Entergy's (ETR) CEO Leo Denault On Q2 2014 Results - Earnings Call Transcript

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 |  About: Entergy Corporation (ETR)
by: SA Transcripts

Entergy (NYSE:ETR)

Q2 2014 Earnings Call

July 29, 2014 11:00 am ET

Executives

Paula Waters - Vice President of Investor Relations

Leo P. Denault - Chairman, Chief Executive Officer and Chairman of Executive Committee

Andrew S. Marsh - Chief Financial Officer and Executive Vice President

Bill Mohl -

Roderick K. West - Chief Administrative Officer and Executive Vice President

Theodore H. Bunting - Group President of Utility Operations

Analysts

Daniel L. Eggers - Crédit Suisse AG, Research Division

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Kit Konolige - BGC Partners, Inc., Research Division

Steven I. Fleishman - Wolfe Research, LLC

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Paul Patterson - Glenrock Associates LLC

Paul B. Fremont - Jefferies LLC, Research Division

Stephen Byrd - Morgan Stanley, Research Division

Presentation

Operator

Good day, everyone, and welcome to the Entergy Corporation Second Quarter 2014 Earnings Release Conference. Today's conference is being recorded. At this time, I'd like to turn the conference over to the Vice President of Investor Relations, Ms. Paula Waters. Please go ahead.

Paula Waters

Good morning, and thank you for joining us. We'll begin today with comments from Entergy's Chairman and CEO, Leo Denault; and then Drew Marsh, our CFO, will review results. [Operator Instructions]

In today's call, management will make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Additional information concerning these risks and uncertainties is included in the company's SEC filings. Now I'll turn the call over to Leo.

Leo P. Denault

Thank you, Paula, and good morning, everyone. As many of you know, at Entergy, delivering safe, secure, reliable power underpins everything we do. Our work is especially exciting during periods of growth. No one wants to hinder economic development or job creation and everyone wants to be part of a brighter, more prosperous future. I'm pleased to say that in the second quarter of 2014, this focus allowed us to deliver our commitments to all 4 of our stakeholders: our owners, customers, employees and the communities we serve. Weather aside, results in the second quarter were largely consistent with our expectations and I suspect, with yours. The state of Entergy's business is strong.

At Utility, we saw strong industrial sales growth. All of our operating companies improved by several points in the annual J.D. Power residential customer satisfaction survey. River Bend earned an excellence rating for its operations, joining Indian Point, which earned the same rating in the first quarter. At EWC, the nuclear fleet delivered fewer outage days, allowing us to provide extended periods of uninterrupted power to the market. This kind of excellence, which we see from our plants to our corporate operations, is driven by the determination and dedication of Entergy employees, and I'd like to take a minute here to acknowledge that hard work and to say thank you.

Many of you on this call heard us present our growth objectives in Analyst Day on June 5. We continue to see a path to achieving each of these, including the consolidated earnings per share compound annual growth rate of 2% to 4% through 2016, which is based on our point of view of market prices. In the second quarter, we continued to position the company for this growth.

Let me address how we did so, beginning with the Utility. The big story for us at the Utility continues to be the economic growth in our service area, and all of us at Entergy are doing our part to both drive and leverage this growth. As I mentioned earlier, industrial sales increased quarter-over-quarter, resulting in a growth rate of more than 5%, which included expansions. At Analyst Day, we said that we believe the opportunity of 1,700 megawatts through 2016.

At the end of the second quarter, we had completed negotiations of approximately 1,200 megawatts. This includes about 100 megawatts signed since June. We expect to see this trajectory continue through the end of the year and well into decade's end. We anticipate that meeting this growing demand will require significant capital needs over and above current levels, but it will also require a focus on 4 areas: First, as I said earlier, safe, secure and reliable power; second, an efficient operations responsive to customer needs; third, financial strength and stability; and fourth, regulatory frameworks that allow us to expand the system to meet anticipated demand.

Starting with the first item on the list, we continue to invest in our infrastructure to ensure that we are able to safely deliver power to all of our customers, even in difficult circumstances. As we've said before, we'll be deploying nearly $6 billion through 2016 on generation, transmission and distribution systems throughout Utility. We intend to make this investment while keeping electricity affordable. As many of you know, historically, Entergy's rates have been about 20% below the national average, and these low rates benefit our industrial customers just as much as families and the communities we serve.

Moving to item 2 on the list. We continue to look for ways to become a nimbler, more efficient organization. This was the impetus behind the company-wide restructuring we announced last year, which, by 2016, will have removed $200 million to $250 million in costs company-wide. We're also working hard on all fronts to support load growth in utility infrastructure needs. For example, as part of that restructuring, we created a new department whose sole mission is to manage capital projects to ensure that they are planned, implemented and finished in a timely and efficient manner. We're expanding resources for functions central to our strategy of economic development and nuclear oversight.

