Ladies and gentlemen, thank you for standing by, and welcome to the Entergy Corporation Second Quarter 2020 Earnings Release and Teleconference. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Ford, Vice President, Investor Relations. Thank you.
Please go ahead, sir.
Thank you. 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 participant person 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. And now, I will turn the call over to Leo.
Thank you, David, and good morning, everyone. Thank you for joining us. Today, we are reporting strong second quarter results of $1.37 adjusted earnings per share. Sales in the quarter were better than we expected. We are on track to achieve our $100,000,000 O and M cost savings target for the year, and our capital plan is unchanged.
With these results, we are affirming our full year guidance, our longer term outlooks and our dividend growth aspirations. As you all know, the COVID-nineteen pandemic has placed a burden on our customers, employees and communities. We believe it is part of our mission empowering life to do all that we can to support our pace to be another year of significant accomplishments for Entergy. This quarter, we've made progress on multiple fronts, all of which will benefit our stakeholders. We completed Phase 2 of the Western Region Economic Transmission Project.
The New Orleans power station came online. The Public Utility Commission of Texas finalized its rulemaking for a generation rider. The Mississippi Public Service Commission approved Entergy Mississippi's formula rate plan filing. Entergy Arkansas and Entergy Louisiana each filed their annual formula rate plans and requested extensions of these mechanisms. And Entergy Louisiana issued a request for proposal for up to 300 megawatts of new renewable resources.
And more importantly, we continue to successfully manage the effects of our investment on customer rates. According to an S and P Global Market Intelligence study published earlier this month, in 2019, Entergy provided power to retail customers at the 2nd lowest average price of the major investor owned utilities in the United States, something we are very proud of. The COVID-nineteen pandemic continues to affect all of us across the country. As we discussed last quarter, we were well prepared from the outset and we continue to effectively manage our response. We are taking precautions for our employees and our customers.
Those who can are working from home and we have procedures in place to keep our employees in the plants and in the field safe. We are also creating innovative solutions to help our customers and our communities. For example, our social responsibility and automation employees work together to develop a bot that proactively informs customers in need about the Low Income Home Energy Assistance Program or LIHEAP. This project also won 2nd place in a global contest for innovative ways to reduce COVID-nineteen's impact on the economy and communities. Students and faculty at Southern University are using 3 d printers in their Entergy sponsored lab to make parts for reusable N95 masks for healthcare professionals.
With our community partners, Entergy has helped to prepare more than 2,000,000 meals, provide crisis grants for more than 5,000 households and deliver personal protection equipment to first responders, individuals and families in need. Through the first half of the year, Entergy has donated almost $9,000,000 in charitable contributions support our communities, including almost $3,000,000 in COVID relief efforts and Entergy's The Power to Care program, which helps customers who need financial assistance to pay their bills. In parallel to our COVID-nineteen relief efforts, we continue to execute on our major projects across our service area to modernize our utility infrastructure and enhance its efficiency and reliability for the benefit of our customers. We placed New Orleans power station in service in May in time for the summer peak period and hurricane season. Since entering service, this highly flexible and efficient peaking unit is being dispatched frequently.
We completed Phase 2 of the Western Region Economic Transmission Project. This $115,000,000 investment supports economic growth in Southeast Texas and enhances reliability for existing and future customers. The Public Utility Commission of Texas also approved our certificate for convenience and necessity for the Timberland transmission line, a $57,000,000 project expected to be completed in 2022. We reached an important energy milestone with the 100th customer signing up for the Renewable Orleans residential rooftop solar program. The program offers a cost effective way for low income customers to participate in the benefits of renewable energy without having to make an upfront capital investment.
Entergy New Orleans installs, owns and maintains the rooftop solar systems and customers get a bill credit for their participation. Renewable Orleans is a good example of the innovative programs we are implementing to deliver renewable energy solutions to our customers. We will continue to engage with our regulators and stakeholders to expand the use of renewables under a framework that ensures we build the most economic system balancing reliability, cost and sustainability. In addition to providing meaningful customer benefits, our 3 year capital plan has significant certainty. We've talked to you before about the ninety-ninety framework by which you should view the certainty of our capital plan.
That our capital plan is 90% ready for execution from a regulatory approval standpoint and that more than 90% will be recovered through timely mechanisms. Today, we're adding a third ninety to further emphasize the strength of the plan. That 90% of the capital plan is based on the need for system modernization and not dependent on customer growth. These three statistics mean that our customer centric capital plan is necessary, the majority will not require special regulatory review, and we expect timely recovery. We benefit from constructive and progressive regulatory mechanisms that provide clarity to our plan and give us confidence in meeting our financial commitments.
