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Entergy Corp  (NYSE:ETR)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Entergy Corporation Fourth Quarter 2018 Earnings Release and Teleconference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. David Borde, Vice President of Investor Relations. Please go ahead.

David Borde -- Vice President of Investor Relations

Good morning, and thank you for joining us.

We will begin today with comments from Entergy's Chairman and CEO, Leo Denault. And then Drew Marsh, our CFO, will review results. In an effort to accommodate everyone who has questions, we request that each person ask no more than one question and one follow-up.

In today's call, management will make certain forward-looking statements. Actual results could differ materially from these forward-looking statements due to a number of factors, which are set forth in our earnings release, our slide presentation and our SEC filings. Entergy does not assume any obligation to update these forward-looking statements.

Management will also discuss non-GAAP financial information. Reconciliations to the applicable GAAP measure are included in today's press release and slide presentation, both of which can be found on the Investor Relations section of our website.

And now I will turn the call over to Leo.

Leo Denault -- Chairman of the Board and Chief Executive Officer

Thank you, David, and good morning, everyone.

Today we are reporting strong results for another successful year of significant accomplishments. For our core Utility, Parent & Other business, adjusted EPS were in line with our guidance and growth expectations, and our consolidated operational earnings came in above our guidance range.

A year ago, I told you that the foundation for our success in 2018 was largely in place and we laid out what we needed to do to stay on track to achieve our outlooks and aspirations. We've checked off every deliverable on that list as well as a few more and our success keeps us firmly on track to achieve our strategic and financial objectives in 2019 and beyond. As a result, we raised our dividend for a fourth consecutive year, a trend we expect to continue subject as always to approval of our Board.

At EWC, we made important progress toward exiting that business. At the start of the year, we have made shutdown decisions on all EWC nuclear plants and we had an agreement in place to sell Vermont Yankee, a first of its kind transaction. Since then, we completed the sale of Vermont Yankee and we announced agreements to sell Pilgrim and Palisades.

The Vermont Yankee transaction is an important milestone, not only for our strategy to completely divest our merchant nuclear assets, but also for the nuclear decommissioning industry. It establishes a model for the sale of nuclear plants post shutdown, which benefits the industry and key stakeholders by accelerating the decommissioning time line, drawing on industry leading decommissioning and site remediation expertise and experience and laying the foundation for future business development opportunities in the regions.

We're also making progress on the sale of Pilgrim to Holtec. Holtec submitted its post shutdown decommissioning activity report to the NRC and we submitted the license transfer application. We will shut down Pilgrim no later than May 31st, and we expect to close on the sale of that plant by the end of the year. Since announcing our intent to exit the merchant business, our progress has been deliberate and on the mark. We've sold five facilities, two Wind Ventures, the Rhode Island State Energy Center and two nuclear plants, leaving EWC with three nuclear plants. We have agreements in place to sell two of those and we are now actively working toward a post shutdown sale of the third, Indian Point. All of this work and success significantly advances our clear strategy to transition to a pure play utility.

This past year, we also saw solid achievements at our core utility business. At Analyst Day, we demonstrated our ability to successfully execute our plan to improve technology across our business. Our disciplined capital projects management organization and rigorous processes give us confidence that we can grow the business through investments that benefit not only our customers but all our stakeholders.

These investments are important because they help sustain and modernize our system, provide lower production cost and lower carbon emission rates, enhance reliability, support customer growth, bring jobs and economic development to our communities and provide opportunities for our employees. Our new build CCGT projects remain on budget and on schedule, with the St. Charles power station slated to be in service in mid 2019. We also received regulatory approval from the Louisiana Public Service Commission for the acquisition of Washington Parish Energy Center and we expect to close on that plant in 2021.

More recently, we entered into an agreement to acquire the Choctaw Generating Station in Mississippi. We've cleared review under Hart-Scott-Rodino and have requested approval from the Mississippi Public Service Commission. We will also be requesting approval from the FERC in the near future and we expect to complete the transaction by the end of 2019.

We continue to make progress on adding renewable generation to our portfolio. We are committed to providing our customers with renewable power options which are playing an increasingly important role in our resource planning. We have approximately 1,000 megawatts of renewables in various stages of development and specific projects include: two solar PPAs in Arkansas totaling 180 megawatts, one of which is operational; a 100-megawatt utility scale solar project at Entergy Mississippi; three utility scale solar projects for Entergy New Orleans totaling 90 megawatts; multiple rooftop solar projects in New Orleans totaling 5 megawatts; and a 15 megawatt solar project selected in Entergy Louisiana's renewable RFP. Each of these projects is in process and their in-service dates range from 2019 to 2022. Entergy Arkansas recently announced its intent to issue a solar RFP. The company is interested in curing up to 200 megawatts of solar PV resources through an asset acquisition.