We're also streamlining back-office functions. Partly as a result of this reinvigorated focus, our plans at the Utility remain on track as are efforts to make our business even more reliable, effective and efficient. For example, in May, to ensure reliable affordable power, as well as to respond to the state's evolving generation landscape, Entergy Arkansas issued an RFP for 200 to 600 megawatts of long-term resources beginning in 2017.

No self-build options are being considered and selections are targeted for November. In July, we issued an RFP for 650 to 1,000 megawatts beginning in 2020 in the Amite South planning region in Southeast Louisiana. As part of the RFP, we will be testing a self-build option at our existing Little Gypsy site. Proposals are targeted for November.

You may remember that a few years ago, the 550-megawatt Ninemile 6 plant was selected through a similar process. Barring unforeseen circumstances, this, the first new combined cycle natural gas fired plant to be built by the Utility, should be completed by the end of the year. We want to be in a position to replicate this success and are working to ensure that we will be.

In transmission, we're in the process of evaluating potential projects to help us connect new industrial customers, expand our capacity to serve the load and enhance the economics of providing safe, secure, reliable power. We're also working to finalize our annual long-term transmission reliability plan for submission to MISO.

Moving to the third area. Financial strength gives us the flexibility to expand our system, to meet step-out industrial growth. For example, last month, Entergy Louisiana and Entergy Gulf States Louisiana filed a study that included a preliminary analysis of combining the 2 companies. As we expected, the study showed that a larger company would improve the financial flexibility of the Louisiana companies and help finance investment required to serve new industrial customers. For our regulators, a combined company would save millions of dollars in administrative costs. The added geographic and customer diversity of a consolidated company will also help it withstand storms and sector-specific economic downturns.

This leads me to the fourth area of focus, regulatory frameworks. For some time now, we have been working with our regulators to find ways to streamline processes and identify new regulatory mechanisms that benefit current and potential customers, as well as Entergy. Two examples of these would be riders and certification mechanisms that our regulators have had in place for many years and regulatory tools used at other utilities like forward test years.

We are pleased to say that the second quarter saw progress on this front. In June, for the first time in 12 years, Entergy Mississippi filed a general rate case. This multifaceted plan is designed to position our Mississippi service territory for economic growth and development by improving reliability, modernizing the grid, stabilizing rates and implementing new technologies.

From a rate-making perspective, Entergy Mississippi has proposed revisions to the formula rate plan to use a forward test year, which will help bring transmission service to some of Mississippi's most attractive industrial sites. EMI has also proposed several rate incentives for industries and small businesses, all of which are designed to support job creation. All these items, safe, reliable power, operational efficiency, financial strength and regulatory frameworks are just some examples of how we are executing our plan to support economic growth across our 4-state Utility service territory.

Turning now to EWC. As I mentioned earlier, our financial results for the quarter reflects strong operational performance, as well as higher power prices. As you know, our strategy is to preserve the optionality and manage the risk in this commodity-based business. As we saw again, commodity prices are volatile. Overall, from March 31 through June 30, average 2015 and 2016 forward prices for New York Zone G and New England's Mass Hub increased an average of $3.81 per megawatt hour, peaking on June 3.

Since June 30, prices for those 2 years are off by 9%. While short-term power and natural gas markets have not been constructed due to recent production gains and mild summer weather, long-term market fundamentals, as discussed in Analyst Day, remain sound. In addition to a robust long-term demand picture for natural gas, starting next year, we see a wave of older coal unit retirements, coupled with higher pricing for CO2 under the Northeast regional pact, continued power volatility during constrained periods, long-term load recovery and the potential for lower-than-expected energy efficiency gains. All of these factors will likely lift power prices to higher levels than indicated by current forwards in 2016 and beyond. For these reasons, among others, we remain both resolute and optimistic about the future.

On the capacity side, ISO New England is implementing a downward sloping demand curve in next February's auction for the 2018 to 2019 capability period. This will help provide appropriate incentives to ensure that existing economic capacity continues to operate and that new capacity is constructed to ensure reliability.

With respect to Indian Point, in June, the New York ISO released a draft of its biannual reliability needs assessment. For the fourth report in a row, the ISO found that Indian Point is critical to maintaining the reliability of the grid in New York and that its closure would cause transmission problems and worsen existing risk of outages beyond acceptable levels. It should be no surprise to anyone that for a variety of reasons, Indian Point is and will remain a critical part of the generation mix of New York, and we are committed to ensuring its continued safe operation.

I'm now going to turn to some significant developments on the environmental front. The past 3 months have seen a lot of activity on issues ranging from air to water quality. In April, the U.S. Supreme Court upheld the U.S. Environmental Protection Agency's cross-state air pollution rules, which were introduced in 2011. In May, after several delays, the EPA issued the final 316b cooling water intake regulation revisions. And in June, the agency released the proposed rule on carbon emissions from existing units. The Casper in 316b rules will have some effect in our operations. And while we are still studying the specifics, we believe them to be manageable.