Recently, the Public Utility Commission of Texas finalized the generation rider, which will provide for full and timely recovery of capital costs associated with a new generation facility. We are grateful for the commission's leadership in developing this new rule. More timely recovery will help us create value for our stakeholders and ensure that the communities we serve remain economically competitive. We plan to make a filing later this year using this mechanism to request recovery of Montgomery County Power Station when it comes online in 20 21. Entergy Mississippi received approval of its formula rate plan filing.
Rates were implemented in April. Entergy Arkansas and Entergy Louisiana each submitted their annual FRP filings. Summaries of the requests are included in the appendix of our webcast presentation. Both of these operating companies are in the last year of their FRP cycles and both are requesting extensions. Entergy Louisiana's request includes a midpoint reset and a new distribution rider similar to the transmission rider that is currently in for the recently approved 3 year formula rate plan.
At Siri, we filed our brief on exceptions to the ALJ's initial decision issued in April. As you know, we disagree with most of the initial decision because it incorrectly seeks to resolve the important policy issues of first impression that FERC ultimately must decide. The actions we've taken seek to create significant benefits for our customers, who consistently experience some of the lowest rates in the country year after year. Our customers have not been harmed by our actions and in fact stood to benefit greatly from them. Our tax planning practices have created more than $900,000,000 in direct customer benefits, dollars 550,000,000 of has already been credited to customer bills.
The April initial decision, if it is affirmed by the FERC, would discourage utilities like ourselves from pursuing such prudent innovative strategies to lower customer bills. The sale leaseback arrangement also produced significant savings for our customers and the ALJ's recommendations would similarly discourage utilities from entering into such transactions. We feel strongly that our positions on the law and the facts are correct. To be very clear, we believe that our actions have been prudent for the benefit of customers and that there should be no refunds or disallowances except for the small depreciation correction that we agreed to. While we will vigorously defend our position at the FERC, the timeframe for pursuing Series uncertain tax position any further is lengthy and the outcome is uncertain.
This leaves us no choice but to mitigate risk for our owners. In the next few weeks, we will give up series uncertain tax position with the IRS. This will effectively cap the principle of any potential historical refunds, eliminate the basis for any reduction in series rate base going forward, and eliminate the basis for the $147,000,000 excess ADIT customer credit raised in the July ALJ initial decision. Drew will provide additional thoughts on this matter, and I encourage you to review our brief on exceptions. At Entergy, we play a vital role in every region where we operate, and our core values are reflected in our efforts on behalf of our stakeholders.
Entergy is consistently recognized for its corporate citizenship, climate leadership and commitment as an employer of choice, which is a tremendous honor. For a 5th consecutive year, Entergy was named a 2020 honoree of the Civic 50 by Points of Light, the world's largest organization dedicated to volunteer service. This award recognizes Entergy as one of the 50 most community minded companies in the United States. Additionally, 3BL Media has named Entergy to its annual 100 Best Corporate Citizens ranking, which recognizes outstanding environmental, social and governance transparency and performance among the 1,000 largest U. S.
Public companies. This is the 8th year Entergy has been included in this prestigious ranking. We were also named the winner of the Bronze Stevie Award for our 2019 Climate Report, where we outlined steps that we are taking to deliver cleaner energy solutions and promote a lower carbon future for all of our stakeholders. Finally, like many of you, I've been saddened and upset by recent events that have laid bare yet again the deep social inequalities and injustices so many in our country continue to face. As our human rights statement outlines, Entergy respects the human rights of all individuals.
With a workforce of close to 14,000, we leave no room in Entergy for racism, discrimination or intolerance, but rather seek to achieve our vision mission and you as owners, including our employees who are a top 10 owner of the company, have my and the entire Entergy leadership team's commitment that we won't retreat from our obligations personally or professionally. We know that our actions towards creating real and meaningful change speak much louder than words. As I said at the outset, we delivered yet another strong quarter. Even though COVID-nineteen has had an impact, 2020 has already been a year of significant accomplishments keep us on track to meet our strategic, operational and financial objectives. We are committed to those objectives and are resolved to be the premier utility.
The foundation of our business remains strong and sustainable. We have among the lowest retail rates in the country. Our capital plan remains on track and will modernize our system and benefit our customers and our local economies. We have constructive and progressive regulatory mechanisms. We are an industry leader in critical measures of in industrial activity, our industrial base is among the most economically advantaged in the world, and we expect that they will lead the region's recovery in their respective industries.
We create innovative solutions to help our customers, and we are prepared to overcome headwinds through a disciplined cost management program as evidenced in our response to both last year's unfavorable weather and this year's COVID-nineteen impacts. It should not surprise you that we are affirming our longer term outlooks given our commitment to create permanent cost savings through continuous improvement efforts. These efforts strengthen and when possible will improve our delivery of steady, predictable earnings growth as we demonstrated on this call just last year. This is what makes Entergy a compelling long term investment. This is the foundation on which we will grow, innovate and expand our investment profile to continue to deliver on our commitments tomorrow.
