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Entergy Corporation (NYSE:ETR)

Q4 2006 Earnings Call

April 26, 2007 11 am ET

Executives

Michele Lopiccolo - VP, IR

Wayne Leonard - Chairman & CEO

Leo Denault - CFO & EVP

Rick Smith - President and COO

Gary Taylor - Group President of Utility Operations

Mike Kansler - President and Chief Nuclear Officer

Analysts

Dan Eggers - Credit Suisse

Greg Gordon - Citigroup

Jesse Lauden - Zimmer Lucas

Michael Lapides - Goldman Sachs

Jonathan Arnold - Merrill Lynch

Leslie Rich - Columbia Management

Zack Schreiber - Duquesne Capital

Vigas DeVity - Morgan Stanley

Vivek Krisnan - Deutsche Asset Management

Steve Cushner - Catapult Partners

Presentation

Operator

Good day ladies and gentlemen and welcome to today's Entergy Corporation First Quarter 2007 Earnings Conference. Just as a reminder, today's conference is being recorded.

And now I'd like to turn the conference over to our host today is Michele Lopiccolo. Please go ahead ma'am.

Michele Lopiccolo

Good morning and thank you for joining us. We'll begin this morning with comments from our Chairman and CEO, Wayne Leonard, and then Leo Denault, our CFO, will review results. After the Q&A session, I will close with the applicable legal statements.

Wayne?

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Wayne Leonard

Good morning everyone. Last quarter I outlined for you our how view this from '07 and beyond. This quarter, I'm pleased to report progress on many fronts.

Starting with the Utility, in Louisiana the hearing began yesterday in storm cost recovery cases. At the start of the hearing, the stipulation was read into the record quantifying the balance in storm costs for recovery, in the amounts of $545 million for Entergy Louisiana and $187 million for Entergy Gulf States Louisiana.

Reserves for future storms were also stipulated among the parties in the amounts of $152 million for Entergy Louisiana and $87 million for Entergy Gulf States Louisiana. The stipulation also calls for the securitization of both storm costs and storm reserves in the same amounts. The stipulation is among the companies, the commission staff and most but not all are the parties for the case. We view this as constructive, comparable to the outcomes in the other jurisdictions.

The stipulation brings us closer to resolution of the recovery of the substantial storm costs incurred in Louisiana in an equitable manner for all the stakeholders preserving the company's ability to respond to future storms in the timely efficient manner that our customers deserve and are accustomed to. Simply put, we can continue to respond in an extraordinary manner we are known for, even in the most extraordinary of events.

We are hopeful that the commission will approve the stipulation, and anticipate the commission will take action on this stipulation and the remaining issues in the case during the second quarter.

In Mississippi and Texas, we already have financing orders in hand authorizing a securitization of approximately $369 million in total for storm restoration costs and storm reserves which we expect to receive no later than the third quarter.

There has also been some good news for Entergy New Orleans in (inaudible) [State Office]. Just yesterday the bankruptcy judge approved two contracts that should ultimately enable Entergy New Orleans to remove conditions precedent in order to emerge from bankruptcy.

The first contract, relates to an agreement that was reached with the Office of Community Development, in the State of Louisiana., whereby Entergy New Orleans will receive $171.7 million in Community Development Block Grant funding in the near term. Entergy New Orleans expects to collect the remaining $28.3 million of the $200 million of the total CDBG funding awarded by the State of Louisiana, as cost to incur for storm restoration and rebuild work in the coming month.

Second contract pertains to an agreement to settle the storm insurance claims with one of three insurers, Hartford. This settlement, with one of the two excess carriers is in the amount of $69.5 million of which $53.7 million is attributed to Entergy New Orleans. We are projecting roughly $400 million of total insurance recovery on a system wide base. Given this progress Entergy New Orleans expects this plan of reorganization to receive approval leading to exit from bankruptcy in the second quarter.

Another utility regulatory matters yesterday, Entergy Arkansas began the evidentiary hearing in its base rate case. For over 20 years Entergy Arkansas' base rates has not seen an increase. Entergy Arkansas' case in [Chief] supports the rate increase in the $100 million range. In contract, the commission staff's pre-filed testimony advocated $16.8 million rate reduction putting rates below 1986 levels. Yesterday, it is my understanding, which I have not seen the document yet, I don't believe Rick has either. But it is our understanding that the staff filed supplementary exhibits in response to one of our witnesses for a rebuttal testimony. And the revised testimony now reflects a revenue deficiency, not a surplus of about $2 million, that's almost a $20 million improvement.

We still do not believe the record or balance regulatory policy supports through remaining adjustments the staff is still advocating. On the other hand we're encouraged by yesterday's amended testimony and two other developments in the case.

More specifically, all parties expressed support for continuation of the Entergy cost recovery rider as the ongoing means for recovering fuel and purchase power cost. Remember last year, the commission ordered a review to consider elimination of the fuel tariffs. There's also support for use of a rider mechanism for recovery under System Agreement Payment.

It's important to point out that if you add our base rate increase in total and the System Agreement Rider scheduled to be implemented this summer, a typical residential customers' bill will be essentially unchanged from the beginning of 2007, due to the reduction of fuel charges during this period. Despite the fact that we have been on the receiving end of some particularly harsh words at Arkansas Times, we expect to have a fair hearing on the merits of this case. The Commission has until mid-June to rule on this case.

In Mississippi we made our annual formula rate plan filing in March. That filing calls for a 10.85% ROE mid-point and $12.9 million rate annual rate increase. The report is currently been reviewed by the Mississippi Public Utility Staff, and Louisiana will make our annual formula the rate plan filings in both jurisdictions in May.