I know that the proposed rule on carbon has been getting a lot of attention, so let me spend a little bit of time on that. As you know, Entergy's overall fleet, both Utility and EWC, is one of the cleanest in the nation. In fact, our fleet exceeds EPA guidelines for new build power plants, which mandate that new natural gas plants emit no more than 1,000 pounds of carbon dioxide per megawatt hour. Today, Entergy's fleet emits about 580 pounds per megawatt hour, driven largely by the prevalence of nuclear power, clear evidence that carbon reduction goals cannot be met without maintaining the nation's nuclear generation capacity.

The proposed rule governs emission state-by-state and, for this reason, is arguably the most complex regulation EPA has proposed in recent history. We continue to study it and its potential implications, and we've continued to have productive discussions with EPA staff. However, our concern is that the implementation of the rule, that is its impact, would not match the agency's stated objectives. So at this point, we have more questions than answers, and I think it's fair to say this is a point that is shared across the industry. The public comment period on the proposed rule closes October 16. By that time, we expect to have a crystallized point of view. We plan to present that perspective to the EPA, as well as our stakeholders, including those of you on this call, so stay tuned.

In closing, I want to reiterate that we believe the future of our business is strong. Our plans are structured to facilitate growth at our Utility and to take advantage of the optionality inherent in our nuclear fleet. At Analyst Day, we detailed our near-term objectives, what we believe we can achieve financially and operationally to help grow our economies, support job creation, help maintain and improve the environment and enhance and replace the infrastructure to improve reliability.

There are a number of building blocks to this vision, some we control, some we do not. So it's worth noting that our business is, by nature, volatile in the short term. However, this short-term volatility should not and does not change our confidence in the long-term fundamentals. The classic example is the recent steep drop in natural gas prices, driven mainly by weather. This has not changed our longer-term bullish views. As such, we continue to see a line of sight to our 3-year Entergy EPS growth outlook.

Other factors affecting our business include the timing of complex industrial projects, evolving policy landscapes in our states, as well as in Washington, and of course, the weather. Again, the fundamentals are strong, even with this uncertainty. At Utility, with respect to industrial projects that support growth, some will move more quickly than anticipated and some may be delayed. For example, Big River Steel got its financing and permitting this past quarter and is moving ahead. We had originally anticipated Big River to be completed in 2015, now it looks like it will be 2016.

At EWC, rising demand for natural gas and shrinking reserve margins, combined with infrastructure constraints and the region's growing need for environmentally and economically sustainable, reliable power, point to higher value for EWC nuclear portfolio. Despite such uncertainty, we know the shale revolution will continue for far into the foreseeable future to drive competitive U.S. natural gas prices and liquid prices relative to the rest of the world. So we can be confident, as indeed we are, that whatever the particulars in our service territory is, the stage is set for significant economic growth. And as I said a number of times already, we're doing everything we can to make that growth happen.

So today, as it has been for more than a century, Entergy's business is a long-term play. Over the years, we have prided ourselves on delivering strong value for our stakeholders, including a long history of dividend payments and growth to our owners. Results in the second quarter are further evidence of this and the progress we've made on many fronts over the past 18 months. But I also want to say that we are committed to ensuring that short-term volatility does not compromise the long-term health of the business or that of our stakeholders. A lot of the initiatives we undertook during the second quarter are also a good demonstration of that.

With that, I'll turn the call over to Drew, who will review our financial performance for the quarter and update you on our 3-year outlook.

Andrew S. Marsh

Thank you, Leo, and good morning, everyone. Today, I will review the financial results for the quarter, as well as our forward-looking outlook. Starting with Slide 2. Our second quarter results for the current and prior years are shown on an as reported and on operational bases. Operational earnings per share were $1.11 in the second quarter of 2014 compared to $1.01 in 2013. Operational results excluded special items from the decision to close Vermont Yankee, HCM implementation and the transmission spin-merge effort last year.

Turning to operational results on Slide 3. Entergy's operational earnings increased, driven primarily by higher earnings at EWC. Parent & Other earnings were flat and at Utility, operational earnings per share were $1.17, $0.01 lower than a year ago. There are a few key offsetting drivers. For the quarter, Utility net revenue was a positive driver. Retail sales growth for the quarter was 2.1% or 2.6% on a weather-adjusted basis.

Industrial customer class had the strongest gains of 5.3%. Industrial growth was broad-based across multiple segments, led by refining chemicals and small industrials and aided by several expansions. Increases within ETIs and EGSL service areas drove industrial growth. Sales growth was offset by the effects of weather, including milder-than-normal weather in this quarter's unbilled period. The quarterly net revenue increase also reflected higher price resulting from rate actions. A portion of the price increase was offset by other line items.

Despite the spending increases offset in net revenue, nonfuel O&M was favorable quarter-over-quarter, reflecting our cost management efforts. Improvements from net revenue and O&M were offset by higher depreciation expense and higher effective income tax rate.