Renewables are an important resource beyond their obvious environmental attributes. They can provide cost-effective energy supply, fuel diversity and advance the adoption of distributed energy solutions for our customers. As the economics, performance and reliability of these resources improve, we will continue to engage with our regulators and stakeholders to solve technical challenges associated with expanding the use of renewable energy across our service area.

Last month, we hit an important and very exciting milestone in our AMI deployment plan, with the installation of the first meters. We will install approximately 3 million automated meters across our jurisdictions, with plans to activate 1 million new meters in 2019. We are pleased with this progress, especially in light of the benefits this technology will provide our customers from faster outage restoration to enhanced customer service and cost savings. Additionally, with these meters, we will have more tools to help our customers manage their energy usage and lower their bills. AMI will also serve as a foundation for future customer solutions as we evolve from being a supplier to a partner with our customers. We are excited about this next chapter and are actively studying other opportunities to prepare our distribution system for the future. We will provide updates on our progress when appropriate.

Successful execution also includes our nuclear operations. In 2016, we rolled out our five-year roadmap to invest in our people, our clients and our processes to achieve operational excellence. Today, we are about halfway through that journey and our performance to date is in line with our expectations. In 2018, we realized an important milestone when ANO returned to Column 1 of the reactor oversight process matrix. As planned, we expect Pilgrim to also return to Column 1 this quarter. These are just a few illustrations of the many investments that we are making to develop an efficient, sustainable electric generating and delivery system for our customers.

We also had an active regulatory calendar last year with proceedings in each of our jurisdictions. It started with tax reform, and customers are now seeing benefits in their bills. We worked with our retail regulators and resolved the return of more than $1 billion of benefits to customers and we were able to return the benefits on an expedited basis. This not only helped our customers but also provided financial clarity which was important to solidify our credit as illustrated by Moody's moving our outlook to Stable in November.

Entergy Louisiana extended and modified its formula rate plan to include a new mechanism to recover incremental transmission investments eight months beyond any historic test year. In the fourth quarter, we resolved two base rate proceedings. The Public Utility Commission of Texas approved the rate case, which was a good step toward improving earnings and returns in that jurisdiction in the near term. The Arkansas Public Service Commission approved our partial settlement in the annual forward test year FRP, and new rates are now effective. And Entergy New Orleans rate case is still ongoing and is expected to be completed by August of this year.

In addition, a recently filed legislation in Texas could help reduce regulatory lag on generation investment in that jurisdiction. If passed, it would allow the Commission to approve a rider to recover reasonable and necessary generation investment, which would be more timely and less burdensome than a base rate case filing. This legislation is consistent with our desire to align regulatory structures with customer benefits.

Overall, the resolution we achieved on all of the regulatory matters we undertook last year provides clarity to our plans and solidifies the financial commitments we've made.

At Entergy, we're dedicated to sustainability efforts. Once again, we were named to the Dow Jones Sustainability North American Index, which measures performance in economic, environmental and social dimensions against industry peers around the globe. We earned top scores in the areas of policy influence, climate strategy, water-related risks and corporate citizenship and philanthropy. This is the 17th consecutive year Entergy has been included on either the World or North American index or both.

We were recognized by the US Chamber of Commerce Foundation who named Entergy a finalist in its 2018 Corporate Citizenship Awards in the Best Economic Empowerment Program category. The award recognized Entergy's five year, $5 million workforce ready initiative aimed at promoting economic development for communities throughout our service region.

At Entergy, creating a diverse and inclusive workplace is one of our shared values and we are committed to leveraging the richness of a diverse workforce. In recognition of our efforts, Black Enterprise magazine has recognized Entergy as one of its 2018 50 best companies for diversity. The list highlights companies that champion professional inclusion of people from all races and demographic groups. This is the fifth consecutive year that we've been included on that list.

2018 has been another successful year for us. We executed on our strategy and we expect 2019 will be no different. Our operating and financial positions are solid and our strategic direction is clear. Today, we are a very different company than we were just a few years ago. We are a simpler company and a stronger company for the benefit of all our stakeholders.

We have an -- we are an industry leader in critical measures of sustainability. We have among the lowest rates in the United States. We operate one of the cleanest large scale fleets in the country. We operate in a region the benefits from strong industrial growth. We invest in our employees to create a workforce for the future. We are recognized as a socially responsible growth engine for our communities, and our aspirations for our customers are aligned with the goals of our regulators.

These attributes alone make Entergy a compelling long-term investment today. But this is also the foundation on which we will grow, innovate and expand our investment profile for tomorrow. We will invest in new technologies and new revenue streams that offer promising returns for our owners. We will embrace innovations that will transition us from an energy provider to delivering new outcomes and solutions that our customers want.

We will continue to promote the well-being of our communities by partnering to improve education, eradicate poverty and protect the environment, and we will remain at the forefront of our industry's efforts to address climate issues, while also maintaining reliable and economic service for our customers.

We are in the early days of our industry's transformation. Innovation is changing how we see the future of our industry, a future that offers a significant opportunity for continued long-term growth, and we are well positioned to lead the way.