In Texas, we remain on track to file a base rate case in the third quarter. The filing will support the first base rate increase in over 16 years and allows Entergy Gulf States Texas a reasonable opportunity to earn its cost of capital.

With regard to our portfolio transformation effort in February, we announced an agreement to purchase the Calcasieu Generating Facility, a modern and quick-start peaking resource in close proximity to large customer loads with large potential load swings.

In a region where there are natural limitations on the ability to import power, such as the Gulf of Mexico. We also identified resources in our long intermediate term RFPs for further negotiations including the repowering of the unit at Entergy Louisiana's Little Gypsy plant.

Little Gypsy will utilize circulating fluidized bed technology development under Department Entergy's Clean Coal Technology Program and use the abundant low cost pet coke supply in the area as its primary fuel. The project is expected to produce substantial customer value due to fuel savings even in a carbon constrained environment for both lower rate and greater price stability. The repower unit will be among the cleanest plants of this type in the nation.

The Shell group has been selected as the EPC contractor for the project. Of course, regulatory pre-approval is a condition to proceed and we anticipate filing plans in the near future with the Louisiana Public Service Convention.

As for new nuclear, it is competing for baseload needs in the 2015 to 2020 timeframe. Critical issues include, the level of cost estimates, the risk sharing arrangement with the EPC, and the clarity and equity of legislated and regulatory rules and mechanisms with regard to risks, including timely cash recovery necessary to maintain the credit quality to attract capital at rates consistent with the project's cost estimates.

In fact, in response to Louisiana Commission's directives to develop a rule making that will promote development of nuclear power in Louisiana. In March, the staff filed a cost recovery rule for nuclear power generation. The commission considered this for over its March business and executive session and is expected to take action at its May meeting. And another action required for New Nuclear, in April, Entergy Nuclear received an early site permits from the NRC for another unit at the Grand Gulf spot. The early site permit is valid for 20 years and certifies that the site is suitable for a new nuclear unit resolving many safety and environmental issue.

In other developments at Entergy Nuclear, we completed the Palisades acquisition on April 11th. And finally we advanced our efforts to operate Vermont Yankee and Pilgrim for another 20 years with the NRC Staff issued its Preliminary Safety Evaluation report finding nothing that would slow its path for license renewal.

I am also pleased to report that we were named in the Forbes list of America's most trustworthy companies for our corporate governance practices and accounting transparency. We were the only Utility to make the list which was drawn from 8,000 public company, using more than 200 accounting governance metrics, audit integrity generated a list of 100 companies showing the highest degree of accounting transparency and fair dealing to stakeholders during 2006.

Particularly significant was our top-five rating among the listed large cap companies. That result combined with our ISS proxy analysis and corporate governance rating demonstrates our commitment to the highest standards and how we conduct business.

The ISS report indicated the Entergy outperformed 99.8% of all companies in the S&P 500 and outperformed 100% of the other companies in the Utility’s group.

ISS calculates governance rating from more than 8,000 companies. Before closing I would like to briefly touch on the leadership reorganization announced earlier this quarter. In my nine years at Entergy I have resisted reorganizations or change for the sake of change. With over 30 years experience in the industry I always felt confident that we have the best people in the industry in the right job. Particularly given the challenges and the opportunities we face as the Company.

As we experienced the loss of institutional knowledge due to retirements, we back-filled those jobs with people I had enormous confidence in. And I feel the performance of each person has supported that confidence. It is Bob Dylan, who once wrote and sang The Times They Are A-Changin', that want us make changes with them.

Thankfully, we already have the right people with the right experiences. You will just see them in different roles than they have been in the last few years. We have done more than just move people around. We've gone to some effort to redo all the boxes to best fit what we're trying to accomplish and to assure we have very well defined accountability and responsibility. In a matrix structure, this can be the downfall if it's not perfectly clear.

Bringing together the best of the utility and nuclear cultures along with respective experiences, and talents of their leaders is critical to advance in our corporate aspirations and initiatives. And I remain confident that will become more obvious to all of you over the next year.

And now I will turn the call over to Leo.

Leo Denault

Thank you, Wayne and good morning everyone. In my remarks today, I will cover quarterly results followed by liquidity and cash flow performance, an update on our share repurchase activity and a recap of our '07 guidance. I will then close with a brief discussion of our longer term opportunities.

Looking first at our financial results for the quarter, slide 2 shows that first quarter '07 as reported earnings increased by 12% compared to one year ago. Operational earnings also reflect improvements in the current period rising 13% compared to the first quarter of '06. The increase in operational earnings came from higher results at Entergy Nuclear, partially offset by lower results of the utility plan and other and the non-nuclear wholesale business.

Slide three presents the factors that drove the quarter-on-quarter increase at Entergy Nuclear. Increased revenue from higher pricing was the major driver. The scheduled refueling outage Indian Point 3 partially offset this increase as there were no refueling outages in the first quarter of '06.

Our Utility, Parent and Other earnings were lower in the current quarter than those of the first quarter last year. The key factors that contributed to lower results were higher operational and maintenance expense, higher depreciation expense coming from increased plant additions during the period and higher interest expense due to financing costs associated with storm spending and share repurchases.

The increase in O&M spending this quarter is driven by several factors. Some elements of the increase in expenses are incremental costs, while others are a function of year-over-year changes in spending patterns and we again have a storm related effect.

Incremental costs include items such as transmission spending, to implement our ICT plan and higher insurance costs. Insurance expense for example reflects higher premiums as insurers respond to '05 storm effects as well as some added coverage. These are additional expenses we anticipated and included in our guidance.

