Earnings Call: Q2 2014

Aug 7, 2014

Good day, and welcome to the Duke Energy Second Quarter Quarterly Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bill Kearns. Please go ahead, sir. Thank you, Randy. Good morning, everyone, and welcome to Duke Energy's 2nd quarter 14 earnings review and business update. Today's discussion will include forward looking information and the use of non GAAP financial measures. Slide 2 presents the Safe Harbor statement, which accompanies our presentation materials. A reconciliation of non GAAP financial measures can be found on our website at duke energy.com and in today's materials. Please note that the appendix to today's presentation CEO along with Steve Young, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take your questions. Other members of the executive team will be available during this portion of the call. A few weeks ago, we announced the launch of the Duke Energy Investor Relations app, which can be downloaded for free in the App Store or Google Play. This app allows those of you on mobile devices to easily access and download some of the company's most commonly used Investor Relations materials, including press releases, SEC filings, presentations and webcasts. All of this morning's Q2 earnings materials have been uploaded to the app in addition to being available on the company's website. With that, I'll turn the call over to Lynn. Good morning, and thank you for joining us today. Earlier today, we released the results of another strong quarter. As a result of our financial performance for the first half of the year, we have increased our 14 adjusted EPS guidance range by $0.05 to $4.50 to $4.65 per share. I'm very pleased with how we're executing our growth strategy, delivering on our commitment and building positive momentum for the future. July marked the 2nd anniversary of the merger between Duke and Progress. As a result of great focus and teamwork, we have exceeded expectations from the combination. After 2 years, we have achieved 45% of our total 5 year fuel and joint dispatch savings commitment for Carolina's customers. We've exceeded our original non fuel O and M savings target, and we recently completed the 8 required transmission projects ahead of schedule and under budget. We believe the combination continues to deliver significant value for customers and shareholders as we leverage our scale and operations and in capital deployment. This morning, I would like to update you on the progress of our growth projects, our efforts to maximize value from our commercial portfolio and the status of our efforts around coal ash management and the operational performance of Edwardsport. Then I will turn the call over to Steve to discuss the specifics of the quarter. First, growth. For the 5 year period from 2014 through 2018, we are targeting between $16,000,000,000 $20,000,000,000 of growth investments. These investments include new generation, infrastructure projects and regulatory compliance initiatives, all of which underpin our 4% to 6% long term earnings per share growth rate. The investments as outlined on Slide 4 allow us to meet the needs of our customers and grow the company well into the future. We have made significant progress to advance our portfolio of new generation projects, including gas fired generation in Florida and South Carolina and renewable generation in our commercial and regulated businesses. In mid May, we announced plans for 3 major construction projects in Florida as outlined on Slide 5. These projects represent a total investment of about 1,900,000,000 dollars and include a 16 40 Megawatt combined cycle plant in Citrus County, 2 new combustion turbine plants at our existing Swanee plant and an upgrade project at our Heinz Energy Complex. These projects are expected to be in service by the end of 2018. The Florida Public Service Commission will hold hearings on these projects later this month with an order anticipated this fall. Next, turning to South Carolina. We received commission approval in April for our proposed 7 Megawatt Lee combined cycle natural gas plant. The plant is expected to be operational in late 2017, and Duke's share of the investment is expected to be approximately $600,000,000 Turning to Slide 6, I'll provide an update on our renewable growth investments. Through 2018, we are targeting total investments of around $2,000,000,000 in our regulated and commercial renewable businesses. We presently have 400 megawatts of wind and approximately 100 megawatts of solar under construction in our commercial businesses. In our regulated business, we were encouraged by the strong response we received to our solar RFP in North Carolina and are presently negotiating power purchase agreements and ownership options for approximately 300 megawatts of regulated solar generation. We're also pleased with progress in South Carolina, where the state recently passed comprehensive solar legislation to encourage development of renewable generation. This legislation followed a year long collaborative process with important environmental stakeholders. We expect to invest in or incentivize renewable generation of up to 3% of our