I will now turn the call over to Drew, who'll provide more detail on our 2018 financial results, 2019 guidance under our new single measure and our three-year outlooks.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Thank you, Leo. Good morning, everyone.

Leo stated we are reporting strong results for another successful year. We executed on all our plan deliverables and this progress is reflected in our financial performance.

For Utility, Parent & Other, on an adjusted view, we ended the year in line with our expectations, and for Entergy consolidated we exceeded our expectations for the year. We are pleased with these results and we look forward to continuing this momentum into 2019.

For the next few minutes, I'll review the results of the fourth quarter and then the full year. We're also issuing 2019 guidance and the three-year outlook under our new Entergy adjusted measure.

Starting with the quarter on slide six. Our adjusted Utility, Parent & Other earnings were $0.04 higher than fourth quarter 2017. The key driver was lower non-fuel O&M, driven by lower nuclear costs this quarter. Also contributing to the increase were favorable base rate actions. Partially offsetting these drivers were regulatory provisions for two items I highlighted for you on the last earnings call. First, the $25 million refund to Entergy Texas customers from the lower tax rate retroactive to January 2018; and second, because Entergy Arkansas and Entergy Mississippi performed above expectations such that future true-ups would result in amounts due back to customers, we have accrued those in 2018. We also had lower income tax expense and higher depreciation expense.

Before we move on, I'd like to point out that starting next quarter, we will revert back to showing our variances on an EPS basis only since the statutory tax rate period over period will be the same again. This will simplify our variance views going forward.

Moving to EWC on slide seven. Operational earnings decreased $1.22 from a year ago. This was largely the result of lower returns on decommissioning trust investments during the quarter and to a lesser extent, lower net revenue from lower nuclear volumes. Lower non-fuel O&M and lower income taxes helped partially offset the decrease.

On slide eight. Operating cash flow in the quarter was $526 million, $385 million lower than a year ago. The decrease is primarily due to the return of the unprotected excess ADIT to customers at the Utility as well as lower net revenue and higher severance and retention costs at EWC.

Now turning to the full year on slide nine. Consolidated operational earnings for 2018 were $7.31 per share, higher than the $7.20 per share in 2017. These results exceeded our guidance range primarily due to favorable weather and favorable non-fuel O&M at EWC. We also had tax items and losses on the EWC decommissioning trust that mostly offset each other. Excluding these items, results would have been firmly within our guidance range.

UP&O adjusted EPS, on slide 10, was $4.71 in 2018, $0.14 higher than 2017. The increase in 2018 was due largely to base rate actions. This increase was partly offset by higher non-fuel O&M and other operating expenses as well as higher interest expense at parent. We also had lower income tax expense as a low -- as a result of the lower federal income tax rate which was offset in net revenue.

Slide seven summarizes EWC operational earnings, which decreased $2.22 year-over-year. Losses on the decommissioning trust fund investments and less favorable income tax items in 2018 as compared to a year ago were key drivers. Lower net revenue from lower prices and lower volume also contributed. Partially offsetting these decreases were favorable depreciation and decommissioning expenses.

Full year 2018 operating cash flow, shown on slide 12, was approximately $2.4 billion in 2018, $239 million lower than last year. A main driver was the return of the unprotected excess ADIT to customers, which reduced cash flow approximately $600 million. Lower net revenue at EWC was also a driver. Favorable weather at the Utility and lower severance and retention payments at EWC partially offset the decrease.

Moving to slide 13. As we mentioned last quarter, with the progress we've made on our strategy to exit our EWC business and transition to a pure play utility, we are moving to a single, simpler measure that better results -- better reflects the nature of our business going forward. Today, we are initiating our new Entergy adjusted EPS guidance and three-year outlook. The new measure excludes all of our EWC earnings as similar to our previous UP&O adjusted measure with the following exceptions.

We now exclude large tax items as opposed to normalizing to a statutory tax rate and we no longer normalize the effects of weather. While we have not changed our views of the underlying business, our Entergy adjusted guidance is higher than our previous UP&O adjusted disclosure. The change is only attributable to our expectation for lower than statutory tax rates in those years. The lower tax rates are created by the return of protected excess ADIT and AFUDC from the significant capital investments we are making at our core business to benefit our customers. The effective tax rate is lower in 2019 versus '20 and '21 primarily due to higher AFUDC in 2019. Reconciliation of the UP&O adjusted measure to the new Entergy adjusted measure can be found in our appendix.

Starting next quarter, we'll report actual results under this Entergy adjusted measure only and our disclosures will be revised accordingly. The Entergy adjusted guidance range is $5.10 to $5.50 with the midpoint of $5.30. I will note that this is the same midpoint we showed at our Analyst Day in 2016, except for the $0.20 improvement related to the lower effective tax rate.