Now moving on to EWC. EWC's operational earnings per share of $0.18 was higher than the $0.07 earned a year ago. EWC EBITDA for the quarter, summarized on Slide 4, was $84 million higher than last year. The increase is due to higher net revenue from improved sales volume, following continued operational improvement in our merchant nuclear fleet. This is illustrated by a stellar 95% nuclear fleet capacity factor for the quarter versus 82% in 2013.

Unplanned outage days were dramatically reduced by 37 days, and there were no refueling outage days in the second quarter of this year. The average realized price for EWC's nuclear fleet also improved to just under $50 per megawatt hour compared to $46.40 a year ago or about 7% higher. The price increase was largely due to capacity prices while energy prices were relatively flat.

Now moving on to operating cash flow shown on Slide 5. OCF was $761 million in the current quarter, up $189 million from 2013. Higher net revenue from EWC was the largest driver.

I'll now turn to forward-looking information. In today's release, we affirmed our 2014 operational earnings per share guidance range of $5.55 to $6.75. Based on the result through the second quarter and June 30 forward prices, our current expectations point to just below the midpoint of the range, due largely to mild weather in the second quarter. As we think about the remainder of 2014, there are a few things we're paying close attention to.

For EWC, we have seen market forwards for the balance of the year come down since June 30. There are also open regulatory proceedings that could see resolution this year at Utility. For example, the Waterford 3 steam generator prudence review is currently in process. On the call last quarter, we also discussed the expectations for incremental opportunistic 2014 O&M spending aimed at accelerating projects, improving top line growth and improving operational performance and reliability to benefit customers. Identified opportunities have fallen more into the improvement categories, but are generally consistent with the amounts outlined last quarter. EWC spending is a little lower than discussed last quarter, while Utility spending is a little higher.

Now let's turn to 2015. For the past several years on this call, we provided a few thoughts for prompt year earnings. Following that practice, Slide 6 summarizes considerations for next year. The issues are probably what most of you expect. A few things of note. At the Utility, drivers include a full year of rate actions in 2014, including ELL's $10 million rate increase in December of this year and potential rate actions in 2015, including the EMI rate case, which is in progress. Also, recall that last quarter we noted that some of our Utility tax benefits originally expected in 2014 are now more likely to fall into 2015. And at EWC, note that the EBITDA expectation includes the full year benefit of DOE waste fees set at 0.

At our Analyst Day, we also provided 3-year long-term outlooks for the Utility business net income, EWC operational adjusted EBITDA and consolidated earnings per share growth. As Leo indicated earlier, the precise building blocks or how we achieve those outlooks are likely to change due to the nature of our business. Utility outlook is to achieve $1 billion to $1.50 billion of operational net income by 2016. The unique industrial growth opportunity is the cornerstone in Utility's earnings outlook. They [ph] continue to develop new leverage to grow the top line and make productive investments beyond the discussions at the Analyst Day to ensure we meet those expectations.

At EWC, operational adjusted EBITDA estimates that we provide in our webcast in the Appendix material are based on market prices as of a certain point in time. 2016 prices from our Analyst Day were consistent with both our point of view and April 30 forwards, but we're about 4% higher than market prices as of June 30. This has led to lower June 30 mark-to-market EBITDA around the bottom of our stated point of view range for 2016.

Our point of view development is an evergreen process. Our point of view evaluates longer-term fundamentals that's not as volatility as day-to-day market prices. Despite some near-term gas market headwinds, we still expect to see natural gas demand pick up over the next 5 years and drive marginal natural gas drilling towards slightly higher-priced dry gas areas. Meanwhile, we continue to see tightening reserve margins in key Northeast power markets.

With these considerations, we reasonably believe that we can meet our consolidated 2016 growth target, even with volatility and the underlying earnings drivers. Our Analyst Day in June is barely in the rearview mirror. We laid out then and reinforce today how we intend to create sustainable value for our 4 key stakeholders: our owners, customers, employees and communities. And while the building blocks will evolve over time, we still intend to achieve the overarching goals that we communicated at our Analyst Day as we look to aggressively grow the Utility and actively preserve the optionality and manage the risk at EWC.

And now the Entergy team is available for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Dan Eggers at Crédit Suisse.

Daniel L. Eggers - Crédit Suisse AG, Research Division

Just following up on the point of view conversation, which is obviously getting a lot of attention. If the point of view was consistent with where prices were earlier in the second quarter, can you talk about the lack of additional hedging that happened from the first quarter to the second quarter and how you guys are going to kind of approach the hedging strategy over the remainder of the year?