Before I turn the call over to Drew, I want to confirm that our Virtual Analyst Day will be held on September 24. These are exciting times for Entergy, and we look forward to continuing the conversation with you then about what we're doing to build the Premier utility. Drew will now review our 2nd quarter results and our outlooks.
Thank you, Leo. Good morning, everyone. As Leo noted, our 2nd quarter results were strong. Sales were better than we expected on our last call. We are well on track to achieve our cost savings for the year and our capital plan remains unchanged.
We are affirming our guidance and longer term outlooks as we stay focused on becoming the premier utility. Entergy adjusted earnings for the quarter were $1.37 and drivers were straightforward. Starting with utility on Slide 6, we saw positive actions associated with our customer centric investments in Arkansas, Louisiana, Mississippi and Texas, including the Lake Charles power station, which came online a few months early. We experienced lower sales volume due to impacts from COVID-nineteen and unfavorable weather. Lower O and M reflected our cost reduction initiatives as well as the timing and scope of non nuclear generation outages and lower nuclear generation expenses.
Depreciation and interest were higher as a result of our continued growth and earnings on a per share basis also reflected a higher share count. At EWC, on Slide 7, as reported earnings were $0.55 higher than a year ago. The key driver was strong market performance for EWC's nuclear decommissioning trust funds. The quarter's results also reflected lower revenue and lower O and M, primarily due to the down of Pilgrim and Indian Point 2. Slide 8 shows operating cash flow increased approximately 240,000,000 dollars The main drivers were higher collections for fuel and purchase power costs and a $45,000,000 reduction in the unprotected excess ADIT returned to customers.
The 2nd quarter also benefited from lower nuclear refueling outage spending and lower severance and retention payments at EWC. Lower collections from utility customers partially offset the increase. 9, we are affirming our 2020 adjusted EPS guidance range of $5.45 to $5.75 and our 2021 2022 outlooks remain unchanged. As I mentioned in my introduction, our sales came in higher than we discussed last quarter when we initially estimated the effects of COVID-nineteen and we're well on track to achieve our cost savings for the year. Sales were better than expected in all classes and our overall 2020 expectation has improved slightly.
For O and M, to date we have achieved nearly 40% of our $100,000,000 spending reduction and remain on track to achieve the remainder by year end. And while our year to date variance is very positive, a portion of that is due to planned projects that were shifted to the second half of the year in response to COVID-nineteen. As a result, we expect the 3rd and 4th quarters to reflect spending for these delayed projects as well as the balance of our identified cost savings initiatives. Our credit metrics and liquidity position are outlined on Slide 10. Our parent debt to total debt was 22% and our FFO to debt was 14.6%.
The FFO metric includes the effects of returning $189,000,000 of unprotected excess ADIT to customers over the last 12 months. Excluding this give back and certain items related to our exit of EWC, FFO to debt would have been 16%. As we noted last quarter, we remain committed to achieving FFO to debt atorabove15% by Q4 2021. Our liquidity position remains strong and you can see that as of June 30, our net liquidity including storm reserves was 3 $500,000,000 Following up on Leo's comments regarding Siri, we estimate that if the FERC were to agree with the conclusions in the ALJ's initial decision without modification, the ongoing adjusted EPS impact could 0 point 15 refunds to customers. This also reflects that we will give up impact.
This estimate should not be interpreted as acknowledgment on our part of the merits of the initial decision or our expectation of the potential outcome on this matter. As Leo mentioned, we disagree with the initial decision we've clearly laid out in our filings in this case, and we don't believe there should be any material impact to EPS. Before closing, our Analyst Day is scheduled for September 24. We'll share with you our longer term growth strategy, including our customer centric investments and continuous improvement efforts. And we'll provide 5 year views of our EPS outlook and credit expectations as well as details on the key drivers that support our path to achieve our objectives.
We're excited to share our plans with you. We had a strong quarter a strong second quarter. We achieved a number of significant accomplishments, and we remain on track to meet our strategic operational and financial objectives. We are committed to these objectives as well as our goal to be the premier utility and we look forward to continuing this conversation Day. And now, the Entergy team is available to answer questions.
Our first question comes from the line of James Salazar from BMO Capital Markets. Your line is now open.
Good morning and thank you for taking my call. Can you guys hear me?
Yes, we can. Good morning, James.
