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Entergy Corp (NYSE:ETR)
Q2 2020 Earnings Call
Jul 29, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Entergy Corporation Second Quarter 2020 Earnings Release and Teleconference. [Operator Instructions] I would now like to hand the conference over to your speaker today, David Borde, Vice President, Investor Relations.

Thank you. Please go ahead, sir.

David Borde -- Vice President, Investor Relations

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

In an effort to accommodate everyone who has questions, we request that each participant ask no more than one question and one follow-up. In today's call, management will make certain forward-looking statements. Actual results could differ materially from these forward-looking statements due to a number of factors which are set forth in our earnings release, our slide presentation and our SEC filings. Entergy does not assume any obligation to update these forward-looking statements. Management will also discuss non-GAAP financial information. Reconciliations to the applicable GAAP measures are included in today's press release and slide presentation, both of which can be found on the Investor Relations section of our website. And now I will turn the call over to Leo.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Thank you, David. And good morning, everyone. Thank you for joining us. To-date we are reporting strong second quarter results for a $1.37 adjusted earnings per share. Sales in the quarter were better than we expected. We are on track to achieve our $100 million O&M cost savings target for the year and our capital plan is unchanged. With these results, we are affirming our full-year guidance, our longer-term outlooks and our dividend growth aspirations.

As you all know, the COVID-19 pandemic is placed a burden on our customers, employees and communities. We believe it is part of our mission in powering life to do all that we can to support our stakeholders, as we all work to recover from its effects. Despite these extraordinary times, 2020 is on pace to be another year of significant accomplishments for Entergy. This quarter, we've made progress on multiple fronts, all of which will benefit our stakeholders. We completed Phase 2 of the Western Region economic transmission project. The New Orleans Power Station came online. The Public Utility Commission of Texas finalized its rule making for generation rider. The Mississippi Public Service Commission approved Entergy Mississippi's Formula Rate Plan filing. Entergy Arkansas and Entergy Louisiana, each filed their annual Formula Rate Plans and we requested extensions of these mechanisms. And Entergy Louisiana issued a request for proposal for up to 300 megawatts of new renewable resources. And more importantly, we continue to successfully manage the effects of our investment on customer rates.

According to an S&P Global Market Intelligence Study published earlier this month, in 2019, Entergy provided power to retail customers at the second-lowest average price of the major investor-owned utilities in the United States, something we are very proud of. The COVID-19 pandemic continues to affect all of us across the country. As we discussed last quarter, we were well prepared from the outset and we continue to effectively manage our response. We are taking precautions for our employees and our customers. Those who can, are working from home and we have procedures in place to keep our employees in the plants and in the field, safe.

We are also creating innovative solutions to help our customers and our communities. For example, our social responsibility and automation employees worked together to develop a bot, that proactively informs customers in need about the Low Income Home Energy Assistance Program or LIHEAP. This project also won second place in a global context for innovative ways to reduce COVID-19's impact on the economy and communities.

Students and faculty at Southern University are using 3D printers in their Entergy sponsored lab to make parts for reusable N95 masks for healthcare professionals. With our community partners, Entergy has helped to prepare more than 2 million meals, provide crisis grants for more than 5,000 households and deliver personal protection equipment to first responders, individuals and families in need.

Through the first half of the year, Entergy has donated almost $9 million in charitable contributions to support our communities, including almost $3 million in COVID relief efforts and Entergy's The Power to Care program, which helps customers who need financial assistance to pay their bills. In parallel to our COVID-19 relief efforts, we continue to execute on our major projects across our service area to modernize our utility infrastructure and enhance its efficiency and reliability for the benefit of our customers.

We placed New Orleans Power Station in service, in May, in time for the summer peak period and hurricane season. Since entering service, this highly flexible and efficient peaking unit is being dispatched frequently. We completed Phase 2 of the Western Region economic transmission project. This $115 million investment supports economic growth in Southeast Texas and enhances reliability for existing and future customers. The Public Utility Commission of Texas, also approved our certificate for convenience and necessity for the Timberland Transmission Line, a $57 million project expected to be completed in 2022.

We reached an important energy milestone with the 100th customer signing up for the renewable Orleans Residential Rooftop Solar Program. The program offers a cost effective way for low-income customers to participate in the benefits of renewable energy, without having to make an upfront capital investment. Entergy New Orleans installs, owns and maintains the rooftop solar systems and customers get a bill credit for their participation. Renewable Orleans is a good example of the innovative programs we are implementing to deliver renewable energy solutions to our customers.

We will continue to engage with our regulators and stakeholders to expand the use of renewables, under a framework that ensures we build the most economic system balancing reliability, cost and sustainability. In addition to providing meaningful customer benefits, our three year capital plan has significant certainty. We've talked to you before about the 90-90 framework, by which you should view the certainty of our capital plan. That our capital plan is 90% ready for execution from a regulatory approval standpoint and that more than 90% will be recovered through timely mechanisms.

Today, we're adding a third 90 to further emphasize the strength of the plan, that 90% of the capital plan is based on the need for system modernization and not dependent on customer growth. These three statistics mean that our customer centric capital plan is necessary. The majority will not require special regulatory review and we expect timely recovery.