peak load capacity by the end of 2021, representing approximately 150 megawatts. The law also establishes a process for the commission to review net metering rates, which we expect to occur over the next 9 to 12 months. We will continue to work collaboratively with all interested stakeholders as this legislation is implemented. As summarized on Slide 7, last week we announced an agreement to purchase the North Carolina Eastern Municipal Power Agency's minority ownership and certain existing Duke Energy Progress plants, in all about 700 megawatts of nuclear and scrubbed coal generation that we already The asset purchase price is $1,200,000,000 and we would also enter into a 30 year full requirements wholesale contract to supply power to NCE MPA. This agreement provides benefits to both the customers of Duke Energy Progress and the members of NCE and PA. If approved, this transaction would be one of the largest municipal power plant transactions on record. Under the agreement, we are required to close the transaction by the end of 2016. This project is incremental to the capital plan that we shared with you in February and provides additional support to our long term earnings per share growth objective of 4% to percent. The ultimate annual earnings contribution from this investment will be dependent upon the timing of closing, appropriate regulatory treatment and how the company chooses to finance the transaction. We currently expect a full year earnings uplift of between $0.05 $0.10 per share. There are a number of important regulatory milestones that are critical to the successful execution of this purchase. We expect to start this process with a FERC filing at the end of this month and we'll provide updates as the approval process progresses. Let me also highlight a couple of infrastructure investments that we are developing. As you know, last year, Indiana passed Senate Bill 560, which was designed to streamline implementation and recovery for transmission and distribution infrastructure needs. We plan to make a filing this year, resulting in potential investments over 7 years of between $1,500,000,000 $2,000,000,000 And in April, Duke Energy and Piedmont Natural Gas jointly issued a solicitation for a major new natural gas pipeline into North Carolina. We received initial bids in June and expect to announce the winner within the next several weeks. Our Carolinas utilities expect to enter into a gas transportation contract with the pipeline, and we are pursuing an ownership interest in pipeline underpinning the project's financial viability. The RFP has an initial capacity of at least 900,000,000 cubic feet per day with a targeted in service date of late 2018. We continue to make progress with initiatives related to our non regulated commercial portfolio. As outlined on Slide 8, the exit of the Midwest merchant generation business is progressing. We are in the final 2015. Use 2015. Use of proceeds for this transaction are under evaluation and could include a combination of funding growth investment opportunities, avoiding future holding company financings or a stock buyback. We are committed to redeploying the proceeds in a manner that maximizes shareholder value and expect the transaction will be accretive to our adjusted earnings per share beginning in 2016. We are also making meaningful progress on the evaluation of our international business. We are considering a wide range of options, including opportunities for growth as well as tax efficient strategies for utilization of our $1,700,000,000 in offshore cash. We expect complete this review late this year or early 2015. Next, turning to Slide 10. Let me provide an update on Dan River. As you know, we have taken responsibility for the accidental discharge of coal ash in early February and have been working on cleanup activities at the site and the river. Our work at the site and the river has been under the direction of the EPA. Last month, we announced that we have met the EPA's requirements to date, but we'll continue to monitor the river's water quality. Our overall goal is to ensure the long term health of the river. Costs incurred on cleanup activities were approximately $20,000,000 over the 1st 6 months of the year. We do not expect total cleanup costs related to the Dan River incident to be material. We are cooperating with and defending the company in ongoing investigations resulting from the Dan River accident. We have also made progress on our comprehensive plans around the near term and longer term management of each of our coal ash basins. We are committed to developing a scientific engineered solution for each site that will protect the environment and allow us to continue to provide safe, reliable and cost effective electricity for customers. We expect to finalize the development of comprehensive closure strategies by year end. Ultimately, our plans will need to be in alignment with any final legislation in North Carolina and upcoming federal rules for coal ash, which are expected by the end of the year. Our Ash Basin closure costs will be dependent upon the methodology selected and approved for each site. We will continue to refine our