Hey, how are you? Great. Just real one or two real quick questions. I think your previous guidance had assumed a 2% decline for 2020 I'm sorry, 2 point 5% decline for the full year, now you're at 2%. Can you kind of give us a breakdown of how you are kind of looking at the recovery through the end of 2020?
Yes. I think kind of looking at the recovery through the end of 2020?
Yes. James, it's Drew. Yes, so we haven't changed our outlook for sales actually for the 3rd Q4 from what we described in May, even though we did see a little bit better outcome in the Q2 than what we were anticipating. It is possible that we could do better, but given the spike in cases around the country and our service territory, we thought we should just keep it about where it is for right now. We do continue to see the phase reopening even though it's paused in certain municipalities right now.
So there is opportunity perhaps over the balance of the year. But for the time, we've elected to keep our outlook for sales where we had it for the second half.
Perfect. So basically, the improved sort of outlook really comes from just the Q2 and the weather you've kind of and the sales you've seen sort of quarter to date?
That's correct. That's correct.
And then the other question, I guess, just comes back to sort of credit is that you are you still comfortable with the equity guidance that you had given before where you're looking, I think, for the high end of the 5% to 10% of the planned CapEx? Is that still sort of how you're looking at things? And do you still feel like you're on target for the end of the year to get to 15% FFO to debt, which I think is where you guys were sort of targeting last time we spoke?
That's right. We are still targeting that. We expect to make that by Q4 next year. And our equity outlook is in that same range that we've talked about previously. We have continued to think about timing, and we think it's probably in the later half of next year when the need will actually arise.
And we've continued to think about the method in which we would deliver that. And in the past, we've talked about block rate. That's what we did a few years ago. So that's still on the table, but we've also added other options to the table, including an ATM possibility and even perhaps preferred equity. Right now, we don't have authorization for preferred equity within our charter.
So we would need a proxy vote to ensure that that would be shareholder friendly, but we're considering that as well.
And just to follow-up on the preferred equity, I'm assuming that'd be like a mandatory convert?
Yes.
Okay. Is that from a rating agency standpoint, I know that you'll get anywhere from 25% to 50% credit for something like that. Does that kind of limit, I guess, how much of the funding you can do through the convert, just considering it's a little bit farther out and you don't get as much equity credit as you would versus, say, a block sale or through an ATM?
Yes. So that's why the preferred equity gets you actually, I think, up to the 100%. There are other options around preferred debt and other versions of convertibles that will give you various credit And we have authorization for all of those. What we don't have authorization for is the preferred equity that would allow you to get the 100% credit. Got it.
Okay. I
understand. Great. Thank you so much for all the time.
Thank you, James.
Thank you. Our next question comes from the line of Shar Pourreza from Guggenheim Partners. Your line is now open.
Hey, good morning guys.
Good morning, Shar.
So, good to see that the $100,000,000 cost savings program is on target. Is there any plans to hold recurring savings into 2021? Any sort of rough numbers to think about? I mean, what could be recurring with the 2020 savings? Anything perpetual?
And I have a follow-up.
Shar, this is Drew. So, obviously, at this point in the year, we are also thinking about 2021 and what that might mean. And we have started to think about opportunities for savings in 2021. So that is actually well underway. Currently, we are monitoring everything that's going on in the world and making sure that there isn't any other risks that may be out there that we would need to apply those to.
But that work that you're referring to is well underway, but we're not prepared to talk about specific numbers at this point.
Got it. And obviously, you've highlighted it's been relatively a strong start to the year. Can you just maybe point us to kind of where you're tracking within your 2020 earnings band? It seems to be just with rough modeling you're getting a little bit closer to the top end, especially if the 3Q weather transpires. Just maybe a little bit of from a trend perspective with where you're opening the band?
Yes. So we're still tracking towards the middle of the band. There are opportunities potentially out there for us, but we continue to track towards the middle at this point.
Thank you. Our next question comes from the line of Jonathan Arnold from Vertical Research. Your line is now open.
Hi, good morning, guys.
Good morning.
Good morning, Jonathan.
I would just could I just come back to sales and just ask you where they most sort of deviated to the positive or otherwise from in the second quarter? Because the way you showed that slide on the Q1 deck, I believe that was sort of versus guidance rather than a year over year comp. So just curious whether the sort of down, I think it was down 1% in industrial, for example, in Q2. Was that where the favorability was? Or was it
more shelter in place was showing up excuse me, was showing up in our residential sector. And you had some volatility in the commercial sector because you had so many different levels of uncertainty with schools and churches and restaurants and the like. And I think the clarity we had in the industrial sector played out, although it was a little bit better than expected. So the fundamentals have not changed dramatically when you think about this cross sector contribution to growth. So residential is really showing up for us and offsetting a large part a lot of the volatility we're seeing elsewhere.