We benefit from constructive and progressive regulatory mechanisms that provide clarity to our plan and give us confidence in meeting our financial commitments. Recently the Public Utility Commission of Texas, finalized the generation rider, which will provide for full and timely recovery of capital costs associated with a new generation facility. We are grateful for the commission's leadership in developing this new rule. More timely recovery will help us create value for our stakeholders in Texas and ensure that the communities we serve remain economically competitive. We plan to make a filing later this year using this mechanism to request recovery of Montgomery County Power Station, when it comes online in 2021.

Entergy Mississippi received approval of its Formula Rate Plan filing. Rates were implemented in April. Entergy Arkansas and Entergy Louisiana each submitted their annual FRP filings. Summaries of the requests are included in the appendix of our webcast presentation. Both of these operating companies are in the last year of their FRP cycles and both are requesting extensions. Entergy Louisiana's request includes a midpoint reset and a new distribution rider similar to the transmission rider that is currently in effect.

In New Orleans, we continue to work with the City Council on the appropriate timing to begin the filing cycle for the recently approved three year Formula Rate Plan. At SERI, we filed our brief on exceptions to the ALJ's initial decision issued in April. As you know, we disagree with most of the initial decision because it incorrectly seeks to resolve important policy issues of first impression that FERC ultimately must decide. The actions we've taken seek to create significant benefits for our customers, who consistently experienced some of the lowest rates in the country, year after year. Our customers have not been harmed by our actions and in fact still to benefit greatly from them. Our tax planning practices have created more than $900 million in direct customer benefits, $550 million of which has already been credited to customer bills.

The April initial decision, if it is affirmed by the FERC, will discourage utilities like ourselves from pursuing such prudent innovative strategies to lower customer bills. The sale leaseback arrangement also produced significant savings for our customers and the ALJ's recommendations would similarly discourage utilities from entering into such transactions.

We feel strongly that our positions on the law and the facts are correct. To be very clear, we believe that our actions have been prudent and for the benefit of customers and that there should be no refunds or disallowances, except for the small depreciation correction that we agreed to. While we will vigorously defend our position at the FERC, the timeframe for pursuing SERI's uncertain tax position any further is lengthy and the outcome is uncertain. This leaves us no choice but to mitigate risk for our owners. In the next few weeks, we will give up SERI's uncertain tax position with the IRS. This will effectively cap the principle of any potential historical refunds, eliminate the basis for any reduction in SERI's rate base going forward and eliminate the basis for the $147 million excess ADIT customer credit raised in the July, ALJ initial decision. Drew will provide additional thoughts on this matter, and I encourage you to review our brief on exceptions.

At Entergy, we play a vital role in every region where we operate and our core values are reflected in our efforts on behalf of our stakeholders. Entergy is consistently recognized for its Corporate Citizenship, Climate Leadership and commitment as an employer of choice, which is a tremendous honor. For a 5th consecutive year, Entergy was named a 2020 honorary of The Civic 50 by Points of Light, the world's largest organization dedicated to volunteer service. This award recognizes Entergy as one of the 50 most community-minded companies in the United States. Additionally 3BL Media has named Entergy to its annual 100 Best Corporate Citizens ranking, which recognizes outstanding environmental, social and governance transparency and performance among the 1,000 largest U.S. public companies. This is the 8th year Entergy has been included in this prestigious ranking. We were also named the winner of a Bronze Stevie Award for our 2019 Climate Report, where we outlined steps that we are taking to deliver cleaner energy solutions and promote a lower carbon future for all of our stakeholders.

Finally, like many of you have been saddened and upset by recent events that have laid bare yet again the deep social inequalities and injustices so many in our country continue to face. As our human rights statement outlines, Entergy respects the human rights of all individuals. With the workforce of close to 14,000 we leave no room and Entergy for racism, discrimination or intolerance but rather seek to achieve our vision and mission through diversity and inclusion of all people and their unique ideas, backgrounds and perspectives. We will continue to move forward in our mission and you, as our owners, including our employees, who are a top 10 owner of the company, have my and the entire Entergy leadership team's commitment, that we won't retreat from our obligations personally or professionally. We know that our actions toward creating real and meaningful change, speak much louder than words.

As I said at the outset, we delivered yet another strong quarter. Even through co -- even though COVID-19 has had an impact, 2020 has already been a year of significant accomplishments, that keep us on track to meet our strategic, operational and financial objectives. We are committed to those objectives in our resolve to be the premier utility. The foundation of our business remain strong and sustainable. We have among the lowest retail rates in the country. Our capital plan remains on track and will modernize our system, benefit our customers and our local economies. We have constructive and progressive regulatory mechanisms. We are an industry leader in critical measures of sustainability. We have one of the cleanest large-scale power generation fleets and while we have seen some slowdown in industrial activity, our industrial base is among the most economically advantaged in the world and we expect that they will lead the region's recovery in their respective industries.

We create innovative solutions to help our customers and we are prepared to overcome headwinds through a disciplined cost management program, as evidenced in our response to both last year's unfavorable weather and this year's COVID-19 impacts. It should not surprise you that we are affirming our longer-term outlooks, given our commitment to create permanent cost savings through continuous improvement efforts. These efforts strengthened and when possible will improve our delivery of steady, predictable earnings growth, as we demonstrated on this call, just last year. This is what makes Entergy a compelling long-term investment. This is the foundation on which we will grow, innovate and expand our investment profile to continue to deliver on our commitments tomorrow.