projections for closure costs and provide updates as are finalized. We believe the recoverability of coal ash basin closure costs will be determined by the Carolinas commissions. Next, let me provide a brief update on the recent legislative session in North Carolina, where the General Assembly introduced legislation addressing the management and closure of Ash Basin. The legislature did not come to an agreement on a compromised bill and adjourned last week. The adjournment resolutions contemplate the coal ash legislation could be considered during a reconvened legislative session later this month or later this year. It's important to highlight that this delay will not impede our actions or our commitment to working constructively with all parties to continue advancing our comprehensive plans for the long term management of coal ash in North Carolina. Next, let's turn to Slide 11 and our Edwards Port plant in Indiana, which achieved commercial in service in June of last year. Because Edwardsport is a large and complex project, we estimated that it would build up to long term level of availability over 15 months. I was at the site last month, and I'm pleased with the progress as well as the dedication of the plant staff. Plant output and overall performance have steadily improved since early this year, when extreme caused operational challenges. May was the strongest month we have seen for gasification output to date and June was not far behind. In fact, gasification availability during the Q2 was around 75%. July's results were also favorable with gasification availability coming in around 80%. We have completed GE's rigorous performance testing protocol and have validated that all major technology systems are working. We are reviewing the test data received from GE and preliminary results are positive. During testing, we achieved the nameplate capacity of 6 18 megawatts and had encouraging preliminary results on heat rate. The right side of the slide outlines the status of the regulatory proceedings associated with the plant. The Indiana Commission has is fully briefed and we are awaiting a commission order. IGCC 11 is fully briefed, and we are awaiting a commission order. The commission will examine the operational performance of the plant and the normal course of reviewing our semiannual rider filings, while any replacement power costs resulting from the operational performance of the plant are reviewed in connection with the quarterly fuel clause proceedings. We will continue to update you on our operational progress and these important Thank you, Lynn. Today, I'll focus on 3 primary areas. First, I'll discuss, at a high level, the primary drivers to our 2nd quarter results and update you on the status of our earnings guidance range for 2014. 2nd, I'll discuss our volume trends and the economic conditions within our service territories. Finally, I will close with our progress toward achieving our overall financial objectives. Let's start with the major second quarter earnings per share drivers as outlined on Slide 12. This morning, we announced 20 14 second quarter adjusted diluted earnings per share of $1.11 which exceeds 20 13 second quarter results of $0.87 per share. We saw higher quarterly earnings at each of our 3 business segments. As expected, quarterly results were supported by revised customer rates, growth in our regulated wholesale business and higher PJM capacity prices. We also experienced favorable weather and a lower effective tax rate during the quarter. As Lynn just mentioned, due to the strong results experienced through the first half of the year, we have increased our 2014 adjusted EPS guidance range by $0.05 to $4.50 to $4.65 per share. I will discuss more details on our revised guidance range at the end of my presentation. On a reported basis, the company earned $0.86 during the quarter compared to $0.48 in the Q2 of 2013. A reconciliation of reported results to adjusted results is included in the supplemental materials. Adjusted earnings at our regulated utilities segment increased by dollars per share during the quarter. We continue to benefit from increases associated with our 2013 rate cases in the Carolinas and increases from newly contracted wholesale customers. We experienced favorable weather this quarter compared to below normal weather O and M costs were also favorable during the Q2, partially driven by a prior year donation associated with Duke Energy Progress' rate case and benefits from nuclear outage cost levelization. Absent these drivers, our cost control efforts have helped us maintain flat O and M compared to last year's quarter. We continue to drive costs out of the business through our merger related initiatives and are targeting flat O and M costs through 2016. International Energy's quarterly results were $0.09 per share higher this year, primarily driven by a $0.07 favorable tax benefit resulting from a reorganization of the company's operations in Chile. As a result of this benefit, we are lowering our overall consolidated adjusted effective tax rate assumption for 2014 to between 32% 33%. National Methanol's contribution for the quarter was $0.02 higher than