On slide 13, you will also see a few of the key drivers for 2019 guidance. Starting on the top line. Our projected sales volume in 2019 is expected to increase about 1% year-over-year, driven by strong industrial sales of approximately 2.5% to 3%. We continue to expect volatility from quarter to quarter as slightly positive residential sales in the first half of the year turning slightly negative for the second half of the year as advanced meters go in service. Additionally, a full year of 2018 rate activity in Arkansas, Louisiana and Texas contribute to 2019's results, along with the 2019 FRP filings in Mississippi and Louisiana. Recovery of the St. Charles power station is expected to begin mid-year when the plant goes in service.

We project non-fuel O&M to be approximately $2.7 billion, which represents a 3% increase -- about a 3% increase compared to 2018. This reflects our ongoing capital intensive construction plan, which creates higher spending on fossil and transmission operations. We expect 2019 to be the last year for incremental nuclear hiring under our nuclear strategic plan, and there are a few costs anticipated for cybersecurity, grid modernization and customer -- customer initiatives (inaudible) explore new technologies and services building off of our AMI platform.

We expect other expenses such as depreciation, interest and property taxes to increase as we continue to make productive investments to benefit our customers and our communities. And 2019 also assumes normal weather and no income tax planning items at the Utility.

Finally, as a result of settling a portion of our equity forward in late 2018 and the remainder plan for second quarter 2019, we expect dilution of approximately $0.35. Even though EWC's results are excluded from the Entergy adjusted EPS guidance, we will continue to provide our expectations for EWC's financial performance through 2022. This information can be found in the appendix of our webcast presentation.

I would also like to give an update on our cash position at EWC. While weak market performance led to lower returns on our nuclear decommissioning trust investments in fourth quarter 2018, we still expect EWC to provide positive net cash to parent from 2019 through 2022, and this includes our current view of potential decommissioning trust contributions.

Additionally, we continue our efforts to reduce risk at EWC. We have rebalanced EWC's decommissioning trust portfolio such that we eliminated its equity market exposure. Pilgrim's de-risked NDT, along with the close of the VY sale earlier this year, are notable steps in our transition to a pure play utility.

Moving to the longer-term view on slide 14. You'll see our 2020 and 2021 outlooks have been updated to reflect the new measure. And as I previously mentioned, our longer-term view of our business has not changed. We continue to target a 5% to 7% growth rate for adjusted earnings.

Finally, our cash and credit metrics as of the end of the year are shown on slide 15. Our parent debt to total debt ratio has improved to 22.6%. This was largely due to the settlement of a portion of our equity forward in December. Our operational FFO to debt is 12%, but this includes the effects of returning $600 million of unprotected excess ADIT to customers. Excluding this giveback, operational FFO to debt would be 15.3%.

As I've noted on previous calls, we remain committed to our targeted ranges at or above 15% for FFO to debt and below 25% for parent debt to total debt as well as maintaining our investment grade profile. Additionally, we continue to de-risk our balance sheet by managing our pension liability. 2018 pension obligation is lower by almost $600 million from last year, and we've lowered our return on assets expectation by 25 basis points for 2019.

As a reflection of these collective efforts, Moody's upgraded our outlook to Stable in November. 2018 was another year of strong results and we're proud of what we accomplished. We made significant progress in our exit of the EWC business and we continue to execute on our customer-centric investment plan at the Utility.

As we have stated, we are committed to creating sustainable value for our customers, employees, communities and owners. I look forward to another successful year in 2019.

And now the Entergy team is available to answer questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Julien Dumoulin-Smith from Bank of America. Your line is open.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Hey, good morning. Congrats.

Leo Denault -- Chairman of the Board and Chief Executive Officer

Good morning, Julien.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Good morning.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Hey, so just a quick clarification here. Obviously, well done on '19 and onwards guidance. But wanted to just -- structurally, as you think about beyond even '21, is this $0.10 sustainable in sort of the upside tied to the new effective tax rate you always talk about? I just want to understand how sustainable it is.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

We believe it is sustainable, Julien. With the tax reform, there is -- there is a structural change in the way that that effective tax rate going to come out due to the protected excess ADIT. As you know, that that's going to go on for many years and it will lower revenue, also lower the tax expense that you see and so, it won't be exactly dollar for dollar like the unprotected piece, but it will effectively be in there on an ongoing basis and so we expect to see a lower effective tax rate going forward.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Got it. Excellent. If I can just quickly follow up, it seems like Utility CapEx went up a little bit from the preliminary guidance you guys all gave back at Eel. Can you elaborate a little bit on what's moving there? I mean, it sounds like there might be some -- well, I'll let you elaborate.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Okay. Well, thanks for noticing that. It did go up a little bit. The primary -- there's two areas. It's primarily in the distribution and the transmission area. The distribution area is continuing to increase our grid mod investments and specifically in the area of distribution automation, as we continue to push into that. And now in transmission, it's continuation of just needed transmission upgrades as part of the MTEP process. And so those are -- those are investments that we recognize out of the MTEP process and so we've added into the capital plan.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Understood. I'll leave it there. Thank you.