Before I turn the call over to Drew, I want to confirm that our Virtual Analyst Day will be held on September 24th. These are exciting times for Entergy and we look forward to continuing the conversation with you then about what we're doing to build the premier utility. Drew will now review our second quarter results and our outlooks.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Thank you, Leo. Good morning, everyone. As Leo noted, our second quarter results were strong. Sales were better than we expected on our last call. We are well on track to achieve our cost savings for the year and our capital plan remains unchanged. We are affirming our guidance and longer-term outlooks as we stay focused on becoming the premier utility. Entergy adjusted earnings for the quarter were a $1.37 and drivers were straightforward.

Starting with Utility on Slide 6, we saw positive effects of regulatory actions associated with our customer-centric investments and Arkansas, Louisiana, Mississippi and Texas, including the Lake Charles Power Station, which came online a few months early. We experienced lower sales volume due to impacts from COVID-19 and unfavorable weather. Lower O&M reflected our cost reduction initiatives, as well as the timing and scope of non-nuclear generation outages and lower nuclear generation expenses. Depreciation and interest were higher as a result of our continued growth and earnings on a per share basis, also reflected a higher share count.

At EWC, on Slide 7, as reported earnings were $0.55 higher than a year ago. The key driver was strong market performance for EWC's nuclear decommissioning trust funds. The quarter's results also reflected lower revenue and lower O&M primarily due to the shutdown of Pilgrim and Indian Point 2.

Slide 8, shows operating cash flow increased approximately $240 million. The main drivers were higher collections for fuel and purchase power costs and a $45 million reduction in the unprotected excess ADIT returned to customers. The second quarter also benefited from lower nuclear refueling outage spending and lower severance and retention payments at EWC. Lower collections from utility customers partially offset the increase.

Now turning to Slide 9, we are affirming our 2020 adjusted EPS guidance range of $5.45 to $5.75 and our 2021 and 2022 outlooks remain unchanged. As I mentioned in my introduction, our sales came in higher than we discussed last quarter, when we initially estimated the effects of COVID-19 and we're well on track to achieve our cost savings for the year. Sales were better than expected in all classes and our overall 2020 expectation has improved slightly. For our O&M to-date, we have achieved nearly 40% of our $100 million spending reduction and we remain on track to achieve the remainder by year-end. And while our year-to-date variance is very positive, portion of that is due to planned projects that were shifted to the second half of the year in response to COVID-19. As a result, we expect the third and fourth quarters to reflect spendings for these delayed projects, as well as the balance of our identified cost savings initiatives.

Our credit metrics and liquidity position are outlined on Slide 10. Our parent debt to total debt was 22% and our FFO to debt was 14.6%. The FFO metric includes the effects of returning $189 million of unprotected excess ADIT to customers over the last 12 months. Excluding this giveback and certain items related to our exit of EWC, FFO to debt would have been 16%. As we noted last quarter, we remain committed to achieving FFO to debt at or above 15% by fourth quarter 2021. Our liquidity position remains strong and you can see that as of June 30th, our net liquidity including storm reserves were $3.5 billion.

Following up on Leo's comments regarding SERI, we estimate that if the FERC were to agree with the conclusions in the ALJ's initial decision without modification, the ongoing adjusted EPS impact could be $0.15 to $0.20. This includes approximately $0.06 for the sale leaseback issue and the remainder is from financing refunds to customers. This also reflects that we will give up SERI's uncertain tax position with the IRS to mitigate risk to our owners and it does not reflect any actions we would take elsewhere in the company to mitigate the impact. This estimate should not be interpreted as acknowledgment on our part of the merits of the initial decision or our expectation of the potential outcome on this matter. As Leo mentioned, we disagree with the initial decision, we've clearly laid out in our filings in this case and we don't believe there should be any material impact to EPS.

Before closing, our Analyst Day is scheduled for September 24th. We'll share with you our longer-term growth strategy, including our customer-centric investments and continuous improvement efforts. And we will provide five year views of our EPS outlooks and credit expectations, as well as details on the key drivers that support our path to achieve our objectives. We're excited to share our plans with you. We had a strong quarter -- a strong second quarter. We achieved a number of significant accomplishments and we remain on track to meet our strategic, operational and financial objectives. We are committed to these objectives as well as our goal to be the premier utility and we look forward to continuing this conversation on Analyst Day.

And now the Entergy team is available to answer questions.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from the line of James Thalacker from BMO Capital Markets. Your line is now open.

James Thalacker -- BMO Capital Markets -- Analyst

Good morning and thank you for taking my call. Can you guys hear me?

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Yeah, we can. Good morning, James.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yeah. Good morning.

James Thalacker -- BMO Capital Markets -- Analyst

Hey, how are you?

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Great.

James Thalacker -- BMO Capital Markets -- Analyst

Just one or two real quick questions. I think your previous guidance had assumed a 2% decline for 2020 -- I'm sorry, 2.5% decline for the full year and now you're at 2%. Can you kind of give us a breakdown of how you are thinking about that for the balance of the year? And do you think there is some, maybe some conservatism baked in there on the industrial side, as you're kind of looking at the recovery through the end of 2020?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yeah, James, this is Drew. Yes. So, we haven't changed our outlook for sales actually for the third and the fourth quarter from what we described in May. Even though we did see a little bit better outcome in the second quarter than what we were anticipating, it is possible that we could do better, but given the spike in cases around the country, in our service territory, we thought we should just keep it about where it is for right now. We do continue to see the phased reopening, even though it's paused in certain municipalities right now. So there is opportunity perhaps over the balance of the year, but for the time, we've elected to keep our outlook for sales, where we had it for the second half.

