay. Thank you.

Leo Denault - Chairman of the Board and Chief Executive Officer

Thank you, Steve.

Operator

Thank you. Our next question comes from the line of Michael Lapides from Goldman Sachs. Your question please.

Michael Lapides - Goldman Sachs - Analyst

Hey, guys. Thank you for taking my question. Real quickly, the O&M savings, the $100 million, do you expect that to be kind of a permanent savings level or do you expect all of that to come back and we should be embedded in '21 or '22 forecast?

Andrew Marsh - Executive Vice President and Chief Financial Officer

Yeah. This is Drew, Michael. We are currently considering that to be one-time - one-time savings.

Michael Lapides - Goldman Sachs - Analyst

So it's an O&M that will go away, but effectively it would come back in future years, maybe not all in 2021 but over time. So not leading to a permanent kind of O&M reduction.

Andrew Marsh - Executive Vice President and Chief Financial Officer

Yeah. It's not permanent. The timing of it, some of it depends. We're already working to - because some of it is deferrals to 2021. So we are working to even offset those in 2021 in our forecast. But I would say that they are just one-time and they don't really relate to future periods at this point.

Michael Lapides - Goldman Sachs - Analyst

Okay. And can you remind us in your multi-year EPS forecast, what is assumed for kind of an O&M growth rate off of 2019?

Andrew Marsh - Executive Vice President and Chief Financial Officer

We were saying that we were going to come in at about $2.65 billion for utility impairments O&M, and then we're going to keep that flat.

Michael Lapides - Goldman Sachs - Analyst

Got it. Okay. Great. And then last thing. On EWC, can you remind me, do you expect EWC to send cash up to the parent or need cash infusions from the parent over the next couple of years.

Leo Denault - Chairman of the Board and Chief Executive Officer

We have said that we expected to be net cash positive to the parent, not by a lot, but by little. And as we get closer to the end, it's trending to zero, because we're very much close to the end of EWC. But right now it's still net cash positive to the parent.

Michael Lapides - Goldman Sachs - Analyst

Got it. And then I'll keep one last one. The RFP for new gas generation in Texas, just curious, does the change in the outlook for demand change the need for the size and scale of that unit?

Leo Denault - Chairman of the Board and Chief Executive Officer

At this point in time, no. As you recall, Michael, the new generation is typically replacing older generation with a much more efficient lower cost, more environmentally sound unit. So this is all part of that portfolio transformation strategy that we've had, where the net adds to our capacity are relatively small compared to the amount of generation that we're at. I think, actually within the next year, we may pare down three new - three old plants, and we're deactivating units as well.

And up till this past year, when we put a couple of new units in service, we were pretty well, you know as many megawatts as we added, that's what we were deactivating. So it's not - as I mentioned earlier, when you look at the capital plan, over 90% of the capital plan is driven by this improvement in the level of service through a technological overhaul across all four functions that we invest in, whether it's generation, transmission, distribution or customer solutions, and that is going to continue.

And as Drew mentioned, to the extent, some of our reliability investment in transmission is kind of like the Lake Charles project was a couple of years ago after the fact beefing up the system to serve load that had already been there to the extent that that might change where we've got a whole host of distribution and customer solutions opportunities that could take its place, a lot of which actually drive down the cost while they improve the level of service for our customers, so they're a good option for us to make.

So I know it's a bit of a long answer to your question, Michael, but keep in mind, 90 plus percent of the capital plan is driven by that reliability improvement, technological improvement across the system, and benefiting customers, and then obviously in the near-term, we're overlaying on that fact that there's a lot of jobs created by the work we do. And if there's one thing everybody can agree on, more people need to be working today rather than fewer.

Michael Lapides - Goldman Sachs - Analyst

Got it. Thank you, Leo and Drew. Much appreciate it guys.

Leo Denault - Chairman of the Board and Chief Executive Officer

Thank you, Michael.

Operator

Thank you. Our final question for today comes from the line of Sophie Karp from KeyBanc. Your question please.

Sophie Karp - KeyBanc - Analyst

Hi. Good morning guys. Most of my questions have been answered, but maybe I could just quickly follow-up on Indian Point. Just check in if there are any disruptions in the process that you're going through from the wide shutdowns in New York State? Thank you.

Andrew Marsh - Executive Vice President and Chief Financial Officer

Hey, Sophie. Thanks. For Indian Point, no change. Indian Point to shut down, as Leo mentioned, April 30, and it's currently being refueled. As far as the processes around the sale of Indian Point, those were initially slightly delayed, but we still have plenty of time. We don't expect to close on that transaction till about this time next year. So we have plenty of time to continue to work through the processes in New York and at the NRC, and we still believe that the interest in New York are aligned with ours. Looking for a way to expeditiously decommission Indian Point is the goal, and working with Holtec to make that happen, we believe this continues to be the best option. So no real changes at Indian Point at this time.

Sophie Karp - KeyBanc - Analyst

Got it. Thank you.

Andrew Marsh - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to David Borde for any further remarks.

David Borde - Vice President, Investor Relations

Thank you, Jonathan, and thanks to everyone for participating this morning. Our annual report on Form 10-Q is due to the SEC today and provides more details and disclosures about our financial statements. Also as a reminder, we maintain a web page as part of Entergy's Investor Relations website called, Regulatory and Other Information, which provides key updates of regulatory proceedings and important milestones on our strategic execution. While some of this information may be considered material information, investors should not rely exclusively on this page for all relevant company information.

And this concludes our call. Thank you very much.

Operator

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ENTERGY CORP

Q1 2020

Earnings Transcript

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