As per our spending pattern, in '06 we saw a significant portion of O&M increase come through late in the year. This is in contrast to our expected '07 pattern we are spending later in the year should be below our spending levels of comparable periods for '06. Also contributing to the quarter-on-quarter increase in O&M is a return to normal spending on both transmission and distribution activities compared to the first quarter of last year's focus on storm recovery.

As you will notice in our release, sales growth at the Utility was over 3% quarter-over-quarter on a weather adjusted basis. While this is certainly encouraging during the first quarter of '06, we were still experiencing customer losses due to the '05 storms as home and business rebuilding process struggled for momentum. Accordingly, we continue to project just under 2% sales growth for the year. At the non-nuclear wholesale business, results in the current quarter were modestly lower compared to the same quarter last year, due primarily to cost associated with the plant outage.

First quarters results included only one special item reflecting the 1% per share increase in earnings in Entergy New Orleans. Earnings at ENO were down from the $0.03 per share earned one year ago. Higher O&M and interest expense were the key factors leading to the lower results in the current period. Increases in both of these items reflect the effect of the storm in '05 as O&M spending patters in the current period reflect more normal activity compared to the first quarter of '06. In addition, interest payments suspended in the first quarter of '06 have been resumed consistent with an agreement reached in the bankruptcy proceeding.

Slide four includes a snapshot of our cash flow performance this quarter. The decrease in cash flow during the current period primarily reflects the absence of two positive contributors in the first quarter of last year. Tax refunds made possible by the Gulf opportunities on legislation, and unusually high levels of accounts receivable collections made significant contributions to the first quarter of '06 cash flow.

On slide five, we look ahead at our overall liquidity position, our net cash available over the '07 to '09 period remains at $1 billion. Slide five also reflects progress during the quarter on our share repurchase program. During the first quarter, we repurchased 5.7 million shares at an average price of approximately $98, just under 90% of those repurchases came through our $1.5 billion program with limited activity coming from purchases to offset the dilutive effect of stock option exercises. We continue to see our '07 as reported in operational earnings guidance in the range of $540 to $570 per share.

Slide six details the components of guidance which have not changed from those we shared with you last quarter. Our Utility, Parent and Other, the positive effects of sales growth and improved pricing is expected to be offset by higher O&M depreciation and interest expenses. The contribution to '07 earnings from nuclear will come from higher revenues reflecting higher pricing for the Northeast portfolio and new sales volume from the Palisades acquisition, which closed earlier this month.

Partially offsetting these strong results a higher O&M primarily driven by the addition of another plant and the effects of two additional refueling outages, including one at Palisades.

With respect to the final component of our '07 guidance, we continued to estimate increased losses at the non-nuclear wholesale business. Through the first three months of the year many of the factors noted above have come through actual results such in the manner we projected. We realized there is always a potential for unexpected events to move earnings up or down and that realization is why we use the guidance range.

One such event is the recent unplanned outages an Indian Point 3. With Indian Point 3 now having been down out of service for 21 days. There will be a negative effect on nuclear’s earnings. As an update I can tell you that we currently expect the unit to be back online within a week. On the positive side, better than expected pricing and other factors such as the early close of Palisades gives us confidence but our earnings range is still intact.

We've been extremely active in the first three months of this year and the remainder of '07 offers opportunities for more the same. Our financial aspirations remain unchanged and our path to achieving those aspirations is well defined. We' will focus on investing in positive NPD projects in a non-regulated businesses and high quality assets and the utility, while maintaining operational excellence in all that we do.

Through these investments and operating success, we will achieve positive returns and continue to reinforce reliable service to our customers. These actions support our financial aspirations with maintaining balance sheet strength consistent with our risk profile, focusing on credit quality and growing earnings per share by approximately $1 per year through 2010.

Our success on these efforts will then position us to achieve the 60% dividend payout overtime and continue our share repurchase activity. We believe the realization of each of these aspirations will be a significant accomplishment and a collective result will lead to continuing to provide top quartile return to our shareholders.

The process of identifying opportunities in line with each of these aspirations is well underway. Investments in projects such as Palisades and Little Gypsy reflect our success achieved to-date. Our portfolio transformation initiative, as well as advancing our work on the potential financing of the nuclear business can also generate value creating opportunity. We do not have a shortage of positive catalysts and our time will be filled with pursuing initiatives we create the most value for all of our stakeholders.

With that, we now turn to our Q&A session and our senior team is available to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We'll go first to Dan Eggers with Credit Suisse.

Dan Eggers - Credit Suisse

Hi, good morning.

Leo Denault

Good morning.

Dan Eggers - Credit Suisse

First question I guess, my only question. Given the good free cash flow generation, the fact that the strong cost cash is now coming in the door, can you remind us of balance sheet targets, the parameter you guys are going to hold yourself to both leverage and coverage ratios, and then key prioritize, which are those measures are going to be most important?

Wayne Leonard

Well, you know the bottom line on that Dan as we continue to measure to the aspirations that we set out, I think earlier this year in the last year, as far as, that overall metric on the balance sheet, we’ve been looking at 50% to 55% debt to cap on a total basis. As far as all the other metrics, we are focused on maintaining the credit quality that we already have and in those ranges of where we stand today at the corporate level around the BBB rating, we actually believe the balance sheet that we have is stronger than that coverage ratios that we have are stronger than that. That's why we sit with the agencies kind of with the split rating at their Parent level.

So, we are going to continue to manage within those and we think that while we do we can still target the 60% payout overtime, we can still target our share repurchases along the way as we've outlined them before, finishing up the $1.5 billion program that we have currently. But also looking at that idea of -- as we go forward looking at both investments, and the nuclear investments in the Utility business as well as maintaining a view on can we or can we do on average $500 million of share repurchase of the year. All those things Wayne laid out for you earlier.