And I'll just add that it pretty much was across all three classes where we were a little bit ahead of expectations. It wasn't one or the other that completely dominated.
Perfect.
And just my follow-up on so on the balance sheet, it looks like your uncollectibles went up from $7 odd 1000000 to $43,000,000 or so. Can you talk a little bit about what you're seeing there? Whether it's sort of on a has it kind of spiked and is it plateauing now? Or is it sort of on an accelerating trend? And then just how to think about some of those variables going forward?
Yes. Jonathan, that's a good question. So we are seeing more uncollectibles right now. We actually, as you noted, we booked about $30,000,000 of bad debt to recover those costs. Historically, we've experienced about bad debt expenses about a third of our typical arrears.
So typically, we have arrears in any given point of about $75,000,000 and we experience about $25,000,000 of bad debt expense. We are about $100,000,000 higher on our arrears right now and that's why we booked the $30,000,000 sort of consistent with that ratio. We expect that there are some people that are able to pay, but are just taking advantage of the current situation. And we do expect that to grow a little bit more. We haven't turned on our dunning programs.
And we would expect that that balance would continue to grow through the summer, although we expect it to continue to be manageable. And that growth is reflected in our liquidity expectations, which continue to be strong. So that is something that we're closely monitoring, and it's important for us to continue to work with our customers in order to help them through this.
Perfect. Thanks for that and good quarter. Thank you.
Thanks, Jonathan.
Thank you. Our next question comes from the line of Julien Dumoulin Smith from Bank of America. Your line is now open.
Hey, good morning, team. Thanks for the time. If I can, and I first off want to say that I appreciate the merits of the brief on the argument.
Julian, we're having trouble hearing you.
I apologize. Hey, guys, apologies. On the merits of your argument with Siri and just understanding the financial implications, Drew, you specifically said that there were some mitigating factors, but didn't quantify or specify what they were. Can you help walk through what they might be, be it from a reduction in financing needs or otherwise? Just help us understand what reserves you might have already taken and or other mitigating circumstances?
Julian, I'll start with the mitigating circumstances and I'll let Drew kind of finish up. But 1st and foremost, my expectation would be that we would that whatever impact ultimately happened that we would overcome that and still meet our expectations. So that's our going in position from just an organizationally that whatever the impact is that we would continue to meet the objectives that we've laid out for you. There are also some within the Siri case, I think there are some things that we've talked about in the past could be used to mitigate such as the interest costs that we've been paying the IRS and
some other things like that.
So and obviously there'd be some financing or whatever that would fit into whatever financing plan Drew has. But I guess the overall the overarching mitigation is that whatever it is, that would be our expectation to overcome it.
Right. And I would say that the opportunity within our business is embedded within our continuous improvement program. And so as you know, we've been working hard to continue to develop that. We feel like it's continued to grow and mature. And that is where that opportunity would come from.
So not all of it clearly has been identified at this point. But as Leo clearly just articulated, there is an expectation about how we would be expected to operate within the company. And just like we have in the past, I 100% confidence that the company is going to figure out how
to make that work. And of course, Julian, our perspective is that there won't be an impact because of our position in the case. So I just want to make that clear too.
Absolutely. I appreciate the merits of your arguments there as well. They sound sound. But if I can ask you to expand on this, because you obviously have $100,000,000 in cost cuts that you are well on track to achieve for this year. When you say you'll find ways to offset that, does that include leveraging or offsetting it with continuation of this $100,000,000 dollars in cost cuts?
And maybe even more broadly, conceptually, I know the last quarter and at the outset of COVID, we've been talking about the sustainability of these cost reductions. How do you think about that now given the plans for the back half of the year and how that might impact 'twenty And also considering potential timing in 'twenty one of resolution to the sales data business when you say that you've committed to
So I'll unpack a little bit of that Julian and I'll ask my colleagues to tell me if I forget some of the points that you get that in there. I appreciate the question because really there's a couple of things at play here. The $100,000,000 is by and large our Flex program of what we're doing within the year to manage the impacts of COVID and weather. Obviously, we've had bad negative weather so far this year, plus the impacts of COVID. Last year, we had negative weather.
And those intra year dollars are primarily what we talked about at the beginning of the year when we started to flex associated with weather and then continued to ramp up the flex because of the impact on sales of COVID. In parallel to that, we do have a continuous improvement program, which is more akin to what we did last year on this call, where we found permanent cost reductions that, as you recall, allowed us to invest more capital into the system to improve the reliability of the system and the impact and the experience on our customer base plus grow the business, allowed us to add actually add money to our charitable foundation and to our employee benefits through those the headroom that was provided through those continuous improvement. So when we start to talk about next year, there'll be a combination of the 2 as well. I will say that I'm sure this is not unique to us that we're finding there are some areas of impact on our cost associated with our reaction to COVID that will likely fall into that bucket of continuous improvement and could be permanent. We're in the process of trying to marry what goes from an annual thing to a permanent thing.