James Thalacker -- BMO Capital Markets -- Analyst

Perfect. So, basically the improved sort of outlook really comes from just the second quarter and the weather, you've kind of and the sales you've seen sort of quarter-to-date...

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

That's correct.

James Thalacker -- BMO Capital Markets -- Analyst

Okay. And then the other question I guess just comes back to sort of the credit, is that -- are you still comfortable with the equity guidance that you had given before where you're looking I think for the high end of the 5% to 10% of the planned capex? Is that still sort of how you're looking at things and do you still feel like you're on target for the end of the year to get to 15% FFO to debt, which I think is where you guys were sort of targeting last time we spoke?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

That's right. We are still targeting that and we still expect to make that by fourth quarter next year and our equity outlook is in that same range that we've talked about previously. We have continued to think about timing and we think it's probably in the later half of next year when the need will actually arise and we continue to think about the method in which we would deliver that end. In the past, we've talked about block trade. That's what we did a few years ago. So, that's still on the table, but we've also added other options to the table, including an ATM possibility and even perhaps preferred equity. Right now we don't have authorization for preferred equity within our chart. So we would need a a proxy vote to ensure that, that would be shareholder friendly. But we are considering that as well.

James Thalacker -- BMO Capital Markets -- Analyst

And just a follow-up on the preferred equity. I'm assuming that would be like a mandatory convert?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yes.

James Thalacker -- BMO Capital Markets -- Analyst

Is that from a rating agency standpoint? I know that you'll get anywhere from 25% to 50% credit for something like that. Does that kind of limit, I guess how much of the funding, you can do through the convert just considering it's a little bit farther out and you don't get as much equity credit as you would versus say a block sale or through an ATM?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yeah. So that's why the preferred equity gets you actually I think up to the 100%. There are options around preferred debt, other versions of convertibles that will give you various credit, depending on the rating agency. And we have authorization for all of those, where we don't have authorization for is the preferred equity that would allow you to get the 100% credit.

James Thalacker -- BMO Capital Markets -- Analyst

Got it, OK. I understand. Great, thank you so much for all the time.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Thank you.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Thanks, James.

Operator

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

Shar Pourreza -- Guggenheim Partners -- Analyst

Hey, good morning guys.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Good morning.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Good morning, Shar.

Shar Pourreza -- Guggenheim Partners -- Analyst

So, good to see that the $100 million cost savings program is on target. Is there any plans to hold recurring savings into '21? Any sort of rough numbers to think about, I mean what could be recurring with the 2020 savings, anything perpetual? And I have a follow-up.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yeah. Shar, this is Drew. So, obviously at this point in the year, we are also thinking about 2021 and what that might mean and we have started to think about opportunities for savings in 2021. So that is actually well under way. Currently, we are monitoring everything that's going on in the world and making sure that there isn't any other risks that may be out there that we will need to apply those to. But that work that you're referring to is well under way. But we're not prepared to talk about specific numbers at this point.

Shar Pourreza -- Guggenheim Partners -- Analyst

Got it. And obviously you've highlighted, it's been relatively a strong start to the year. Can you just maybe point us to kind of where you are tracking within your 2020 earnings band, seems to be just with rough modeling, you're getting a little bit closer to the top end, especially if the 3Q weather transpires? Just maybe a little bit of from a trend perspective with where you over in the band?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yeah. So, we are still tracking toward the middle of the band, there are opportunities potentially out there for us, but we continue to track toward the middle at this point.

Shar Pourreza -- Guggenheim Partners -- Analyst

Got it, OK. Thanks, guys, congrats.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Thank you.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Thanks. Shar.

Operator

Thank you. Our next question comes from the line of Jonathan Arnold from Vertical Research. Your line is now open.

Jonathan Arnold -- Vertical Research Partners -- Analyst

Hi, good morning guys.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Good morning.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Good morning, Jonathan.

Jonathan Arnold -- Vertical Research Partners -- Analyst

I would just -- could I just come back to sales and just ask you where they have most sort of deviated to the positive or who are otherwise from in the second quarter, because the way you showed that slide on the Q1 deck, I believe that was sort of versus guidance rather than a year-over-year comp. So just curious whether it is sort of down? I think it was down 1% in industrial, for example in Q2 was that where the favorability was or was it more on the residential side?

Rod West -- GROUP PRESIDENT, UTILITY OPERATIONS

Hi, this is Rod. Good morning. I think the story line remains consistent with what we expected back in May, where the growth was driven by residential because so much of the shelter in place we're showing up, excuse me, we're showing up in our residential sector and you had some volatility in the commercial sector, because you had so many different levels of uncertainty with schools and churches, in restaurants and the like. And I think the clarity we had in the industrial sector sort of played out, although it was a little bit better than expected. So the fundamentals have not changed dramatically when you think about sort of just cross sector contribution to growth. So residentials really are showing up for us in offsetting a large part a lot of the volatility we're seeing elsewhere.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

And I'll just add that it's pretty much was across all three clients...