We tried to balance all those and in addition to that as we look forward to the utilities and the securitization, that's going to have an impact on what we do at the operating companies as well. As you start to see some of the debt that those businesses be replaced by securitized debt as we get through the course of the year.

Dan Eggers - Credit Suisse

With credit metrics better than the BBB rating at the Parent, does that mean that you would move credit metrics to match the rating or would you hope for a rating increase to match the credit metrics?

Leo Denault

Well that's an interesting discussion that we have a lot when we are meeting with the agencies. Right now, we think that the metrics that we target are the metrics that we should target. We pay attention to the rating, obviously we have discussions with the rating agencies on a regular basis about what those ratings are and what we think they should be versus what may be they think should be. But we don't manage the business to the rating necessarily, we manage the finances of the business to the risk profile of the business.

And as we go through the year and evaluate again with securitization proceeds, how we manage into the OpCos when we get through that process, how we manage the corporate credit and then as we continue to evaluate what we're going to do on the nuclear side? All of that, we continue to revise, but while we are certainly cognizant of what the ratings are and how those ratings are determined by the agencies, we first and foremost try to manage the business with the risk profile of the business or businesses that we are looking at as opposed to manage it to the rating.

Dan Eggers - Credit Suisse

Got it. Thank you, guys.

Operator

And we'll go next to Greg Gordon with Citigroup.

Greg Gordon - Citigroup

You've covered a lot of what I was going to ask. I guess Leo, you made a comment in your formal statements that you consider, you need to think about more broadly what the right balance sheet position of the company is. Not just on a consolidated basis, but when you look at each of the individual operating businesses. How far along is that process? Are you comfortable giving us sort of a timeframe over which you plan on making a decision on? How the corporation ought to be levered? How the different operating businesses ought to be levered? And what type of sort of pros and cons of sort of stacked up on either side of the ledger here as you think about that decision?

Leo Denault

Well, it relates to how far along we are. We're pretty far along on a global basis. It's like you're really drilling down to is maybe going around what we're doing with nuclear, that's something that we continue to investigate and as far as a timeline on that as we've said earlier, we will make some choices on that during the year.

And it's one of those things that hasn't really been done before and there's a lot of steps in looking at what may or may not to inspire there restructuring the business into a standalone entity as well as technology financial statement, having discussions with rating agencies, making filings with the NRC, making filings with the FERC. There is lot of activity around that, that would have to occur, if we head down that path.

You will see us do some of those things probably throughout the year whether with the end of the day we actually did the financing or not. Just because to putting in place, we get that evaluated, you have to actually make those filings you have to do those restructurings et cetera. So we were pretty far along in our thought process on that is just as a lot of work to be done and there are a lot of people outside the company that we have to deal with when we do it.

Greg Gordon - Citigroup

Thanks Leo.

Operator

Moving on to Jesse Lauden with Zimmer Lucas.

Jesse Lauden - Zimmer Lucas

Hi, good morning.

Leo Denault

Good morning.

Jesse Lauden - Zimmer Lucas

Regarding the progress on the repowering at Little Gypsy, should we assume that the CapEx associated with that is in your CapEx forecast as is presented now or is that incremental?

Leo Denault

No, there is CapEx in there for a project like Little Gypsy. At the time we did the CapEx it shows up in the 10-K. We knew we would need a project like that. So there is CapEx in and they are not necessarily specifically for Little Gypsy but there is CapEx in there for a project like Little Gypsy. And, so it's covered in that '07 to '09 period. The project wouldn’t go in service by then. So there would be CapEx associated with it out beyond 2009 as well.

Jesse Lauden - Zimmer Lucas

Okay. Is it mostly in '08 and '09 in terms of where we would actually see that?

Leo Denault

As far as what you would see in the 10-K, yes.

Jesse Lauden - Zimmer Lucas

Okay, and without?

Leo Denault

There will be, as I mentioned the project would go in service after that point in time, so there will be CapEx that we continue after 2009 as well.

Jesse Lauden - Zimmer Lucas

And are there opportunities for additional sort of regulated generation projects that we should think about and sort of getting regulatory traction on or in the next maybe 12 months?

Leo Denault

Is what are you talking about new build or repowering or acquisitions?

Jesse Lauden - Zimmer Lucas

I mean, I was talking, I guess kind of sort of running the range of new build or repowering?

Leo Denault

Okay.

Jesse Lauden - Zimmer Lucas

But on acquisition.

Leo Denault

Okay. Rick, would you go ahead and then we will.

Rick Smith

Yeah. There is coming down the RFP, we have a couple of projects that we are pursuing with counter parties right now. See if we can come to contractual terms. So I would expect we'd get that account by [shift] this year and make the necessary regulatory filing this year to do that. So they would be acquisitions and then in a normal planning process we are looking at other generation but for this year they'd would be acquisitions.

Jesse Lauden - Zimmer Lucas

Thank you.

Operator

Moving on to Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs

Hey, guys Michael Lapides here. Questions for you on Entergy commodity services on the non-regulated, non-nuclear plants, one or two industry, kind of magazines or sources have listed those who's plants that are actively being shopped right now. And just wanted to ask kind of what your view point overall on that business and what your kind of a long-term strategy for it?

Wayne Leonard

Well the strategy for that business Michael is no different than it's been since we exited the kind of development business several years ago. Those are assets that we either are already constructed or they were far enough along that we, the commitments were made to go ahead and finish them up. We've been trying to create as much value out of those assets as we possibly can and we have sold bits, pieces and total plants continuously over the last several years and that process continues. So, we bid them into RFPs, both as for Entergy RFPs as well as RFPs of other companies that have gone out for power in the region.