Bill Mohl

Sure. Dan, this is Bill. A couple of things. As we look at what's happened in the short term -- shorter-term market, as mentioned, we've seen moderate weather increasing storage, obviously, the front end of the curve has dropped down. However, when you look at 2015, we are still -- our point of view is consistent with the market. And in fact, in the second quarter, we executed about 750 megawatts of hedges or converting placeholder hedges into more fixed-price hedges, which represents about 17% of the portfolio. So at this point in time, we believe we have got 2015 adequately hedged. As you look out into the future, '16 and beyond, our point of view is largely unchanged. Perhaps, 2016 was reduced a little bit from a point of view perspective. But remember that, as we talk about the ability to hedge, there's a couple of things to consider. One is -- and primarily is the liquidity out in the marketplace. So as we look at hedging '16 to '18, we're seeing a much less liquidity than we do for 2015. Obviously, our point of view is higher than current market prices and increasingly higher as you go further out on the curve, really due to the drivers, both from a heat rate perspective, heat rates being compressed, and our point of view on demand for natural gas. So we remain bullish on natural gas because of addition of gas generation, shutdown of coal units, incremental industrial load, additional exports to Mexico and LNG expansion. So really, the challenge we face '16 to '18 is just a lack of liquidity and the fact that our point of view was substantially higher. The other piece of that is, if you remember, I think we were pretty clear at Analyst Day, volatility in the markets has been substantial since the polar vortex. Therefore, making structured products, options, et cetera, much more costly and really, we don't believe now is the time to put those hedges on.

Daniel L. Eggers - Crédit Suisse AG, Research Division

And then, Leo, there seem to be a couple of Utility properties for sale in the region. Can you just remind us how you guys think about M&A and how that prioritizes against the CapEx program you guys have internally?

Leo P. Denault

Sure, Dan. The whole M&A question for us has not changed in terms of how we think about it. We have our objectives as a company that we're trying to meet in terms of growing the business. And if we can do transactions that will facilitate that objective, we will do them. So something with a growth opportunity, something with a balance sheet opportunity, something with a cash flow opportunity, things like that. The capital decision that you're talking about, for us, is probably a little bit unique in that we have significant amount of growth opportunities that reside within the Utility itself, the organic kind of growth. So that just, I guess, would tend to potentially make the bar higher if we were looking to deploy capital, deploy balance sheet towards something. It would have to be a superior way to grow the business than the objectives or the opportunities that we have within the business itself. And again, as we've talked about a lot of times, the size of the customers that we look to add, that 1,700-megawatts is between now and kind of the foreseeable future. But as long as oil to gas ratio stays where it is, as long as the opportunities remain out there from a manufacturing standpoint, we -- that was just a point-in-time estimate. We go out beyond that. We would continue to see that growth opportunity. So nothing's changed. If you think about our objectives, growing the Utility business and preserving the optionality within EWC, if we can help manage that with a transaction, we'll do it. But the thing we have to be mindful of is the capital deployment opportunities we have within the business as well.

Operator

And we'll go next to Michael Weinstein with UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

It's Julien here, actually. Excellent. So first question on the EWC side, if you could comment. With regards to what's going on in New York, not just the highway but the REV, how do you see that impacting the future of Indian Point? And perhaps, more broadly, what are your latest thoughts on the Lower Hudson Valley pricing and sustainability as a construct, if you could comment?

Bill Mohl

Sure, this is Bill. As it relates to our point of view on New York, if you look at where they stand, obviously, they're in a situation where they've got declining reserve margins. In fact, as Leo mentioned, if you look at their projections as they go into the future, they really need Indian Point. In fact, if they try to pull Indian Point out of the portfolio, even with some of the resource additions proposed, they violate reliability limits. So we believe that projects or policies such as REV are certainly something that can be implemented over time, but it will take a substantial amount of time to implement those. And if you look at a lot of the proposed projects in New York and the timing associated with those projects, you really have to question the viability of those projects and if they can meet the actual commercial operations date. So our point of view is that Indian Point remains critical for reliability, economic sustainability and also environmental sustainability. As it relates to Lower Hudson Valley zone, we feel confident that FERC will uphold its decision on that zone. Prices can change in that zone as resources are added. As we look out into the future, we include some of that in our forecast. Obviously, Danskammer is on the front burner right now, and so we're watching that very closely. Our point of view on that is that maybe part of that unit may become commercially viable within a reasonable period of time. The rest of that unit may take longer as it relates to the larger units at that facility. But we -- in general, we believe that the pricing associated with LHV will be maintained and that FERC will uphold its prior decisions.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Excellent. And could you just clarify a little bit on the last question, when it comes to your 2% to 4% range in the context of the latest commodities? Can you clarify, do you see any improvement on the regulated side to offset the commodity? Or are you effectively saying, status quo, we're moving forward on the plan on the regulated side and we have a view on the commodity that is different than the commodity is today?

Andrew S. Marsh

This is Drew. It's more of the latter, Julien. It's -- the Utility, we continue to look for ways that we can look for levers that can help us maintain the $1 billion to $1.50 billion and if the opportunity is available, maybe go above that. But right now, what we're talking about is -- at the Utility, is the $1 billion to $1.50 billion. And then our point of view is the part at EWC that gets us back to the 2% to 4%.