Rod West -- GROUP PRESIDENT, UTILITY OPERATIONS

Clients

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Where we were a little bit ahead of expectations. It wasn't one or the other that completely dominated.

Jonathan Arnold -- Vertical Research Partners -- Analyst

Perfect, thank you. And just my follow-up on, so on the balance sheet, it looks like your un-collectibles went up from seven odd million to $43 million or so. Can you talk a little bit about what you're seeing there? Whether it's -- has it kind of spiked? Is it plateauing now or is it sort of on a accelerating trend and then just how to think about some of those variables going forward?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yeah, Jonathan, that's a good question. So we are seeing more un-collectibles right now. We actually, as you noted, we booked about $30 million of bad debt expense this quarter, that was offset by regulatory assets, given the regulatory orders that we have in our retail jurisdictions. So there's not really any bottom line impact associated with that because we would expect to be able to recover those costs.

Historically, we've experienced about -- bad debt expenses about a third of our typical arrears. So, typically we have arrears in any given point of about $75 million and we experience about $25 million of bad debt expense. We are about a $100 million higher on our arrears right now and that's why we booked the $30 million sort of consistent with that ratio. We expect that there are some people that are able to pay, that are just taking advantage of the current situation. But -- and we do expect that to grow a little bit more. We haven't turned on our dunning programs and we would expect that, that balance would continue to grow through the summer.

Although we expect it to continue to be manageable and it is -- that growth is reflected in our liquidity expectations, which continue to be strong. So that is something that we're closely monitoring and it's important for us to continue to work with our customers, in order to help them through this.

Jonathan Arnold -- Vertical Research Partners -- Analyst

Perfect, thanks for that. And good quarter, thank you.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Thanks, Jonathan.

Operator

Thank you. Our next question comes from the line of Julien Dumoulin-Smith from Bank of America. Your line is now open.

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

Hey, good morning team. Thanks for the time.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Good morning.

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

If I can. I know -- I first off, want to say that our [Technical Issues]

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Julien, we're having trouble hearing you.

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

I apologize. Hey, guys. So, apologies. On the bear your argument with that theory and just understanding the financial implications though you specifically said that there were some mitigating factors that didn't quantify or set by what they were. Can you help walk through what they might be, be it from a reduction in financing needs or otherwise? Just help us understand what reserves you might have already taken into or other mitigating circumstances?

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Julien, I'll start with the "mitigating circumstances" and then i'll let Drew kind of finish up it. Your first and foremost, my expectation would be that we would --that whatever impact ultimately happen that we would overcome that and still meet our expectations. So, that's our going-in position from just an organizationally that whatever the impact is that we would continue to meet the objectives that we've laid out for you.

There are also some -- within the SERI case, I think there are some things that we talked about in the past that could be used to mitigate such as the interest cost that we've been paying the IRS and some other things like that. So -- and obviously there'll be some financing or whatever that would fit into, whatever financing plan Drew has. But I guess the overall -- the overarching mitigation is that whatever it is, that would be our expectation to overcome it.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

All right. And I would say that the opportunity within our businesses embedded within our continuous improvement program and so, as you know, we've been working hard to continue to develop that. We feel like it's continued to grow and mature and that is where that opportunity would come from. So, not all of it clearly has been identified at this point. But as Leo said clearly just articulated, there is an expectation about how we would be expected to operate within the company. And just like we have in the past, I have 100% confidence that the company is going to figure out how to make that work.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

And of course Julien. Our perspective is that there won't be an impact because of our position in the case. So, I just want to make that clarity too.

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

Yeah, absolutely. I appreciate the merits of the argument there as well. It [Indecipherable] but if I can ask you to down on this, as you obviously have a $100 million in cost that you are well on track at least for this year. When you say you'll find ways to offset that? Does that include leveraging or operating it with continuation of this $100 million in cost cuts and and maybe even more broadly, actually, I know the last quarter and at the offset of COVID we've been talking about the sustainability of these price reductions. How do you think about that now, given the plans for the back half of the year and how that might impact '21 and also considering potential timing in '21, a resolution to the sales basis is when you say...

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

So, I'll unpack a little bit of that Julien, and I'll ask my colleagues to tell me if I forget some of the points that you can get that in there. I appreciate the question because it's really there is a couple of things at play here. The $100 million is by and large, our Flex program with what we're doing within the year to manage the impacts of COVID and weather. Well obviously we've had negative weather so far this year, plus the impacts of COVID. Last year, we had negative weather and those intra-year dollars are primarily what we talked about at the beginning of the year when we started to flex associated with weather and then continued to ramp up the flex because of the impact on sales because of COVID.

In parallel to that, we do have a continuous improvement program, which is more akin to what we did last year on this call, where we found permanent cost reductions that as you recall, allowed us to invest more capital into the system, to improve the reliability of the system and the impact on the experience in our customer base, plus, grow the business, allowed us to actually add money to our charitable foundation and to our employee benefits. Through those -- the headroom that was provided through those continuous improvement. So, when we start to talk about next year there'll be a combination of the two as well.