We have entered into contracts off of those, just like we do with the nuclear business. We have sold slices of those units to other parties and we have sold entire units to other parties such as one [recent] plant that we sold last year. So, creating value out of them is actively shop on a regular basis and to the extent that includes those plants, that’s always on the table.

Michael Lapides - Goldman Sachs

Got it, one follow up a little bit unrelated, on the non-regulated nuclear business, what's your just view overall of kind of going forward the market or potential for acquiring nuclear assets? Is that as the number of companies have brought assets over the last couple of years, is that market obviously shrinking or are there are still opportunities and what type of opportunities, not necessarily specific plants, but just in general, do you think exist over the next few years?

Wayne Leonard

Okay, Michael. I am going to ask Gary Taylor to address that Michael -- Mike Kansler is our new CEO of Entergy Nuclear. Mike's here but so is Gary, so since Gary has been mostly involved in this piece and we're still in kind of in the transition, I am going to ask Gary to ahead and give you his views. Gary.

Gary Taylor

Yes, I think there is really -- I think you are going to continue to see some plants come up for sale. If you look at the landscape out there, there are still in excess of about 20 plants that still have single operators to them and I think they can recognize the value by combining those. Having said that though, if you look it what the cost that the last auction went for, I think we are really starting to approach whether or not too much value is being transferred to the present owners and none of value that we could see necessarily going forward. So, I think we're kind of reaching that point. I think a lot of this may actually be implemented to and what happened to carbon legislation as we go forward and how would that plays out in some of these sales. But I think there are still some opportunities. I think they are getting it on the upper end of where the risk that you're taking on and the rewards that we would expect to generate for our shareholders may not be in agreement.

Michael Lapides - Goldman Sachs

Got it. Thank you, guys.

Operator

And we'll now move on to Jonathan Arnold with Merrill Lynch.

Jonathan Arnold - Merrill Lynch

Good morning.

Wayne Leonard

Good morning John.

Jonathan Arnold - Merrill Lynch

Hope to get a little update on what's being going on in the Texas legislature and your take on that and implications of the plans, obviously both going to market and also integration?

Wayne Leonard

Okay, and may I ask Rick to handle that? I think we're going to stick with our outdated organization structure it appears. Rick would you go ahead.

Rick Smith

Jonathan, there is a lot of activity going on in the Texas legislature, and I think it's still pretty difficult to predict with how it's going to sort out at the end of the day. We got about another month to go through those activities. As it relates to Entergy, we are still pushing movement to ERCOT and I think it's still on the table even though there has been some bills that have passed in the house that would not have that happen, but the commission is still moving forward on our TTC filing and we're having conversations with a variety of parties over there, trying to convince them that that's the best thing for us to do. But I think more broadly, I don’t know if I'll turn it over to Leo from an investment and generations and stuff like that. We are not spending much time looking at those avenues today.

Leo Denault

In ERCOT we haven't really been focusing on that lot actually since we get out of the retail business in if you recall last year.

Wayne Leonard

I think when Rick says the best thing for us is ERCOT. What Rick is alluding to is the best thing for system reliability. And for the wholesale markets and whether we go to retail competition or whether that we are going table is so far down the road and so many things will happen between now and then that it's not even really on the table at the moment even as part of that filings.

The testimony that we have in Texas and has been supported by the ERCOT analysis is it moving, our footprint in to ERCOT is good for the wholesale market, good for liability, reduces congestion cost, and pays for itself. So, we don't want to confuse the two issues even though they are commingled into Texas. And what we are really asking the Commission to do is to just make the first step, which is pays for itself and then they can decide the other issues some time down the road based upon the merits of the case or whether they change the rules or whether the circumstances changes or whatever.

So, we still feel pretty strongly that going to ERCOT is the right answer. Not necessarily for the reason that we originally headed down that path or pushed down that path, for other reasons.

Jonathan Arnold - Merrill Lynch

And if I can just follow up, in the event that the bills whether passed Senate and become law, does that preclude you just from going to market or whether it preclude you also from integrating into ERCOT?

Rick Smith

Jonathan currently those bills would preclude us from going to ERCOT.

Jonathan Arnold - Merrill Lynch

Okay. Thank you.

Operator

And we now move on to Leslie Rich with Columbia Management.

Leslie Rich - Columbia Management

Thank you. I had ERCOT questions, but since you just answered those I'll asked about the outage at Indian Point. You said that was an unplanned outage and just wondered sort of what the nature of that was and sort of what that's attributable to?

Wayne Leonard

Okay. Now we are going to go back to our new territory and Mike Kansler is really an expert on this subject in particular. So, Mike why don't you go ahead.

Mike Kansler

How you are doing Leslie?

Leslie Rich - Columbia Management

Fine, thanks.

Mike Kansler

Yeah. We actually had failure of the high side bushing on the transformer, which caused the transformer to fail, and we've done a lot of work on the transformer and the bushings during the outage to verify they were intact and good for the cycle and this was kind of the surprise. So, we are trying to get to the root cause of why the bushing failed.

Fortunately, we maintain a capital spare transformer onsite, so we've been in the process of switching that transformer out and we are moving the unit towards startup going forward.

Leslie Rich - Columbia Management

So, in aggregate it's about a 28 day unplanned outage?

Mike Kansler

I think it will be well less than 28 days, yes. But, probably a three weeks and a few days.

Wayne Leonard

That's very close to just refueling outage is kind of where we are.

Leslie Rich - Columbia Management

Thank you.

Operator

And from Morgan Stanley, we move on to [Vigas DeVity].