Operator

And we'll go next to Kit Konolige of BGC.

Kit Konolige - BGC Partners, Inc., Research Division

So I wanted to ask a little bit about your mention, Leo, of the carbon rule. I noted that you said that the implementation may not match the EPA's objectives, if I can quote or misquote you. But can you give us a little more detail on what you think the development of that situation might look like?

Leo P. Denault

Sure. Rod will handle that.

Roderick K. West

Behind the comment is the observation. We're not going to make a formal statement beyond it. It's the observation that the state-by-state limits that have been -- or at least are evident in the EPA proposed rule -- remember, it is just a proposal -- suggest to us that we're not going to -- it's not going to be an easy path to achieve across-the-board emissions if we're just limited to a state-by-state approach. Our fear is that the marginal cost of compliance across the board is ultimately going to wind up working against EPA's objectives to reduce carbon and have a greater impact on, for instance, jobs, the cost of electricity for customers. Here where we see the chaos creating problems for EPA's objectives. If we aren't able, between now and October, to arrive at, let's just call it a consensus position for EPA, given the industry, given their respective states, we're going to put -- we're going to force EPA to wind up having to go a square against Congress and as a forcing mechanism to try and get at a comprehensive energy plan. We don't see that as being realistic within EPA's time line. And what we're trying to figure out between now and October is whether or not there's a path that allows us to get there. And so we're taking a very cautious approach but recognizing the complexity of this rule alone. It's just making it really difficult for us to see a path where EPA is actually achieving these stated goals of achieving though its 4, what we call, building blocks to achieving any realistically -- achievable, enforceable rules at the end of the day. And Entergy has been at the forefront of the greenhouse gas reductions from 2012. And just from our limited perspective, given where we are today, we really don't see how, beyond EPA's stated goals, how they get there from here. It's just -- we're trying to remain optimistic. We're trying to remain engaged with the EPA and figuring out whether the rule can be modified between now and October. But it's just -- we're having a hard time finding a reason to be optimistic that this ultimately works for us.

Leo P. Denault

Kit, if I could just add, there's a -- as Rod said, there's stated objectives about the reduction, stated objectives about the flexibility, stated objectives about types of technology and everything and then there's a lot of math behind the rule, and we're not sure that the math and the stated objectives all mesh up as well. But as he said, proposed rule, through constructive dialog, through those sorts of things, maybe we get there. But it's just -- it's kind of drawing that line, as Rod said, between all those objectives, the complexity of the state-by-state issue and then the math that goes behind it that might not support it. But we're -- it's still early in the process.

Kit Konolige - BGC Partners, Inc., Research Division

Right, okay. And then to follow-on on one particular state, New York, has there been any indication that the folks who matter in New York, say, at the Governor's Office or other high-ranking officials, that the possibility of the carbon implementation has changed their thinking at all or led them to reassess how they think about Indian Point?

Bill Mohl

This is Bill. I would say at this point we have not seen any -- we haven't had any significant dialogue associated with that. We've had some conversations with the PSC, but I think, like us, everybody is still in the process of trying to evaluate this and understand how it practically gets implemented. So it wouldn't be fair to say we've seen a change in their position at this point in time.

Operator

And we'll move next to Steven Fleishman at Wolfe Research.

Steven I. Fleishman - Wolfe Research, LLC

Leo, I know you guys have been a point of view company from as far as I can ever remember, but I don't recall kind of initially having the point of view as part of the guidance. So just when we're thinking about future quarters and periods, how are you going to be updating the point of view, so to speak, just so we -- I'm sure you're updating it somewhat all the time, but just as more of like an annual thing, quarterly thing, how should we think about that?

Leo P. Denault

Well, I'd say that in continuing with the past practice, we are not putting our point of view in guidance. In continuing with other -- with past practices, where we've got it overarching in our decision-making process and in our outlook. So when we look at guidance with the exception of the fact that I think last year, when we are given -- we had to put something in on Lower Hudson Valley and there was no market, and so we -- we're clear about imputing that. Our guidance is inclusive of market, not our point of view. Our outlook of what we think is achievable and where we'll be, that's based on what we think is going to happen. And in a lot of situations, that includes an assumption about the price power, and that's where we put our point of view in where we think we'll be at that point in time. But this -- we would distinguish that different from guidance, and that's I don't different than our past practices. As far as how often we'll update that, obviously, we're going to continue to give you a perspective around where we think we're going to get by 2016, et cetera. But that we'll probably just do on a quarterly basis and if we're not -- while we update our book every day, we don't run all the way through all the financial models everyday all the time. Hope that helps.

Steven I. Fleishman - Wolfe Research, LLC

Yes. And just one other question on the 2015 earnings consideration slide. I think all of these were basically things that were in the outlook you gave at the Analyst Day. Is that correct? There's -- none of these are really new.

Andrew S. Marsh

No. I don't think any of these are new, Steve.