But I'm sure even within all of your firms, you found things that you used to do one way that you're doing a different way today that's much more efficient that you'll probably continue to do. So I hope that helps. There's really 2 parallel things that we work on. 1 is just the normal flex within the annual budget that every department has. The other is the permanent continuous improvement that everybody is also focused on.
And you saw that Q2 last year when we changed our outlooks because of the continuous improvement. This year, we're holding on to our outlooks because of Flex. Does that make sense?
Right. And that's the offset potentially the impact next year, if you're?
Yes. Yes. So but I would say impact next year, depending on what it is, whether it's weather or whatever, it'd be a flex sort of thing. We were just talking about Siri, that'd be more of a continuous improvement sort of thing.
Got it. All right. Excellent. Thanks for clarity.
Thank you.
Thank you. Our next question comes from the line of Jeremy Tonet from JPMorgan. Your line is now open.
Good morning. Good morning.
I just wondered if you could speak a little bit more on the 90% of CapEx not dependent on customer growth. And is this kind of like a shift It's
consistent with the capital plan that
we've had for the last 10 years. It's consistent with the capital plan that we've had for the last 10 years. And I felt like it was necessary to add a metric that keeps that top of mind with everybody, because I believe that's important about our plan. If you think about what we're doing in the generation space and what we've been doing for over a decade, We're replacing 50 year old generation with brand new generation. The heat rate is lower.
It creates a significant production cost improvement that pays for the plant. Emissions are 40% lower than the useless water. All those things are good about new plants. And so what we've been doing over the years is adding new generation and then subsequently retiring old generation. So it's meeting the needs of the system with new stuff rather than old stuff.
Same things goes with, the investments that we've had in the distribution system. So if you think about AMI, we're replacing old meters with new meters. It's not new customers. Although there are new customers that get a new meter, the majority of that program is driven by the technological improvement, our distribution automation strategy, our asset management strategy, all of those are really based on improving the level of service that our customers achieve by deploying capital that lowers costs or provides a service that was not available in the past. So 90% of it has been and continues to be based on the fact that we need to modernize the system.
Where the a lower rate path for everybody as we expand the sales that we have on those assets that we're using to modernize the system, which contributes to the fact that we have historically had either the lowest or second lowest rates in the United States. So I just felt like it was necessary given the impact that COVID has had on the economy and sales that we point out that the capital plan is still there to modernize the system and COVID hasn't changed the need for us to modernize the system. If anything, it's actually enhanced the need for us to modernize the system, particularly at the distribution level. And so while 90% of what's in there today is based on technological improvement. If there's a lot in the wings for more technological improvement that we could do to the extent we find the headroom to do it.
I hope that helps answer your question.
That was very helpful. Thank you for that.
One more if I could. Just wondering if you could talk a bit and how your position MISO impacts Entergy's renewable planning. And do you see opportunities here changing over the next 5 years from MISO level planning and changes?
Well, we do our resource planning, obviously, in conjunction with the resource adequacy that we need for MISO, but our resource planning is done at state level. So the resource plans that we have and the type of generation we need incorporates our participation in MISO. But it's not MISO is not driving what resources we pay.
Got it. Thanks for that.
Thank you. Our next question comes from the line of Steve Fleishman from Wolfe Research. Your line is now open.
Yes. Hey, good morning, Leo and Drew. Thank you.
Good morning, Steve.
One very brief clarification on the CRE. Because of this change you're going to make to the uncertain tax position, does that cause the earnings impact to occur kind of temporarily until you get the final decision?
No, no. There shouldn't be any real earnings impact associated with that other than the fact that we did have an expectation that we would be successful, which would have reduced future rate base and subsequent earnings. But that's not what we're referring to when we're talking about maintaining our expectations.
It would
have to come through other means.
Okay. Just the FRPs, the extensions, I think Louisiana you filed and then are you doing Arkansas?
Yes, both jurisdictions, David.
Yes. Just how much do we need to kind of worry about these as more like normal rate cases as opposed to these like annual reviews? Like, can you just explain the issues in the multiyear extensions versus the annual?
I think the primary question on the renewal is, has the FRP accomplished the objective that we set out 5 years ago in Arkansas and 3 years ago in Louisiana. And when you think about how we've shaped the capital plan and we've disclosed to our regulators what our plans were, then the question becomes, can we achieve the objectives? And you've heard it before, Steve, around our reliability, sustainability, affordable low cost competitive rates. Can we achieve that given the capital plan for customers? And if the answer to that question is yes, and as we lay out in our renewal filings, the answer is yes in our view, then they'll we expect that they'll they as well as the other stakeholders will agree that it makes sense to keep it going.