Vigas DeVity - Morgan Stanley

Hi, Good morning this is for you [Chris], and I apologize I joined late, so if you have answered this I'll do a replay later. But, on the nuclear fuel question with rising cost, can you guys remind us what's your cost structure and kind of risk exposure is to those rising cost. Whether its hedges et cetera?

And then the second one is also related to nuclear, on how receptive states like Louisiana and Mississippi have been or those discussions are moving forward on new build even if it's quite a ways away, just getting a start on that?

Wayne Leonard

Okay. This is Wayne. There is a good old choice in why we are reorganizing around here, because all of these questions really do cross functional lines and our new organization is going to make this clear who's got the ball. So, what we are going to do right now is split that question. Gary is going to talk about fuel and Rick is going to talk about whether our home states are on the nuclear.

Gary Taylor

Thank you, Wayne. On the fuel question and I know had not been asked before. So, let's color around that, as far as Entergy it's something that we have monitored for a while and our position has been to be hedged out. So, if you look at our exposure over the next few years, both from an enrichment point of view and from a product point of view, we are actually hedged in those areas going forward. That structure that we have and it's reported in our 10-K, but it has been fairly comparative in the $4.5 to $5 to megawatt hour, total fuel cost in the operation of our plan.

So, we don't see that as a major challenge immediately, obviously as we move forward over those next several years, we would move closer to what you see market price is doing. I think most of us anticipate that there is going to be a response to the higher prices, most of the firms that we look at would call for those to moderate some as we go forward. And I think that would put us in a better position strategically to be in that timeframe as the curve comes the other way.

Vigas DeVity - Morgan Stanley

Okay, Are you able to share how far out you've hedged in general?

Gary Taylor

In general, because for reasons that obviously as far as negotiating with others I think at this point I could just say for the next few years.

Vigas DeVity - Morgan Stanley

Okay.

Gary Taylor

Hey, Rick.

Rick Smith

On new nuclear, I mean quite a few conversations going on in both Louisiana and Mississippi. The governor of Mississippi is very interested in new nuclear. And at the green Gulf side and the Louisiana commission has a docket open or the -- we have filed comments on what regulatory mechanisms would be necessary to encourage new nuclear in Louisiana staff has filed comments, I think the commission will probably enter and order in that next month. So, I would say from both states were getting very positive reception to new nuclear.

And we are moving along with vendors, our vendors to really define what the cost would be in those types of things. So I mean that’s a critical element and what trying to lock down cost, it designed certified with NRC and those type of things. So, there is a lot of activity going on within the company with our vendors and our regulators on new nuclear. But obviously those are very long lead time project. So, we are talking a good 10 years out here before those may show up.

Vigas DeVity - Morgan Stanley

Got it, and would that mean that the first indication of what cost might be still quite a ways away, I mean more kind of measured in years instead of quarters?

Rick Smith

I wouldn’t say years, I mean if you give us four quarters that might be important.

Vigas DeVity - Morgan Stanley

Okay.

Rick Smith

But I don’t think it's years, I mean we are working pretty hard on that with the vendor right now.

Vigas DeVity - Morgan Stanley

Got it. Thank you.

Wayne Leonard

One other things I will just add, one of the things we are particularly focused on, we have a unique situation as you all know with the over build that exist in our territory with combined cycle plants and with the escalations that have occurred in many of the commodities to build something new. Certainly, it's buying the existing power from the owners or buying plants competes pretty favorably with something like new nuclear. But we start looking at carbon constraints, that your forecast for carbon prices are currently for [CO2] it's starting to getting pretty close. I mean depending upon the exact bill and how it’s done, whether the new nuclear works or not is very depended upon how risky the project is what kind of discount rate you are going to use. And what kind of risks that you are going to have your EPC vendor and, so right now risk it might be fourth quarter critical to us is developing the carbon curves under various scenarios that we know what we are comparing it to and other alternatives.

But most likely for us I mean we're probably looking at things to make sense that is going to be buying power off the marketplace more of an environmental dispatch or substitution along with probably nuclear.

Assuming that we can come to a resolution with the EPC and the other parties with regard to the risk. Most of the other new built cycle means just probably are not going to work as we’ve said here today. But again that carbon curve is going to be critical for that decision.

Vigas DeVity - Morgan Stanley

Okay, thank you guys.

Operator

And we will now move on to [Vivek Krisnan] with Deutsche Asset Management.

Vivek Krisnan - Deutsche Asset Management

Hello thank you and congratulations, Wayne and team for such a good progress. I was wondering whether you can discuss little bit more about the synergy between the unregulated side and the regulated side as you think along and whether they should be really under the one ownership or several ownership?

Wayne Leonard

Are we talking about by nuclear Vik?

Vivek Krisnan - Deutsche Asset Management

No. Well the total unregulated business?

Wayne Leonard

The old company is what you?

Vivek Krisnan - Deutsche Asset Management

Okay.

Wayne Leonard

While we've talked about that before and that Leo, like he said he is working through the process in terms of how to maximize the value in particular of the Northeast nuclear fleet while preserving the benefits of having the integration of one fleet, which is what Gary and Mike has been working on for some period of time and the area is unconvinced and unless until and even yesterday more and more there are substantial advantages in the new organization and to the alignment process.

So that's something that we would want to preserve and by legal working through the process of from a financial standpoint making sure that at least we maximize the financial and engineering aspects of it. Along with that I don't think fleet will necessarily got into it in its discussion but he also is working through other structures that are way too preliminary and way too complicated I think for this call. But it does get to the question is that you have posed with regard to, is there a structure that would minimize the tax leakage and preserve the benefits of having one nuclear fleet. And preserve also the credit and the shareholder value and maximize the shareholder value. And that's like I said, there are a lot of ideas, but they are still preliminary. It would be premature to even talk about them, I think, it will be premature to even talk about them I think. But that's number one on Leo's list this year. And I know he's working on it, because he talked to me about it yesterday. That's thus far I can go Vik.