Steven I. Fleishman - Wolfe Research, LLC

Okay. And your highlight to pension discount rate a couple of times. Is that just because that's been a volatility item historically?

Andrew S. Marsh

Yes. I mean, as you know, it gets set at the end of each year, based on interest rates at that particular point in time, and so it is uncertain as to what it'll actually become until you get to that point. The interest rates have been trending down most of the year, so there is some risk to that, that -- and I know you all are aware of that. But I want to just -- that's just part of the list. We want to make sure that you're thinking about all the drivers that we're thinking about.

Operator

We'll move next to Jonathan Arnold at Deutsche Bank.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Just a quick one on there's been obviously a filing made at the New York PSC around some kind of a contract support for another upstate nuclear plant. Any -- would you like -- could you comment on that just conceptually and any sort of likelihood or interest in a similar arrangement or request for FitzPatrick?

Bill Mohl

Sure. Jonathan, this is Bill. Yes, we're well aware of the filing that's been made regarding that facility. Our understanding at this point in time is that is for to meet a short-term reliability need. As it relates to FitzPatrick, we always consider those types of options. But in general, we continue to try to advocate for improved market structures. Our general thought is that the -- if we have the right market structure which values the attributes of specific generators, obviously, with nuclear its base load carbon-free generation with on-site fuel, that is a much better long-term solution. However, if there are opportunities to enter into other agreements based on certain other needs on the system, such as reliability, we certainly are open to that, but nothing on the table right now.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Do you have M&As that these are -- could there be a similar reliability issue to the, I guess, it's the Rochester one up around FitzPatrick's location? Or less likely in that case?

Bill Mohl

Probably unlikely.

Operator

We'll go next to Paul Patterson at Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

I guess, just back to the point of view, could you give us what you think the reason is that the market is mispricing or is not accurately forecasting the issues that you see coming up in terms of reserve margin, et cetera?

Bill Mohl

Sure. I mean, the couple of things you have to remember that I think are constants in what we've talked about for a number of years as is relates to point of view and the forward market is number one is, as you look at the forward power markets, you got to remember that there's a lot more sellers than there are buyers as it relates to long-dated transactions. And so while we see very good liquidity in the front end of the curve so, obviously, for the prompt months and for the next year, as you get beyond that, you have a lot less natural buyers. As a result of that, probably one of the key drivers in the lower market prices is lower heat rates. And that's just kind of the situation that we are dealing with and we have been dealing with. As you get closer to delivery, then you will see the markets respond, you'll see heat rates increase and you'll see the issues, such as the physical constraints that exist in the market -- in the physical delivery market start to come out in the forward market. And so I can't tie it to any specific issue. Our belief is that, in general, infrastructure in the Northeast is going to be constrained. We're seeing a lot more retirements than we are seeing resource additions. Therefore, we're seeing lower reserve margins. And as we saw during the polar vortex, when you get periods of high peak demand, then you see a significant rise in the price of both natural gas and the price of power.

Paul Patterson - Glenrock Associates LLC

Okay. And so basically, around this time next year -- or by this time next year, you would expect the forward curve to come in line. Is that how we should think about it?

Bill Mohl

Yes, we'll see the prompt years...

Paul Patterson - Glenrock Associates LLC

For 2016.

Bill Mohl

Yes, we'll see the prompt years start to rise. And as you get closer to delivery, then depending on what the actual physical conditions are, then you see much more volatility as we did this last winter.

Paul Patterson - Glenrock Associates LLC

Okay. And then turning to New York and the legislation which passed the House of Representatives to defund, I guess, FERC's activity regarding the new capacity zone. How should we think about, a, what do you think the likelihood of that passing the Senate would be? And b, even if it does pass the Senate, what would the practical effect be, considering that I think pretty much FERC has already acted on this and acted on the rehearing if I understand it correctly? If you could just sort of elaborate a little bit on that.

Bill Mohl

Well, first, let me say that this type of intervention in the markets goes to the very heart of what we're working on from a market structure perspective and is what's actually undermining some of the markets overall when we actually see political motives behind proposed changes that affect that market. As it relates to this specific appropriations bill, we -- it's not currently -- has not been initiated in the Senate at all, and our prevailing belief is that FERC has ruled on this. They've had all the information required to make their decision, and we remain confident they will maintain that decision going forward.

Paul Patterson - Glenrock Associates LLC

Okay. But I mean, if they defund this, how would that actually impact FERC? I mean, is there -- I mean, would it just be simply symbolic? Or would it actually have a practical impact on the capacity zone. Can you give us a perspective on this [ph]?

Roderick K. West

This is Rod West. In terms of the actual order that FERC currently has out, the rule is in place. And so the defunding doesn't change the tariff that's ultimately in effect. You can assume -- and you'd have to ask FERC this, whether or not they were specifically defunded, whether they would lose the ability to access resources from other sources to actually do their job. It's opened [ph] a practical matter. The rule is where it is in the unlikely event, and we do not believe that it is a likely outcome that the Senate would carry that amendment. That's a question for FERC. But we have to have confidence that FERC's jurisdiction at the end of the day is going to be upheld and supported through the legislative process.