Leo Denault -- Chairman of the Board and Chief Executive Officer

Thank you.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Thank you, Julien.

Operator

Our next question comes from the line of Praful Mehta from Citigroup. Your line is open.

Praful Mehta -- Citigroup -- Analyst

Thanks so much. Hi guys.

Leo Denault -- Chairman of the Board and Chief Executive Officer

Good morning, Praful.

Praful Mehta -- Citigroup -- Analyst

Morning. So on the EPS outlook going forward, just wanted to understand the change is driven only by the effective tax rate or also by the AFUDC going forward or is the AFUDC fall off only from 2019?

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Yeah. So both of those are what we are citing as affecting the effective tax rate. The main change is the effective tax rate. There isn't really much change in the AFUDC expectation, not in our guidance outlook. But as the AFUDC comes down from '19 to '20, the effect that that has on the effective tax rate is going to diminish. And so it actually pass back up afterwards, but the protected excess ADITPs (ph) starts to come off. So it's going to level out at around the $0.10 effect. It's just a little bit more this first year as we have three large combined -- combined cycle gas turbines under construction that are long-dated construction assets, there's just going to be more AFUDC on the books this year.

Praful Mehta -- Citigroup -- Analyst

Got you. That's super helpful, Drew. And then in terms of Grand Gulf, I know there was an NRC review ongoing. Is there any update on the status on that?

Leo Denault -- Chairman of the Board and Chief Executive Officer

Good morning, Praful. Yes, we have expectations of a formal exit with the NRC next week. We have to self-identify the issues that are determined to be non-cited violations or the lowest safety significance. We're very pleased with our operator response to the issue and we expect a formal inspection report in about 45 days. So there is no significant issues identified in the inspection.

Praful Mehta -- Citigroup -- Analyst

Understood. And so is this effectively -- is there any change needed in terms of how you operate nuclear in general or do you see this within the plan of what was expected?

Leo Denault -- Chairman of the Board and Chief Executive Officer

No. We believe we're on track with our plan and we don't see any need for change.

Praful Mehta -- Citigroup -- Analyst

Okay, understood. And then just the last thing on the credit side, Drew, the 15% target, obviously you're much below that, obviously, driven by the ADIT in the short term. How comfortable is the rating agency view around that metric and like how much time are they expecting you to kind of grow back into that 15% level? Are there any levers that you can pull if the metric is delayed in terms of the improvement? Just wanted to understand kind of what's the flexibility you have on that metric.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Yeah, well, the expectation that we would get above the 15% by 2020, next year, and we are -- we're still on track with that. We have ongoing conversations with the rating agencies. They're fully aware of the plan and they can see the expectation for the excess ADIT, the unprotected excess ADIT going back to customers quite rapidly. In fact, that's one of the things that they cited as positive is that we are getting that behind us so that you can see our FFO to debt measure move higher more quickly instead of drawn out. When we discussed it with them, the expectation was that if we're going to have to deal with this on an ongoing basis, this -- how our recalculating it can show you the effect of it back to 15% in the materials today. If we had to do that on an ongoing basis, it would be much harder for them to get comfortable with our outlook. So they are -- they are very comfortable with it and they see the full depth of it and we all expect to get back by 2020.

Praful Mehta -- Citigroup -- Analyst

Understood. Thanks so much, guys. Appreciate it.

Leo Denault -- Chairman of the Board and Chief Executive Officer

Thanks, Praful.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Greg Gordon from Evercore ISI. Your line is open.

Gregory Gordon -- Evercore ISI -- Analyst

Hey, good morning. How are you?

Leo Denault -- Chairman of the Board and Chief Executive Officer

Good morning, Greg.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Good morning, Greg.

Gregory Gordon -- Evercore ISI -- Analyst

Couple of questions, and I apologize if I'm making you repeat yourself. It's been pretty earnings morning. The -- with the changes in the current EBITDA outlook for EWC, where do you stand in terms of your aspirations of sort of fully exiting on a cash and neutral basis or cash positive -- I mean, have the numbers moved around a little bit in terms of where you expect that exit on an NPV basis?

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Yeah, well, I mean, there is the -- as the world turns, that things are continuing to evolve, we affirmed our expectation that we would be cash positive from net cash back to parent out of EWC '19 to '22. And the market has moved around -- the equity capital market has moved around. As you know, it dipped down in the fourth quarter. It's rallied in January. The rally in January of course was helpful for us and also allowed us to finish the de-risking of Pilgrim and that was very helpful in terms of getting us more comforts toward our expectation of keeping that cash outlook. We've also continued to find ways to manage our O&M and capital costs and those efforts are ongoing within EWC and some of those are realized in the fourth quarter of '18 in the form of -- significantly over O&M. And so those things are helping us keep our expectation for positive cash flow out of EWC net back to parent over the next few years.