Vivek Krisnan - Deutsche Asset Management

Okay, thank you.

Operator

And from Duquesne Capital we will go to Zack Schreiber.

Zack Schreiber - Duquesne Capital

Hi, hi Wayne, hi Leo. It's Zack Schreiber, Duquesne.

Wayne Leonard

Hi, Zack.

Zack Schreiber - Duquesne Capital

Congratulations on a good quarter.

Wayne Leonard

Thank you.

Zack Schreiber - Duquesne Capital

And thank you to all the value that you've created for us shareholders. What I would like that you continue to create. Just a question on following upon, (inaudible) question on sort of on recapping the generation assets discretely, are you talking about a separate legal entity that would support equity traded separately for Entergy, it wasn't clear to me? And then also can you just talk about the pros and the cons of doing this. I can see a lot of the pros you seem to be alluding to some of the hurdles. I don’t know if those hurdles are cons or they are just sort of things you've got to overcome to kind of cap some of the value. And just last but not least, is your commitment to executing on something like this, it seems it was a few months ago, is it waning, is it increasing as you evaluate the markets and talking about what create the most long-term value? Thank you.

Leo Denault

I'll try and go through that or for you Zack. The bottom line is what we are doing when we look at the business like we do all the time and it is a challenge Wayne always gets. How do we create the most value with the portfolio that we have? Those who are operating it and then through the management of the portfolio.

As we look at the nuclear business in particular and as it relates how we financed it and how it's fits within the corporate structure. It's been financed primarily with equity out of the corporate. And so as we look at that business we look at how it operates, we look at its future, we look at its financial strength. It looks like to us we should get to the point of once we have operational got to operating all the plants well like what Gary and Mike and their teams have done. We get to combining the fleet in terms of operating them with the synergy of the fleet itself.

And we grow earnings and cash and all that. That way we will take advantage of the hedging strategy that we've put around with commodity prices being what they are. That the business is now a business that should be able to stands on it's own within the corporate entity at the very least. Just like Entergy Mississippi, Entergy Louisiana and the other company stands completely on their own, that business can stand completely on its own.

And so as you start to head down that path back and then what's the right way of, there is a long list of objectives that we have lined out. We've talked about some of those before. For that in terms of it stands on its own supports its own credit, supports its own contracts and supports its guarantees et cetera. All of that to get it to where it's a discipline of that business is in the finance of that business. The cost signals of that business are at that business, those are all positives to the extent that we start to separate the risk of that business from the risk of the rest of the business that's a positive.

How far we can take that then just depends on a series of analysis which starts with that's the way to create the most value. And so, as we go down that path we do look at setting up separate legal entities that we can actually support themselves. That's the kind of thing that we are analyzing and that we would have to look at it, that we would have to put in place and if we put that in place even just for financing there is a series of regulatory approvals and other things that you would have to go through in addition to creating all the financials commitments and like just to do that.

And I think Wayne really answered, I think, the end game of your question. There is a lot of options that it creates once you put it in that form. And if you just think about in terms of the liquidity, not only the liquidity in the business, but the liquidity of that business right now to hedge it we sell the power or if we wanting to hedge it differently we could sell interest in plants. The more defined structure you put around that entity, the more liquidity of that entity you have to where if ultimately the most value is created through some restructuring of that business that included equity either in a partnership, or JV or a spin or split, an IPO or whatever. You are on your path towards doing that.

Analysis, as Wayne said, is so preliminary and there are so many different ways you could about it that it's already difficult to give you any more than that.

Zack Schreiber - Duquesne Capital

From a leverage perspective what kind of leverage can this business support? How many turns of EBITDA, given there is sort of a low capital intensity on a going forward basis of the business. Are there major CapEx requirements in generators, on reactor vessel heads?

I mean, how much, is it three times, four times, five times. I mean the envelope has been pushed on leverage. I am just trying to understand. I mean, I am sure it's not eight times or seven and half, eight times like TXU. I wish it's not the zero either or one times on the implied with company alone. But, how many turns of EBITDA when we think about what you are exploring and put it through our own models, so we think about?

Leo Denault

Well, it's probably too early for us to talk about that. Right now and that

Zack Schreiber - Duquesne Capital

Is there a range?

Leo Denault

Pardon me.

Zack Schreiber - Duquesne Capital

Is there a range or the credit rating?

Leo Denault

I think you kind of actually defined the range and it's a pretty big range.

Zack Schreiber - Duquesne Capital

Well, zero to eight.

Leo Denault

That's right.

Zack Schreiber - Duquesne Capital

So I will stuck to that.

Leo Denault

And I think the reason to say that is there are lots of implications. There are lots of implications around the credit of that business. There is a lot of implications around how do credit of that business impacts the credit of the rest of the business.

And so we have to go through all that analysis to determine where we think it should show up and then as I said, it's not a unilateral decision but certainly we do have to go through some regulatory approvals and processes associated with that and talk to the agencies and we will take their feedback to heart as well.

As far as, we do the same things you are doing. We are looking at the other GenCos that are out there and the positive and negative sides of those GenCos, versus what our GenCos looks like and certainly ours has a lot of more…

Zack Schreiber - Duquesne Capital

More positives than some other ones outside right.