last year, primarily due to an extended maintenance outage that occurred in 2013. Commercial Power's adjusted earnings were $0.02 higher, supported by increased wind and solar volumes from new projects coming online and higher output from existing projects. Higher PJM capacity prices drove increased results from Midwest Generation. More detailed quarterly earnings drivers for each of our segments are included in today's presentation materials and press release. Before moving on, let me briefly update you on hydro conditions in Brazil. We continue to closely monitor reservoir levels as we have significant contracted hydro capacity. During the Q2, the rainy season came to an end and reservoir levels remain low. In order to help preserve reservoir levels, Brazil's regulatory authorities continue to dispatch thermal generation. In anticipation of below normal rainfall and challenging reservoir conditions, we reduced our contracted capacity levels for 2014. This reduction in contracted levels, along with higher short term pricing, has helped us mitigate significant negative financial impacts from the drought so far this year. Slide 13 highlights our retail customer volume trends for the quarter and the economic conditions within our service territories. Overall, customer load for the quarter was 0.4% higher than 2013. This was in line with our overall expectations for the year. We evaluate the economic growth of our service territories over longer term periods. On a rolling 12 month basis, weather normal retail customer load was 1.6% higher. We continue to be encouraged by broad trends in the economy, such as higher median household income levels, lower unemployment rates and new customer additions. We remain confident in our longer term growth expectation of around 1%. Economic activity is expected to continue expanding over the remainder of the year. In fact, consensus estimates expect GDP growth to be around 3% in the second half of twenty fourteen. Employment activity in the states we serve continues to improve with unemployment percentages at or below the U. S. Average in 4 of the 6 states we serve. In June, approximately 20% of total U. S. Non farm job growth was from states served by Duke Energy. Next, let me highlight some of the trends we are seeing in each of our customer classes. First, our residential customers, where quarter over quarter growth was essentially flat. Household income and available credit heavily influenced this customer class. While these indicators have not yet recovered to pre recessionary levels, they have shown improvement over time. During the quarter, we continued to experience positive growth in the number of customers at our regulated utilities of around 1%. However, usage per customer was unfavorable during the quarter, largely offsetting the growth in the number Office vacancies and unemployment rates continue to improve, leading to growth in retail sales. Continued higher sales were seen in education, healthcare and hospitality sectors when compared to last year. And finally, the industrial sector experienced growth of 0.8% in the Q2. We continue to see encouraging strength in the automotive, construction and metal subsectors. Economic development within our service territories remains active. Our affordable electricity rates help attract businesses to our service territories. Our economic development teams are actively pursuing potential projects within our 6 state footprint, which could represent up to $10,000,000,000 in new investments and over 20,000 jobs. So far this year, 1,000 jobs. So far this year, several new business relocations and expansions have announced in our service territories, representing around $2,500,000,000 in investments and more than 5,000 jobs. We are optimistic about the sustainability of the economic recovery across our service territories. Based on the growth that we've experienced over the rolling 12 month basis. Individual quarters may vary, but the longer economic trends are generally favorable. I will close with our financial objectives for 2014 and the longer term as outlined on slide 14. These financial objectives have remained consistent over time. We have an established track record of achieving each of these objectives. I'm very pleased with our financial performance through the Q2. To date, we have benefited from revised rates in the regulated businesses, favorable weather, solid growth in sales volumes and favorable impacts of tax rates. Additionally, we continue to drive more efficiencies across company. We still have our 3rd quarter ahead of us, which is historically our most significant quarter. In July, we experienced mild weather and do not yet know if that trend will continue into August. We also expect to accelerate the recognition of certain expenses into 2014, primarily a coal unit outage in the Carolinas as well as some costs to advance our coal ash management work. Despite uncertainty with the weather for the Q3, we are pleased with the strength of our results to date and are increasing our 20 14 adjusted EPS guidance range. We will update you on our progress when we report our Q3 results in early November. The balance sheet