Gregory Gordon -- Evercore ISI -- Analyst

Fantastic. And then I think you just answered my next question, which was, you expect to be very solidly inside your metrics through time here, so the -- any significant incremental equity issuance is probably not in the cards here that you -- you really need to be.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Yeah. No change from what we said at Analyst Day last summer. We will finish up our last year's equity issuance. We have that in escrow right now. We should draw that out sometime in the second quarter, and then we wouldn't need to look at anything until 2021 and beyond.

Gregory Gordon -- Evercore ISI -- Analyst

Fantastic. Thank you, guys.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Thank you.

Leo Denault -- Chairman of the Board and Chief Executive Officer

Thank you, Greg.

Operator

Our next question comes from the line of Michael Lapides from Goldman Sachs. Your line is open.

Michael Lapides -- Goldman Sachs -- Analyst

Hey guys, thanks for taking my questions. Actually I have a handful of them. First of all, on the generation rider in Texas, can you talk to us just about the process behind that in terms of getting that finalized potentially and then whether it needs -- whether is this enabling legislation and therefore you need regulation that come with it that kind of outlines how it will work?

Rod West -- Group President, Utility Operations

Hey, Michael, good morning, it's Rod. From a process standpoint, we have proposed legislation in Texas in both the House and the Senate. And you are correct, it is enabling legislation that if passed would give the PUCT an option to enact a generation recovery rider or something to that effect that would essentially match from a better timing perspective our investments with recovery. And so there would be the passage of the legislation, if we're successful, and then, it would enable the PUCT through the regulatory process to implement a generation rider.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. And then one question on all the generating plants that you have coming in the service over the next couple of years. Can you just remind us how those all get into utility rates, meaning, do they go into rates as a special rider win put in service? Do they go in only when the annual formula rate plan process is implemented -- like Louisiana, I think it's implemented and after the summer like in September each year and Mississippi is a different time line. Like how should we think about the timing of when those rate step-ups occur?

Rod West -- Group President, Utility Operations

One of the reasons why we were seeking to get the law changed in Texas was to allow Texas to be more like the future forward test years of Mississippi and Arkansas. And to your point, in Louisiana, our largest jurisdiction, the moment a plant comes online and into service, it automatically goes into rates. And so we were trying to bring Texas forward. So all other -- all the other jurisdictions, with the exception of Texas, through a special recovery rider or through the formula rate plan. The moment that plant goes into service, we begin recovering through the rate regime. So Texas is -- we're trying to get Texas in line with the other three -- really four, with New Orleans.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

And I'll just add, Michael. In Mississippi, we're not building a plant, we're buying a plant, the Choctaw asset, and it should act -- and it should go the same way as Rod just described, in-rates when we are able to close.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. So when I think about the other plants in Louisiana that are coming online, just as they come online, assume the step change that incorporates the O&M, the capital, the return on and recovery of capital et cetera.

Rod West -- Group President, Utility Operations

That is correct.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Last item, just on Indian Point, when is the last -- I don't want to use the word -- when does the state have to make a final decision about the Indian Point retirement in 2020, meaning, when do you reach a point of no return where if the state hasn't said, hey, do a refueling, get it ready, we need it to operate longer, let's talk contracts, when do they actually have to tell you that by?

Andrew Marsh -- Executive Vice President and Chief Financial Officer

I don't think that there is any process associated with the state. But in terms of a point of no return, I'll let Chris answer that.

Chris Bakken -- Executive Vice President-Nuclear Operations & Chief Nuclear Officer

Yeah, we're at the point where Unit 2 is refueled for its last cycle and it will operate until the spring of 2020, and Indian Point Unit 3 we will refuel shortly and it will then run through spring of 2021 and then that's it. I mean, we do not intend to refuel the units again.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. So if the state were to change its mind, it's got to happen within six to 12 months, before you'd have to do another refuel?

Chris Bakken -- Executive Vice President-Nuclear Operations & Chief Nuclear Officer

We would need considerable warning and that's something that we would have to discuss with the state. But to be very clear from our end, we have not made arrangements to purchase additional fuel and have no intentions of doing another refuel outage beyond the one this the spring.

Michael Lapides -- Goldman Sachs -- Analyst

Okay.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

And then we'd also need the incremental capital that we need to go into the plant likely as well.

Chris Bakken -- Executive Vice President-Nuclear Operations & Chief Nuclear Officer

Under negotiations (ph).

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Thank you, guys. Much appreciated.

Leo Denault -- Chairman of the Board and Chief Executive Officer

Thanks, Michael.

Chris Bakken -- Executive Vice President-Nuclear Operations & Chief Nuclear Officer

Thank you.

Operator

Our next question comes from the line of Jonathan Arnold from Deutsche Bank. Your line is open.

Jonathan Arnold -- Deutsche Bank -- Analyst

Good morning, guys.

Leo Denault -- Chairman of the Board and Chief Executive Officer

Good morning, Jonathan.

Jonathan Arnold -- Deutsche Bank -- Analyst

A quick question on just on the new guidance basis. Am I -- do we understand it correctly that -- when you say that you will not include I think significant tax items in there? What's the -- do you have a threshold in mind that we should think of that your -- you'll effectively exclude from evaluating yourselves against this guidance?

