Q2 2012 Earnings Call
July 31, 2012 11:00 am ET
Paula Waters - Vice President of Investor Relations
J. Wayne Leonard - Chairman, Chief Executive Officer and Chairman of Executive Committee
Leo P. Denault - Chief Financial Officer and Executive Vice President
Theodore H. Bunting - Group President of Utility Operations
Steven I. Fleishman - BofA Merrill Lynch, Research Division
Dan Eggers - Crédit Suisse AG, Research Division
Greg Gordon - ISI Group Inc., Research Division
Julien Dumoulin-Smith - UBS Investment Bank, Research Division
Paul Patterson - Glenrock Associates LLC
Michael J. Lapides - Goldman Sachs Group Inc., Research Division
Stephen Byrd - Morgan Stanley, Research Division
Previous Statements by ETR
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Good day, everyone, and welcome to the Entergy Corporation's Second Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. At this time, for introductions and opening comments, I would like to turn the call over to the Vice President of Investor Relations, Ms. Paula Waters. Please go ahead.
Good morning, and thank you for joining us. We'll begin this morning with comments from Entergy's Chairman and CEO, Wayne Leonard; and then Leo Denault, our CFO, will review results. [Operator Instructions] As part of today's conference call, Entergy Corporation makes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties, and there are factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Additional information concerning these factors is included in the company's SEC filings.
Now, I'll turn the call over to Wayne.
J. Wayne Leonard
Thanks, Paula. Good morning, everyone. I'll start today with one of our key initiatives. The proposal for the utility operating companies to join the Midwest Independent Transmission System Operator or MISO. In May, the Louisiana Public Service Commission became the first retail regulator to approve, subject to certain conditions, the proposal by Entergy Louisiana and Entergy Gulf States Louisiana to transfer functional control of their transmission facilities to the MISO Regional Transmission Organization. MISO change of control proceedings are in various stages of progress of the retail regulators in Arkansas, Mississippi, New Orleans and Texas.
During the second quarter, the Arkansas Public Service and General Staff modified their position such that Entergy Arkansas should continue to progress toward joining MISO and when certain conditions are met, the APSC will grant the full change of control. An order from the Arkansas Public Service Commission could come at any time now. Testimony has been filed in the remaining 3 jurisdictions and subject to various conditions. Commission staff, all the advisers and intervenors in each proceeding generally have been supportive of or, at least, have not expressed opposition to joining MISO, with the exception of course, of the Southwest Power Pool. We believe we should receive all the retail commission orders on MISO in 2012. Given this progress, final preparations were underway now to initiate the regulatory approval process for the proposed spin-off and merger of the Entergy operating company's transmission business with ITC Holdings Corp. The retail regulatory filings will describe on both a qualitative and a quantitative basis. The benefits to customers and other stakeholders resulting from the superior independent model for transmission operations that ITC provide, as well as the improved financial flexibility and strength of the Entergy Utility operating company following the completion of the transaction.
We expect to make the initial filings in Louisiana, followed by filings in other retail jurisdictions at the Federal and Energy Regulatory Commission over the next few months. Concurrently, a fully functioning project management office is mapping out the process as activities and plans for the targeted 2013 closing to ensure a seamless transition.
In other Utility developments this quarter: Administrative Law Judges here in the Entergy Texas rate case issued their proposal for decision early July. ALJs recommended an overall $16.4 million base rate increase. However, the staffs' working papers that were used by the ALJs indicate an approximate $28.3 million retail base rate increase. Further, the ALJs recommended a 9.8% allowed ROE. This compares to the adjusted $105 million base rate increase, an ROE of 10.6%, that was requested by Entergy Texas. We should note the recommendation affirmed in full, Entergy Texas passed fuel costs and made no adjustments to $408 million of the capital additions or over 99% of affiliate costs. That is, the ALJs are not saying you are ineffective, inefficient, or improved. Instead the ALJs recommendation results from while we believe our misapplications of basic regulatory principles and practices and these misapplications undermine the traditional rate-making process and public policy objectives. The end result makes it impossible for Entergy Texas to earn a fair return, and that is a clear violation of some of the oldest, tested and affirmed principles of the regulatory law, no matter how you can get there. And particularly, we believe certain adjustments are clearly without basis or merit. For example, approximately $30 million of purchased capacity cost incurred after the end of the test year within the allowed pro forma period when those rates will be in effect, were suggested out with a sort of hyper-technical rationale that is at odds with the purpose of the regulation.
I won't go through all the disagreements we had with the ALJs recommendation, but we strongly believe this is a fundamental misapplication of long-standing regulatory rules and practices in Texas, which provide for recovery of known and measurable costs.
Under the ALJ's proposal, these nonfuel costs could not be recovered for up to 2 years, as the time it takes to prepare and complete another rate case that includes a full year of the cost to be reflected in the test year itself. And if the timing isn't perfect between the test year and historical cost, they may never be recovered. That is why it is common practice in Texas and elsewhere to utilize pro forma adjustments to the test year to eliminate discrepancies, particularly when you don't use a formula rate plan or have extensive use of riders.