I will say that that I'm sure this is not unique to us that we are finding, there are some areas of impact on our cost, associated with our reaction to COVID that will likely fall into that bucket of continuous improvement and could be permanent. We have -- we're in the process of trying to merry what what goes from an annual thing to a permanent thing, but I'm sure even within all of your firms you've found things that you used to do one way that you do in a different way today, that's much more efficient that you'll probably continue to do so. So I hope that helps. There is really two parallel things that they will work -- that we work on. One is just a normal flex within the annual budget, that every department has. The other is the permanent continuous improvement that everybody is also focused on and you saw that second quarter last year when we changed our outlooks, because of the continuous improvement. This year we're holding onto our outlooks because of flex. Does that make sense?

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

Right. And that's the offset, potentially the impact next year too?

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Yeah, yeah. So, yeah, but I would say, impact next year depending on what it is, whether it is weather, whatever it would be a flex sort of thing. We were just talking about SERI, that'll be more of a continuous improvement sort of thing.

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

Got it. All right, excellent. Thanks for the clarity.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Thank you.

Operator

Thank you. Our next question comes from the line of Jeremy Tonet from JPMorgan. Your line is now open.

Jeremy Tonet -- J.P. Morgan -- Analyst

Good morning.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Good morning.

Jeremy Tonet -- J.P. Morgan -- Analyst

I was just wondering if you could speak a little bit more on the 90% of capex not dependent on customer growth and is this kind of like a shift in planning and strategy or is it kind of just more reflective of current system investment levels that are needed?

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

That's a great question, Jeremy. It's consistent with the capital plan that we've had for the last 10 years. And I felt like it was necessary to add a metric that keeps that top of mind with everybody because I believe that's important about our plan. If you think about what we're doing in the generation space and what we've been doing for over a decade. We are replacing 50 year old generation with brand new generation, the heat rate is lower, it creates a significant production cost improvement at pace for the plant, emissions are 40% lower than the -- you know they use less water. All those things that are good about new plants. And so what we've been doing over the years is adding new generation and then subsequently retiring old generation.

So it's meeting the needs of the system with new new stuff rather than old stuff. Same things goes with the investments that we've had in the distribution system. So if you think about AMI we're replacing old meters with new meters, it's not new customers. Although there are new customers that get a new meter. The majority of that program is driven by the technological improvement. Our distribution automation strategy, our asset management strategy, all of those are really based on improving the level of service that our customers achieve by deploying capital that lowers costs or provides a service that was not available in the past.

So 90% of it has been and continues to be based on the fact that we need to modernize the system, where the fact that we have customer growth has assisted us is that it has provided a lower rate path for everybody, as we expand the sales that we have on those assets that we're using to modernize the system, which contributes to the fact that we have historically had either the lowest or second lowest rates in the United States.

So I just felt like it was necessary, given the the impact that COVID has had on the economy and sales, that we point out that the capital plan is still there to modernize the system and COVID hasn't changed the need for us to modernize the system. If anything, it's actually enhanced the need for us to modernize the system, particularly at the distribution level. And so while 90% of what's in there today is based on technological improvement, if there is a lot in the wings for more technological improvement that we can do to the extent we find the headroom to do it. I hope that helps answer your question.

Jeremy Tonet -- J.P. Morgan -- Analyst

That was very helpful, thank you for that. One more if I could, just wondering if you could talk a bit on how you're positioned MISO impacts Entergy's renewable planning and do you see opportunities here changing over the next 5 years from MISO level planning and changes?

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Well, we do our resource planning obviously in conjunction with the resource adequacy that we need for MISO but our resource planning is done its state level. So the resource plans that we have in the type generation we need incorporates our participation in MISO. But it's not -- MISO is not driving what resources we pick.

Jeremy Tonet -- J.P. Morgan -- Analyst

Got it. Thanks for that.

Operator

Thank you. Our next question comes from the line of Steve Fleishman from Wolfe Research. Your line is now open.

Steven I. Fleishman -- Wolfe Research -- Analyst

Yeah. Hey, good morning, Leo and Drew. Thank you.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Good morning, Steve.

Steven I. Fleishman -- Wolfe Research -- Analyst

One very brief clarification on the SERI because of this change you're going to make to the uncertain tax position. Does that cause the earnings impact to occur kind of temporarily until you get the final decision?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

No, there shouldn't be any real earnings impact associated with that. Other than the fact that we did have an expectation that we would be successful, which would have reduced future rate base and subsequent earnings, but I don't -- that's not what we're referring to when we're talking about in maintaining our expectations. It would have to come through other means.

Steven I. Fleishman -- Wolfe Research -- Analyst

Okay. Just the the FRPs, the extensions. I think Louisiana you're filed and then are you doing Arkansas?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yes, both jurisdiction...

Steven I. Fleishman -- Wolfe Research -- Analyst

I think -- just how much do we need to kind of worry about these as more like normal rate cases as opposed to these like annual reviews like, can you just explain the issues in the multi-year extensions versus the annual?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

I think the primary question on the renewals is, has the FRP accomplished the objectives that we set out five years ago in Arkansas and three years ago in Louisiana. And when you think about how we've shaped the capital plan and we've disclosed to our regulators what our plans were, then the question becomes, can we achieve the objectives and you've heard it before, Steve, around reliability, sustainability, affordable, low cost competitive rates. Can we achieve that given the capital plan for customers? And if the answer to that question is yes. And as we laid out in our and our a renewal filings. The answer is yes, in our view. Then they'll -- We expect that they as well as the other stakeholders will agree that it makes sense to keep it going.