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Well, I think I can give you a framework for it. In 2018, we had about $1 of tax items over a couple of quarters and we had one in the fourth quarter related to the restructuring in Arkansas, and then one in the second quarter I think related to an IRS settlement. Those two things added up to a buck. We would have excluded both of them. And we would had an effective tax rate in 2018 of about 21% excluding those items and the -- the effect of the unprotected excess ADIT.

Jonathan Arnold -- Deutsche Bank -- Analyst

Okay. Those would seem to be clearly material.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Yeah.

Jonathan Arnold -- Deutsche Bank -- Analyst

Should we think about this as sort of where you will manage around -- having -- weather in the guidance, perhaps? I'm just trying to get a better sense of how you will evaluate your performance on this new metric.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Well, I mean, I think we are trying to build flexibility into our business to help us do that, not use taxes. So we are actively working on ways that we can manage our business in light of the fact that we're going to have weather volatility in our numbers and I think that's the primary measure. You're not going to see a $0.75 tax item show up at the same time to kind of rescue us. That's not the plan.

Jonathan Arnold -- Deutsche Bank -- Analyst

Okay. That's clear enough. Look forward to seeing it play out. And just a second issue. Leo, you used -- I think you talked about working toward a post shutdown sale of Indian Point when you talked about the decommissioning transactions. Should I take that to mean that you wouldn't anticipate a deal for Indian Point until after the shutdown or more that such a deal wouldn't close obviously till after shutdown? I just wasn't sure if you were trying to give us some indication of timing on reaching a similar agreement.

Leo Denault -- Chairman of the Board and Chief Executive Officer

So the transaction would not close until post shutdown. What I was indicating is that we have begun work on a transaction. That, as we've mentioned before, we would expect to complete sometime between now and the end of the year.

Jonathan Arnold -- Deutsche Bank -- Analyst

Okay. So that is something you think is a reasonable prospect for '19 because that was -- I was going to ask why it wasn't on the '19 items.

Leo Denault -- Chairman of the Board and Chief Executive Officer

That's correct. It is something that we would -- as we've mentioned before, in order to close the transaction post shutdown of the units, we would like to get into the regulatory process in such time that we would want to have a transaction signed and announced by the end of the year. Obviously, we've also mentioned we recognize from your (ph) standpoint, sooner would be better than later, but that's the timeline that we've got. But what I was indicating is that we've actually started that work.

Jonathan Arnold -- Deutsche Bank -- Analyst

Great. Thanks, Leo. I appreciate the clarification.

Leo Denault -- Chairman of the Board and Chief Executive Officer

Thank you, Jonathan.

Operator

Our next question comes from the line of Paul Ridzon from KeyBanc. Your line is open.

Paul Ridzon -- KeyBanc -- Analyst

Good morning. Thank you. Can you just -- for your '19 and '20 guidance, what your assumptions are for effective tax rate?

Andrew Marsh -- Executive Vice President and Chief Financial Officer

So for '19, I think it's about 22.5% and for 2021, it's a little higher. It's more like...

Paul Ridzon -- KeyBanc -- Analyst

A dime -- a dime higher basically?

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Yeah.

Paul Ridzon -- KeyBanc -- Analyst

And then just kind of got lost on your comments about you will no longer weather normalize or you will continue to?

Andrew Marsh -- Executive Vice President and Chief Financial Officer

We will no longer weather normalize. We will still report what we think the effect of weather is on our results, but we aren't going to adjust our results because of that.

Paul Ridzon -- KeyBanc -- Analyst

Okay. Thank you very much.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Shar Pourreza from Guggenheim Partners. Your line is open.

Shar Pourreza -- Guggenheim Partners -- Analyst

Hey guys, good morning.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Good morning, Shar.

Shar Pourreza -- Guggenheim Partners -- Analyst

Sorry, I hopped on a second late. The de-risking of the decommissioning trust, did that have an indirect impact to the viability of the sales that you're looking at for Indian Point trust sometime this year? And then the other question is the transaction that you're sort of working on, can you just confirm whether it's with one bidder or are you still working through a couple of bidders?

Leo Denault -- Chairman of the Board and Chief Executive Officer

I'll start with the second part of question. We're not going to comment on that.

Shar Pourreza -- Guggenheim Partners -- Analyst

Okay.

Leo Denault -- Chairman of the Board and Chief Executive Officer

(inaudible) answer, but we don't comment. Merely just wanted to point out that we've begun that activity.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

And -- Shar, this is Drew. On the first part of your question, so we -- the de-risking activities were related to Pilgrim and not related to Indian Point. As we have a transaction set there and we have expectations there that we want to make sure we meet, and so that's why the de-risking activity took place there. Any point is a different transaction. It will have a -- it will have its own set of expectations around the trust and we'll -- we'll act accordingly on de-risking or otherwise when that's appropriate.