remains strong. This strength affords us the flexibility to invest in our business and grow our dividend without the need for new equity issuances through 2016. We are focused on growing the dividend, which is central to our investor value proposition. In June, our Board of Directors approved an approximate 2% increase to our quarterly dividend. This marks the 7th consecutive year of annual dividend increases. We expect to move into our targeted long term dividend payout ratio range of 65% to 70% in 2014, allowing greater flexibility in future dividend growth. Finally, as Lynn discussed, we are focused on executing our growth initiatives as well as our cost management efforts. We are well positioned to achieve adjusted earnings per share growth within our 4% to 6% target through 2016. Additionally, some of our growth investments provide support for growth beyond 2016. Now, I'll turn it back over to Lynn. Before closing, I thought I would comment on the EPA's recently proposed rule for regulating carbon dioxide emissions from existing power plants. Since issued in June, we've been evaluating this complex rule and engaging with our state regulators. We intend to remain actively engaged in this rulemaking process. We support policies that will result in reasonable decreases in greenhouse gas emissions over time, while balancing impacts to our customers' rates, the economies of our service territories and the reliability that our customers count on. We have made significant progress over the last decade in reducing the environmental impact of our generating facilities. We have invested over $9,000,000,000 in new generation, in new generation, allowing for the retirement of over half of our coal fleet. At our remaining coal units, we've invested over $7,000,000,000 on environmental control equipment. As a result, through 2013, we've reduced our carbon emissions by 20% from 2,005 levels, while also achieving SO2 reductions of 84% and NOx reductions of 63% during the same time period. As we engage in this proposed regulation, our comments will focus on ensuring that this progress is recognized and that these investments continue to deliver value to our customers over their remaining useful life. It's important that our customers receive the full benefit of our early actions, not just actions since 2012. The treatment of nuclear, both new and existing, is also a clear area of focus for us. The complexity of this rule requires careful study and evaluation, not just of each potential building block, but the interaction of all elements together. We expect significant comments as well as legal challenges to the rule, and we will remain engaged throughout the development of this build momentum and deliver value for our customers, communities and shareholders. And we are developing growth opportunities as we position the company for the future. Now I'd like to open the line up for questions. Thank We'll now take our first question from Greg Gordon from ISI Group. Please go ahead. Thanks. Good morning. Good morning, Greg. Good morning, Greg. So that's a bit of a strategic question rather than focusing on the quarter because it was clearly it was a great quarter for you guys. Congrats on Thank you. There's always been this issue with strategic review of Latin America, which is really like okay, well what are we going to do with the money if we bring it back? But now you've got the power plant consolidation investments, the potential for an investment in a major pipeline, the potential for the necessity of incremental major investments to remediate your ash ponds. So can you talk about how the sort of the burgeoning necessity for capital in your core business might change your the way you're looking at your Latin American business? Greg, what I the way I would respond to that is, we've had growth aspirations in the range of the $16,000,000,000 to $18,000,000,000 to underpin our 4% to 6% growth rate for some time. And so we have been analyzing all of our strategic evaluations in the context of positioning the company to grow. And so when we talk about the strategic analysis of international, when we look at the decision to strategically up at the Midwest generation, all of that review has been within the context of better positioning the company to grow and deploy capital in a way that adds value. So, I would think of all those things together and we will provide you with further updates on our thinking and progress on these initiatives as they occur. Can you refresh our memories as to your last public comments on the tax efficiency of bringing back the 1,700,000,000 dollars We haven't made any specific comments, Greg, on that item. Let me just maybe give you a little bit of background. We did bring home $700,000,000 in a very tax efficient format December of 2013. So that was $700,000,000 basically a basis reduction initiative. We now have $1,700,000,000 offshore and we are continuing to look for ways that we can put that cash to use in a tax efficient manner. So that study is underway as part of the strategic analysis. So you can think of cash utilization support of the dividend and growth as being the 3 primary