It's not a it hasn't been viewed, as we've discussed with the stakeholders, as a full blown rate case where we're reviewing, where we spend a year going through the traditional backwards looking base rate case. So that's not the expectation. But of course, the regulator has the ability to weigh in on whatever component that they wish. But we believe the interests are aligned. We think the way that the FRPs have worked historically have been consistent with what we represented 5 years ago in Arkansas.
And as you know, this is a series of 3 year renewals in Louisiana. And again, given the shape of the capital plan, we're going beyond just the renewal of the FRP in Louisiana, for instance, recognizing as Leo laid out, we have reshaping the capital plan with more distribution investment, for instance, as part of that asset renewal. That's going to show up in what we're asking the jurisdiction in Louisiana to consider with a distribution rider. And so it's those type of policy considerations that we're going through with our stakeholders and not as much a rate case review, if that's helpful.
Yes. Steve, Rod mentioned it. We the and just look to look at how it works in Louisiana, just look back to the last renewal and the renewal before that and renewal before that and renewal before that. This is obviously the first time that we've done it in Arkansas, but it's been pretty clear that the Arkansas formula rate plan has worked exactly the way it was intended to work with the combination of if all you have to do is look at something like a year like 2018,
where
we ended up with a year that worked out differently because of tax reform than we thought it was going to. And then we ended up earning our allowed rate of return and we refunded dollars to customers in the next formula rate filing that went through. So that's worked really, really well for customers, as well. So Louisiana, obviously, we have a long history of renewals. This will be the first one in Arkansas, but it appears to be working exactly the way it was intended by all the parties.
Okay, great. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Angie Storozynski from Seaport Global. Your line is now open.
Thank you. So I wanted to go back to Siri. So I appreciate your quantification of the downside case here, the $0.15 to $0.20 and your ability to that potential earnings drag. But it seems like that's just potentially half of the impact, right? Because there is this separate proceeding regarding the ROE and property equity ratio for the asset.
And I see that the ALJ recommendation is expected only in February of next year. But if you could just explain how I'm assuming that there's some negotiations on that front. We had the MISO ROE decision from FERC. We had some adjustments, at least proposed adjustments to the calculation mechanism for the ROE and how that could impact the earnings power of Grand Gulf? Thank you.
So this is Drew. We've had, Angie, an expectation for ROE and capital structure baked in for 3 years or so at this point. Our expectations and those are in our outlooks based on the outcome of this proceeding. And at this point, we don't see any reason to change those based on how the proceedings have moved to date. And even if those outlooks weren't met from an ROE and capital structure perspective, we don't think that the whatever that delta would be is something that we couldn't manage within our current expectations.
Okay. Even if there were those overlapping impacts, right, with the reduction of the rate base and reduction of the ROE and a reduction in the equity layer?
That's correct.
Yes. Anyway, same as we already reserved on the ROE.
We've already we have an expectation for that based in our outlook. So we don't want to we don't usually talk about that because we're still in the proceeding, but we're comfortable with where that is in our outlooks right now.
Great. And just one follow-up. So what should we expect in going into your Analyst Day? I mean, do you plan on making any announcements, for instance, regarding more renewable power spending? Or is this just an additional cost cutting initiatives?
Again, I mean, just the big picture expectations going into the Analyst Day.
Yes. I think big picture, Angie, what we'll be talking about is being able to get a little bit more color on how we operate and what we're doing and what's in the capital plan and how we're thinking about it. The capital plan is pretty certain where it is. As you know, there's a large mix of renewables in our future as it is. As we've stated before, between 2022 and 30, we anticipate a lot of renewables.
We've got the RFPs that we've been involved in, the construction the projects that are up and running, the ones that are under construction. So I think the capital plan is in pretty good shape. We may get some more details about that and talk about what's in our future, particularly as we spend time on the customer solutions side of things. But really a little more depth on things like what's in the capital plan, what's in path to lower emissions, what's in our customer solution space, what's in the distribution space, how are we operationalizing continuous improvement, things like that.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Sophie Karp from KeyBanc. Your line is now open.
Hi, good morning. Thank you for taking my questions. So I wanted to go back to maybe a little bit to the volume picture. And just looking at the breakdown by the class, right? It seems like the industrial is doing pretty well here, right?
It's barely down year over year on a weather adjusted basis. And commercial understandably a little more and the residential is up, and I think we will get that. My question is, I guess, could you help us a little more Dennis, and what's going on, on the ground right now? Is this a trend we should just expect to continue the same way? And if the given this shift in the mix, if the sensitivities to these changes that we had pre COVID still hold in this new environment?