Shar Pourreza -- Guggenheim Partners -- Analyst

Got it, got it. But we could sort of use -- could use the proxies for the existing assets that you have right now as far as we think about return thresholds for this current transaction given some of the other assets are still operating but the decommissioning funds were pre-sold.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

I don't -- I'm not sure I'm following your question exactly. The de-risked elements around Pilgrim, they're going to return some sort of fixed income element in around 2% or so. The Indian Point, from a returns perspective, is going to -- is unchanged at this point.

Shar Pourreza -- Guggenheim Partners -- Analyst

Okay.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

And so once we get to a spot where we have clarity around what our expectations are for that trust, then we will act accordingly there.

Shar Pourreza -- Guggenheim Partners -- Analyst

Okay. That's -- that was what I was trying to get at. Thank you so much.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Okay, thank you.

Operator

Our last question comes from the line of Angie Storozynski from Macquarie. Your line is open.

Angie Storozynski -- Macquarie -- Analyst

Thank you. I have two questions. I know a lot of questions about the decommissioning trusts for EWC assets. But when I think about Indian Point, in the past you'd mentioned that given that it's a two reactor site, it could have some economies of scales -- of scale related to decommissioning of these assets. So when you talk about your expectations for EWC to actually return cash, do you -- do you already account for those efficiencies or is this based on the assumption of that minimum balances of those decommissioning trusts as stated by the NRC?

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Yes. Angie, this is Drew. So when we're thinking about that return of cash back to the parent, we're thinking about basically operating cash flows and working capital in the current business and the operating business and any associated retention payments and capital requirements. We still have one refueling left et cetera. All of that is baked into our expectation for return of cash back to the parent. The decommissioning activities are strictly matched up against the decommissioning trusts and so that -- we do anticipate economies of scale. We think that will be helpful. That helps us mitigate any expectation of actually having put money into those trusts, but other than that, it's mostly the operating expectations that are dictating our expectation that we would be positive cash flow out of that business net to parent through '22.

Angie Storozynski -- Macquarie -- Analyst

Okay. And separately on -- on your new guidance and the effective tax rate assumption, so is it -- does it matter whether this tax benefit is going to be realized, i.e., if it's at the parent level or at the regulated utilities level and if it's the latter, is there any risk that you know as you go through your rate cases some of this benefit would actually be transferred to your customers, i.e., it wouldn't be retained in earnings because you would have to basically embed the lower effective tax rate in your customer rates?

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Yes. I think actually a lot of it hopefully will. That's one of the strategies that we employ to help keep our customer rates low, and one of the drivers of course is the protected excess ADIT, which is basically money that's going back to customers we collected over time for the higher tax rate in previous years. So that's going to be kind of dribbling out over time. That's really the source or one of the two sources of the -- the lower effective tax rate and that is going directly back to customers over time. And then the AFUDC piece, that is -- AFUDC is recognized by books, it's not recognized by tax. So that's just a structural element that's in there associated with that. That will get reflected in rate base ultimately. But those are -- those are the two main drivers of the positive change in the effective tax rate, and of course, when we are defining tax items, we are not including those in our numbers going forward. But often, we are working with retail regulators to share those benefits with customers and as we do that those might flow back to customers as well.

Angie Storozynski -- Macquarie -- Analyst

Great. Thank you.

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Thank you, Angie.

Operator

We have no further question at this time. I will now turn the call back to Mr. David Borde.

David Borde -- Vice President of Investor Relations

Thank you, Shirley, and thanks to everyone for participating this morning. Our Annual Report on Form 10-K is due to the SEC on March 1st and provides more details and disclosures about our financial statements. Events that occur prior to the date of our 10-K filing that provide additional evidence of conditions that existed at the date of the balance sheet would be reflected in our financial statements in accordance with Generally Accepted Accounting Principles. Also, as a reminder, we maintain a web page as part of Entergy's Investor Relations website called Regulatory and Other Information, which provides key updates of regulatory proceedings and important milestones on our strategic execution. While some of this information may be considered material information, you should not rely exclusively on this page for all relevant Company information. And this concludes our call. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. Have a wonderful day. You may disconnect.

Duration: 52 minutes

Call participants:

David Borde -- Vice President of Investor Relations

Leo Denault -- Chairman of the Board and Chief Executive Officer

Andrew Marsh -- Executive Vice President and Chief Financial Officer

Julien Dumoulin-Smith -- Bank of America -- Analyst

Praful Mehta -- Citigroup -- Analyst

Gregory Gordon -- Evercore ISI -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Rod West -- Group President, Utility Operations

Chris Bakken -- Executive Vice President-Nuclear Operations & Chief Nuclear Officer

Jonathan Arnold -- Deutsche Bank -- Analyst

Paul Ridzon -- KeyBanc -- Analyst

Shar Pourreza -- Guggenheim Partners -- Analyst

Angie Storozynski -- Macquarie -- Analyst

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