Leo Denault

Well, you did a good job in finishing my sentence. Because of its position, the markets positions and because of its position within environmental compliance non (inaudible) resource in the likes and then the fact that Gary and Mike and their teams have created quite the best operating nuclear fleet in the country. So, all of those things are positives, we are just in the process of evaluating it.

Zack Schreiber - Duquesne Capital

And what's the use of the cash that you think you could generate from this and how do you deal with potential diseconomies of scale on an operational basis? It either maybe huge -- I mean what seems like to me as if you would create a separate equity, you run the risk of diseconomies of scale. I guess you could solve that with a nuclear operating service agreement, whereas if you did it with leverage and redeployed the capital at a good return or to share buybacks or whatever or regulate utility at a return of other costs of capital and kept the integrated operational you would have financial benefits and not diseconomies of scale on an operational basis. How do you think about the operational aspects of this as well as the financial aspects, there is another dimension right?

Wayne Leonard

Exactly, and that's one of the several pages of objectives that we have with all this analysis. How do we maintain operational capabilities that we have across the fleet and that's a very, very high priority bars make sure that every unit that we operate is operated safely, reliably and providing good service to our customers. So that is a very key objective on the top of our list of how we continue to maintain operations across the fleet. It can be done and so that's the kind of thing we are looking at, as far as the use of the cash, its going to depend on when, how much, and what else is going on and we'll make the determination just like we do every time we look at deploying capital, that the highest value used for the shareholders while we continue to provide great service for our customers in I think reliable manner, and certainly we have got growth opportunities in the Utility to the portfolio transformation as well as share repurchases and like all of those things are always on the table every time a dollar comes into it.

Zack Schreiber - Duquesne Capital

And on these objectives, you've talk about several pages. Have you made that public or is that internal?

Wayne Leonard

That's internal.

Zack Schreiber - Duquesne Capital

Got it, okay. And on SGM payments and the recent RPM auctions and PJM, is there a similar type structure for capacity auctions of different durations in New England? Has there been any read across in the capacity markets by the auctions in PJM and how that might impact value capability generically? What is your position with respect to capacity? Do we think about that separately or is it bundled into your hedging guidelines? What kind of assumptions on dollars to what they are in your numbers and is there any flex on that or it's already in there?

Leo Denault

Well, in our numbers we have capacity payments as part of the plan, and our capacity -- we have a capacity point of view that’s based on what reserve margins are in the region, what new build for the transmission in the like. So, really it's -- we have the same type of analysis around capacity payments as we do energy, as we do basis, as we do environmental compliance, as we do whole host of different things in the market. So I think it's in there, it’s something that we watch as far as New England, we even does have the full capacity markets in that intending full capacity auction. Europe, doesn't have the same type of operation but there is a capacity market there, and we do participate in it. We do have stuff in our numbers for that.

I think I am going to have to ask you Zack, Michele's nudging me, and may be we might move on.

Wayne Leonard

Hey Zack, let me just close this. You asked questions at this point whether we were just previously talked about whether we were waning or whether we were where we stood on the whole subject to and I think from what Leo had to say and what we've said I just said I think we were encouraged from what we were may be a year ago. We knew there was enormous amount of obstacles, had to be gone through and particularly tax aspects and things on the fleet. And we were very encouraged by the analysis that we've done. That doesn't mean that will get to the in gain like Leo described. But there are steps along the ways that we can -- we have more confidence and we did maybe in September that we will able to resolve to create value but kind of avoid the value destroying maybe cap structure we have today and like the way we are financing these plans.

So I would certainly not want to leave you with impression that because it's going to be a lot of hard work in some time that we are backing out on this. We're putting more and more resources on this particularly as we get deeper and deeper and closer to the real issues that has to be resolved. So again I would say I'm encouraged. We’ve made progress on this since we probably last talked to you.

Operator

And we'll take our final question from [Steve Cushner] from [Catapult Partners]

Steve Cushner - Catapult Partners

Hi, Wayne

Wayne Leonard

Hi Steve.

Steve Cushner - Catapult Partners

This maybe a question for Leo, just maybe close out some of the topic. When we look at the debt that you have the parent right now, which I think will someone use the funds for the nuclear purchases that you made? If you were to lever the nuclear business on its own, would you keep this similar level of parent debt or would you potentially reduce the parent debt?

Leo Denault

We would reduce the parent debt, as we go through the restructuring at this there is a lot, I don’t want to dive down into it too much deep because then it would it could just escalate into a lot of discussion. But as we look to push this on a stand on its own type of basis, we would remove potentially the credit support, the financial support that comes from the parent to the nuclear business and put it at the nuclear business. So that would include what we have there as existing debt that they may have funded for example there is some short-term debt there at the moment that funds the (inaudible) acquisition as well as credit support. Some of the other debt at the parent level is their funding the share repurchase program that would be different, but stuff is there to support the nuclear business you could assume we transfer over to that business. So the intent being lets get it to stand on its own to have its own support in as many ways possible.

Steve Cushner - Catapult Partners

Okay. Thank you.

Operator

And that is uptime that we have for questions today Ms. Michele Lopiccolo, I will turn the conference back over to you.

Michele Lopiccolo

Okay. Before I close, I would like to apologize for those of you, who weren't able to get your questions in today, we'll be happy to talk to you after the call. Thank you operator. And thanks to all for participating this morning. Before we close, we remind you to refer to our release in website for our Safe Harbor and Regulation G compliance statements. Our call was recorded, and can be accessed for the next seven days by dialing 719-457-0820, confirmation code 4234382.

This concludes our call. Thank you.

Operator

Once again ladies and gentlemen that does conclude today's conference. We thank you for your participation. Have a great rest of your day.

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Source: Entergy Q1 2007 Earnings Call Transcript
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