Operator

We'll go next to Paul Fremont at Jefferies.

Paul B. Fremont - Jefferies LLC, Research Division

Looking at the preliminary 2015 drivers, can you elaborate at all on the changes in -- the expected changes in EWC depreciation? Because I guess, in 2014, I think your guidance have like a $0.25 increase in depreciation, and it looks like you're looking for depreciation to go up yet further in 2015.

Andrew S. Marsh

This is Drew. That just relates to normal incremental capital, most of it above what we're depreciating right now related to Fukushima and the like. So that's just normal changes. Last year, Paul, you remember that we had that new depreciation study, and that's what was driving the larger change last -- from last year to this year. Going forward, we wouldn't expect to see such a large change. It will just be normal capital increases.

Paul B. Fremont - Jefferies LLC, Research Division

And in terms of the useful life of nuclear, that assumption, is there any type of a major change there?

Andrew S. Marsh

No, no changes there.

Paul B. Fremont - Jefferies LLC, Research Division

Okay. And then in terms of the Department of Environmental Conservation remaining hearings in New York, can you give us an idea of when the hearings are expected to end on Indian Point?

Bill Mohl

Sure. I think you saw a flurry of activity last week regarding this matter, where we had a number of politicians, business folks, community members really speak out against the proposed capacity outages. Following that, the ALJs decided that they were going to push back the hearings associated with that topic for several months that were scheduled to be -- take place in January 2015. Our point of view on this whole process hasn't really changed since we talked to you at Analyst Day as we don't see any decision occurring on this matter any time before 2016 and likely gets -- may get pushed beyond that. So our point of view on that's consistent with what we talked to you about at Analyst Day.

Paul B. Fremont - Jefferies LLC, Research Division

So 2016 would be the -- an actual DEC final decision?

Bill Mohl

There could be a decision at that point in time. However, remember that as we detailed, there's a number of appeals, processes, et cetera, that we would -- we could pursue, so that wouldn't be the final word, so to speak.

Paul B. Fremont - Jefferies LLC, Research Division

Right. And that would -- that takes you to the 2018 time frame, right?

Bill Mohl

Yes, sir, that's correct.

Operator

And we have time for one more question. We'll take that from Stephen Byrd of Morgan Stanley.

Stephen Byrd - Morgan Stanley, Research Division

I wanted to talk about membership in MISO and just if there's any general timing we should be thinking about in terms of further transmission planning, sort of signpost we can look to in terms of the capital that will be required to integrate Entergy into MISO.

Leo P. Denault

Theo, do you want to take that?

Theodore H. Bunting

Yes, I'll start and maybe others could weigh on this. But I mean, MISO has -- obviously goes through its transmission planning processes. And as I think as I've talked about at the Analyst Day, we talked a little bit about transmission opportunities, and I laid out a time line as it related to projects that might have been submitted under MISO's kind of MVP, MEP processes. And August -- the month of August -- August 14, actually is the time when we would see MISO is completing some evaluations of projects that they would consider for their MTEP '14 process. So we also generally have our typical MISO transmission planning process that you would go through as a part of MISO, where we would submit projects, reliability projects and that sort of thing. As we laid out, again, in Analyst Day, I think we said we had about $1.7 billion transmission CapEx through 2016. Many of the projects that would be reliability-type projects that we would submit through MISO would be part of that $1.7 billion. But again, as you think about other types of projects, the MVP projects or other types of projects that might enhance economic benefits, you could see potentially spending above that level.

Stephen Byrd - Morgan Stanley, Research Division

Great. And then just shifting gears for a follow-up on Indian Point, the coastal zone management process. What is the earliest date under which the New York State Department of State can make a consistency determination? I know the deadline is at the end of this year. But what would be the earliest date they could make the decision?

Leo P. Denault

Well, they could actually make a decision themselves by the end of the year. However, we have reason to believe, as based on previous experience, that, that decision could actually be further delayed. Remember, consistent with our discussion at Analyst Day, then that would -- if it was an adverse decision, then we would take that to a Secretary of Commerce appeal process, which lasts over a year, and then there is appeals process is over that -- in addition to that. So at this point in time, everything that we had mentioned at Analyst Day is still correct.

Operator

And that does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to Ms. Waters for any closing remarks.

Paula Waters

Thank you, Audra, and thanks to all for participating this morning. Before we close, we remind you to refer to our release and website for Safe Harbor and Regulation G compliance statements. Our call was recorded and can be accessed on our website or by dialing (719) 457-0820(719) 457-0820(719) 457-0820(719) 457-0820, replay code 6761108. The telephone replay will be available through noon, Central Time, on Tuesday, August 5. This concludes our call. Thank you.

Operator

And again, that does conclude today's conference. Thank you for your participation.

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