It's not a -- it hasn't been viewed as we've discussed with the stakeholders as a full blown rate case where we are reviewing what we spend a year going through the traditional backwards looking base rate case. So that's not the expectation. But of course the regulator has the ability to weigh in on whatever component that they wish. But we believe the interests are aligned. We think the way that the FRPs have worked historically have been consistent with what we represented 5 years ago in Arkansas. And as you know, this is a series of three year renewals in Louisiana. And again, given the shape of the capital plan we're going beyond just a renewal of FRP in Louisiana.

For instance, recognizing as Leo laid out. We have -- we're shaping the capital plan with more distribution investment. For instance, as part of that asset renewal, that's going to show up in what we are asking the jurisdiction and Louisiana to consider with a distribution rider. And so it's those type of policy considerations that we're going through with our stakeholders and not as much a rate case review. That's helpful.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Yeah, well Steve. You know, Rod mentioned it. We -- the just -- to look at how it works in Louisiana, you just look back to the last renewal and the renewal before that and renewal before that and the renewal before that. This is obviously the first time that we've done it in Arkansas, but it's been pretty clear that Arkansas formula rate plan has worked exactly the way it was intended to work with the combination of all you have to do is look at something like a year like 2018, where we ended up with a year that worked out differently because of tax reform, than we thought it was going to, and then we ended up earning our allowed rate of return and we refunded dollars to customers in the next formula rate plan filing that went through. So that's worked really, really well for our customers as well.

So, Louisiana, obviously we have a long history of renewals. This will be the first one in Arkansas, but it appears to be working exactly the way it was intended by all the parties.

Steven I. Fleishman -- Wolfe Research -- Analyst

Okay, great. Thank you very much.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Thank you.

Operator

Thank you. Our next question comes from the line of Angie Storozynski from Seaport Global. Your line is now open.

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

Thank you. So I wanted to go back to theory. So I appreciate your classification of the downside case here, respecting to $0.20 and your ability to offset that potential earnings drag, but it seems like that's just potentially half of the impact, right? Because there is a separate proceeding regarding the ROE and probably equity ratio for the asset. And I see that the ALJ recommendation is expected only in February of next year, but if you could just explain how -- I'm assuming that there's some negotiations on that front. We have the MISO ROE decision from FERC. We had some adjustments, at least proposed adjustment to the calculation mechanism for the ROE and how that could impact the earnings power of grand goal? Thank you.

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

So this is Drew and we've had, Angie the -- an expectation for ROE and capital structure baked in for three years or so, at this point and our expectations and those are in our outlooks, based on the outcome of this proceeding and at this point we don't see any reason to change those, based on how the proceedings have moved to-date. And even if those outlooks weren't met, from an ROE and capital structure perspective, we don't think that the -- whatever that delta would be, is something that we couldn't manage within our current expectations.

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

Okay. Even if there were those overlapping impacts, right, with the reduction of the rate base and reduction of the ROE and the reduction in the equity layer?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

That's correct. Yeah.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Anyway, saying was we already reserved on the...

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

We've already -- we have an expectation for that based on our outlooks. We don't want, we don't usually talk about that, because we're still in the preceding, but we're comfortable with where that is in our outlooks right now.

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

Great and just one follow-up. So what should we expect then going into the your Analyst Day. I mean, do you plan on making any announcements, for instance regarding more renewable power spending or is this just an the additional cost cutting initiative? Again, I mean just a big picture expectations going into the Analyst Day.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Yeah, I think big picture, Angie, what we'll be talking about is being able to give a little bit more color on how we operate and what we're doing and what's in the capital plan and how we're thinking about it. The capital plan is pretty certain where it is, as you know, there is a large mix of renewables in our future as it is, as we've stated before. Between '22 and '30, we anticipate a lot of renewables. We got the RFPs that we've been involved in, the construction, the projects that are up and running, the ones that are under construction, so I think the capital plan is in pretty good shape. We may get more details about that and talk about what's in our future, particularly as we spend time on the customer solution side of things. But really a little more depth on things like what's in the capital plan? What's in our our path to lower emissions? What's in our customer solution space? What's in the distribution space? How are we operationalizing continuous improvement, things like that.

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

Okay, thank you.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Thank you.

Operator

Thank you. Our next question comes from the line of Sophie Karp from KeyBanc. Your line is now open.

Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst

Hi, good morning and thank you for your time...

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Good morning.

Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst

And for taking my questions. So I wanted to go back to maybe a little bit to the volumes picture and just looking at the breakdown by the class, right, it seems like the industrial is doing pretty well here, right. It's barely down year-over-year in the weather-adjusted basis and commercial understandably is suffering a little more and the residential is up, and I think we will get that. My question is, I guess, could you help us a little more, in the sense, what's going on in the ground right now? Is this a trend we should just expect to continue the same way and if the -- given this shift in the mix, if the sensitivities to this changes that we had pre-COVID still hold in this new environment?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yeah so, Sophie. The industrial piece in particular that you noted, we were expecting pretty solid growth this year at the outset, in the 5% to 6% range for industrial. So, the fact that it's 1% down, is a pretty big drop relative, even though year-over-year, it's 1% down. We were expecting it to be 5%, 6% up. And on the balance of the year, yeah, I would say that we expect the residential to trend -- start to trend down as people return to work in different places than their home and we would expect the commercial and governmental to slowly begin to trend up and industrial to hopefully begin to improve and that's all I think consistent with where we lined out our expectations in May. And so I think that we are continuing to expect to the phase reopening to support. You know, slow but steady improvement in these numbers.

Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst

All right, thank you. And then lastly, maybe if you could give us a little bit of a sneak peak into your Analyst Day. I think you are on track for the most part for your company. What topics or what areas do you plan to give us an update on?

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

As far as topics for the Analyst Day, we'll probably just a little more depth and color around what's in the capital plan, you know, our trend to lower emissions and as well as continuous improvement structure and things like that will be subjects that we'll talk about. We don't want to talk too much about it today. We want you to tune in.

Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst

All right, thank you.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Thank you.

Operator

Thank you. Our next question comes from the line of Ryan Levine from Citi. Your line is now open.

Ryan Levine -- Citigroup -- Analyst

Good morning.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Good morning.

Ryan Levine -- Citigroup -- Analyst

What projects are in your capital plan that are most sensitive to load outlook that was incorporated within that 10%? Now was that highlighted in the prepared remarks?

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

There are probably a smattering and you know obviously there is new customer hookups, there is a big piece of it in the distribution of the transmission space. So for example, if you had a major industrial customer that was located in your service territory, the substations for them can be pretty significant. So you'd have to build them a substation. And then we just have general line extension store distribution business. Every day we have new houses built or something like that. So, some of the transmission infrastructure could be put in that bucket as well to the extent that we need to put -- build transmission infrastructure into an area because of either prior load growth or new load growth, but it's really more in the, getting to that last mile.

Ryan Levine -- Citigroup -- Analyst

Thanks. And then in terms of the industrial load assumption in your guidance, what are your conversations with customers suggesting for that outlook and are there any big lumpy customers that you have color as to their plans or timing and plan some of that industrial load can return throughout the remaining portion of the year?

Rod West -- GROUP PRESIDENT, UTILITY OPERATIONS

Hey, Ryan, it's Rod. I know we will talk more in detail about the nuances of our industrial engagement perhaps at the Analyst Day. But part of our confidence comes from -- in our growth observations, comes from the fact that we're actually talking to real customers and we can quantify and identify the existing projects. And so what we are paying attention to at the moment are not just sort of the macroeconomic commodity spreads and other indicators. We're talking to those companies who have made final investment decisions and whether they have delayed projects or ramping back up, we can point to specific companies and tie them to specific projects that are in our outlook.

And as we've shared before, we probably -- we probability weight not just the projects in the plan, but there are other projects that make up our economic development type of pipeline and that are -- that we're also monitoring to determine whether or not we need to include those or exclude those as the case may be in the plan. We've not seen much movement in our existing plan with regard to projects that we've identified that for instance that were canceled. There might have been one or two here and there, but they were on the lower end of the spectrum in terms of impact, but our confidence comes from the fact that we're tying them to actual project that is still in play.

Ryan Levine -- Citigroup -- Analyst

Okay, thank you.

Operator

Thank you. Our last question comes from the line of Durgesh Chopra from Evercore ISI. Your line is now open.

Durgesh Chopra -- Evercore ISI Research -- Analyst

Okay. Close to good afternoon, guys. Thanks for sneaking me here, I just want to quickly clarify, Drew, the $0.15 to $0.20, I'm trying to reconcile that to the Slide 26, where you showed the rate base exposure. Is it -- am I right in thinking about the $0.15, $0.20, is essentially you sort of in a worst-case scenario, losing the return on that north of $400 million. It is that the right way to think about it or am I comparing apples and oranges?

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Yeah, so the $400 million plus the $100 million of interest that is part of the refund, because they are saying that, that we owe the money. And it's not actually really rate base, it's refund. So, the rate base doesn't really change in that regard, it would only change if we were successful in our outcome with the IRS, because that would be a deferred tax and the rate base would go down, the net rate base will go down. So, really what we're talking about is the $510 million that you see there. That total amount is the requested refund. And so we've had to finance that and then the lease payments that are above the $17 million a year on an ongoing basis.

Durgesh Chopra -- Evercore ISI Research -- Analyst

Understood. Thank you. Thanks a lot.

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Thank you.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to David Borde for closing remarks.

David Borde -- Vice President, Investor Relations

Thank you, Gigi. And thank you to everyone for participating this morning. Our annual report on Form 10-Q is due to the SEC on August 10th and provides more details and disclosures about our financial statements. Events that occur prior to the date of our 10-Q filing that provide additional evidence of conditions that existed at the date of the balance sheet would be reflected in our financial statements in accordance with generally accepted accounting principles. Also, as a reminder, we maintain a 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

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

David Borde -- Vice President, Investor Relations

Leo Denault -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Drew Marsh -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Rod West -- GROUP PRESIDENT, UTILITY OPERATIONS

James Thalacker -- BMO Capital Markets -- Analyst

Shar Pourreza -- Guggenheim Partners -- Analyst

Jonathan Arnold -- Vertical Research Partners -- Analyst

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

Jeremy Tonet -- J.P. Morgan -- Analyst

Steven I. Fleishman -- Wolfe Research -- Analyst

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst

Ryan Levine -- Citigroup -- Analyst

Durgesh Chopra -- Evercore ISI Research -- Analyst

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