objectives. Okay. My last question, when you gave the range $0.05 to 0 point $0.05 as the annualized earnings impact of the power plant consolidation, what are the financing assumptions that underlie that? Is that does that assume a sort of debt and equity at sort of consistent with the balance sheet of the Progress Energy Carolinas or some other variable? Yes. So depending on financing structure, it would fall within that range, Greg, depending on how much equity is included and how much is debt financed. Steve, how would you add to that? Yes. I would point out that roughly one half of the purchase price would be financed through OpCo debt. So we're talking about roughly $600,000,000 that would be of the equity piece that could be financed through cash or through HoldCo debt. I don't envision the need to issue common equity to deal with this. Great. Thank you, guys. Thanks, Greg. We'll now take our next question from Dan Eggers from Credit Suisse. Please go ahead. Hey, good morning, guys. Hi, Dan. Good morning. Just extending maybe a little bit on Greg's line of question. When we think about the 4% to 6% earnings growth through 2016, I guess, A, when do you think you're going to maybe reevaluate or maybe put more time horizon on that number? And then B, with the pipeline out there with kind of the redeployment of the monies from NCE, MPA and selling commercial generation that sort of stuff, What's going to swing you within the 4% to 6% as you see it right now? To take the two questions, Dan, we will continue to follow our traditional approach on guidance and updated in February. I think we've been in the 3 year range for the last couple of years, although we have provided capital for a 5 year period. So continue to update that. I think the drivers for growth include capital investment in both the regulated business as well as load growth, cost efficiencies, additional renewable growth, which would be both regulated and non regulated. And so as I think about variables, they can impact earnings over a short or a long term period, load growth to mind, ability to control costs come to mind and the efficiency and magnitude of capital deployment. Okay. And then I guess on the coal ash issue with the EPA rules stating out there in kind of a variety of different fingers in the pot. When do you think we're going to finalize to have visibility into full capital obligations or capital expenditures and kind of the timeline for putting that capital to work? The EPA rule that would be probably most relevant here, Dan, is expected in December, the designation of hazardous or nonhazardous. I believe the time line for that remains. The plans that we have put forward at this point have us in the range of $2,000,000,000 to $2,500,000,000 for ash base enclosure. That's consistent with our historical range of waste disposal updated for the comprehensive plan that we put forward in March. So I think there are couple of things to watch in terms of refinement of those numbers. One being, we will continue to develop our strategic approach for closure of all of the basins and we're targeting the end of this year. We also have the delay in the legislation in North Carolina, which could be finalized this year that would also impact that. And then I would expect all of these plans to come under review by the regulators Carolina over the years to come, which could continue to refine it. So I think we'll reach milestones over 2014 2015 for our plants here in the Carolinas. And then we'll, of course, keep you updated as those milestones occur. And I would also add that the expenditures related to this activity span many, many years. This is well over a decade to deploy these funds. Okay, great. And I guess last question is kind of on load growth. It felt like the last couple of quarters there was more optimism that maybe demand growth is going to sneak above the 1% target you guys have talked about. This quarter seemed a little less enthusiastic not only for you guys but across the industry. Can you just talk about trend line and what you're seeing? And if you think the Q2 is more indicative of what we saw in the preceding quarters is maybe where trend was? Well, Dan, you've hit on the challenge of looking at quarterly data. Certainly, the Q1 of 2014 was probably heavily influenced by weather. We try to pull the impact of weather out, but that's as much art as science. The Q2, the results were lower in line with our forecast. But when you look at a 12 month rolling average, you see that we're around 1.6% growth. The broad economic indicators continue to improve and we look at unemployment, number of customers added in our service territories, household, median household income, those kind of things. Overall, we do feel like it is improving. But given the volatility that we continue to see quarter quarter, we're not ready to move beyond the 1% long term growth. We will be updating our forecast formally in the fall and see what it looks like then. Great. Thank you, guys. Thanks, Dan. We'll now take our next question from Jonathan Arnold with Deutsche Bank. Please go ahead. Good morning, guys. Hi, Jonathan. Can I one firstly, just one question on