Yes. So, Sophie, the industrial piece in particular that you noted, we were expecting So the fact that it's 1% down is a pretty big drop relative. Even though year over year, it's 1% down, we were expecting to be 5%, 6% up. And on the balance of the year, yes, I would say that we expect the residential to trend start to trend down as people return to work, in different places in their home. And, we'd expect the commercial, and governmental to slowly begin to trend up and industrial to hopefully begin to improve.
And that's all, I think, consistent with where we lined out our expectations in May. And so I think that we are continuing to expect the phase re
And then lastly, maybe if you could give us a little bit of a sneak peek into your Analyst Day. The things seem to go on track for the most part your company. What topics or what areas do you plan to give us an update on?
As far as topics for the Analyst Day, we'll probably just a little more depth and color around what's in the capital plan, and things like that will be subjects that we'll talk about. We don't want to talk too much about it today. We want you to tune in.
All right. Thank you.
Thank you.
Thank you. Our next question comes from the line of Ryan Levine from Citi. Your line is now open.
Good morning. Good morning. What projects are in your capital plan that are most sensitive to load outlook that was incorporated within that 10% number that was highlighted in the prepared remarks?
There are probably a smattering across obviously, there new customer hookups are the big piece of it in the distribution of the transmission space. So for example, if you had a major industrial customer that was locating in your service territory, the substations for them can be pretty significant. So you'd have to build them a substation. And then we just have general line extensions to our distribution business every day when a new house is built or something like that. So,
some of
the transmission infrastructure could be put in that bucket as well to the extent that we need to put build transmission infrastructure into an area because of either prior load growth or new load growth. But, it's really more in the getting to that last mile.
Thanks. And then in terms of the industrial load assumption in your guidance, what are your conversations with customers suggesting for that outlook? And are there any big lumpy customers that you have color as to their plans or timing of when some of that industrial look can return throughout the remaining portion of the year?
Hey, Ron, it's Rod. I know we'll talk more in detail about the nuances of our industrial engagement, perhaps at the Analyst Day. But part of our confidence comes from in our growth observations comes from the fact that we're actually talking to real customers and we can quantify and identify the existing projects. And so what we're paying attention to at the moment are not just sort of the and whether they've delayed projects or and whether they've delayed projects or ramping back up, we can point to specific companies and tie them to specific projects that are in our outlook. And as we've shared before, we probability wait, not just the projects in the plan, but there are other projects that make up our economic development type of pipeline that are that we're also monitoring to determine whether or not we need to include those or exclude those as the case may be in the plan.
We've not seen much movement in our existing plan with regard to projects that we've identified that for instance that were canceled. There might have been 1 or 2 here or there, but they were on the lower end of the spectrum in terms of impact. But our confidence comes from the fact that we're tying them to actual projects that are still in play.
Okay. Thank you.
Thank you. Our last question comes from the line of Dukish Chopra from Evercore ISI. Your line is now open. Okay.
Close to good afternoon, guys. Thanks for sneaking me here. I just want to quickly clarify, Drew, the $0.15 to $0.20 I'm trying to reconcile that to the Slide 26 where you show the rate base exposure. Is it am I right in thinking about the $0.15 $0.20 is essentially you sort of in a worst case scenario losing the return on that $400,000,000 north of $400,000,000 is the way it is. Is that the right way to think about it or am I comparing apples and oranges?
Yes. So the $400,000,000 plus the $100,000,000 of interest that is part the refund because they're saying that we owe them the money. And it's not actually really rate based, it's refund. So the rate base doesn't really change in that regard. It would only change if we were successful in our outcome with the IRS because then there would be a deferred tax and the rate base would go down the net rate base would go down.
So really what we're talking about is the $510,000,000 that you see there, that total amount is the requested refund. And so we've had to finance that and then the lease payments that are above the $17,000,000 a year on an ongoing basis. Understood. Thank you. Thanks a lot.
Thank you.
Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to David Ford for closing remarks.
Thank you, Gigi, and thank you to everyone for participating this morning. Our annual report on Form 10 Q is due to the SEC on August 10th and provides more details and disclosures about our financial statements. Events that occur prior to the date of our 10 Q filing that provide additional evidence of conditions that existed at the date of the balance sheet would be reflected in our financial statements in accordance with generally accepted accounting principles. Also as a reminder, we maintain a webpage as part of Entergy's Investor Relations website called Regulatory and Other Information, which provides key updates of regulatory proceedings and important milestones on our strategic execution. While some of this information may be considered material information, you should not rely exclusively on this page for all relevant company information.
And this concludes our call. Thank you very much.
Gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.