what you said about the drought in Brazil? Steve, I believe you said you've taken down the sales commitments and that has substantially mitigated what would have been more negative impact. But what can you give us a sense of how much of a residual negative there still is in the 20 14 number as you see it now if any? And just a bit more kind of some more numbers around what you said there? Well, our contracting strategy has paid off benefits so far in the 1st two quarters of 2014, as we mentioned. We're not in a position to predict how the final two quarters will come out. We're out of the wet season. Fall and that will be critical to the final results for the year. The contracting strategy of lowering should benefit us as well throughout the year. But again, it's hard to say where those reservoir levels are going to be and what hydro capacity is going to be available to serve the commitments we have at this time. We'll just have to wait and see. Through the first two quarters, is it fair to say you meant your actions mitigated any negative impact? Or there was still some drag embedded in the numbers? Well, the 1st two quarters certainly our contracting strategy was beneficial to us. And perhaps I'm not understanding your question. I don't know enough to predict the final two quarters. And Jonathan what I would add is we were in line with our expectations for the 1st two quarters for Brazil. And it's the items that Steve talked about. The lower contracting gave us the ability to take advantage of the higher spot prices in the 1st two quarters. It's different. You kind of ended up about on plan and your comment is you avoided what would otherwise have been a loss. That's correct. Or a reduction in earnings, yes. Yes. And then secondly, could you comment at all about the recent reports that you're involved in the late stages of the Isahan sale in Colombia? And just in the context of your comments about being focused on potential growth avenues in the international business? Jonathan, we are not involved in the late stages of bidding for Issahim. Okay. Thank you for that. And I think and one other thing I just wanted to clarify. You mentioned that the NCMPA transaction is incremental to 4% to 6%. Is that more in the sense of it's incremental beyond 2016? Or is there that statement more that this could push you above the rate the growth rate in 2016? How should we kind of interpret that? I would think about the NCE and PA investment as giving us confidence in the 4% to 6% growth rate. It's the type of capital, the discretionary type capital projects that we are pursuing. And certainly, this will provide earnings over its life of the wholesale contract with the municipalities beyond 2016. But I'd say it gives us confidence in the growth rate. Jonathan, the incremental comment that we made is incremental to the capital that we shared with you in February. Okay. We've been trying to increase that growth from the $16,000,000,000 to the $20,000,000,000 by identifying and pursuing these growth initiatives. So this is one of the key ones. So that whole slide 7 should be seen as sort of the difference between 16% and 20% effectively. That's correct. That's correct. Thank you. Thanks, Jonathan. We'll now take next question from Michael Weinstein from UBS. Please go ahead. Hi, good morning. It's Julian here actually. Very good. How are you, Julian? Good. Excellent. I wanted to follow-up on a few items here. First with regards to the pipeline RFP, could you talk a little bit about potential ownership interest and also talk a little bit about how that might be structured to what level you might take that ownership, etcetera? Julien, it's premature to go into any more specifics on this. As we pursued the solicitation, we did pursue, of course, options to we were looking for transport capacity for the utilities, but we were also looking for an ownership interest. And so that will be a part of our ongoing discussions as we finalize the solicitation. But I don't have anything more specific to share at this point. Fair enough. And then moving on to the coal ash side, could you give us a sense, one, where the conversation is today with respect to the total spend versus what you disclosed previously? And then secondly, as you think about that, how does it compare? What are the key moving parts here as we look towards negotiations in the back half of the year for total spend? Yes. So Julien, you may recall, and there's actually it's actually in this slide deck as well in the appendix that we put forward a range of spending for North Carolina around the ash basins that began on the left hand side of the chart. I'm referring you to Slide 40 at this point. On the left hand side of the chart representing our historic numbers for waste environmental spending updated for the plans that we put forward in March of this year following Dan River. On the right hand side of the page would be a full excavation of all ash in North Carolina as well as conversion to 0 liquid discharge. So our expectation is that we will end up somewhere in between those two numbers over time. And as I shared in call, those final estimates will be revised as closure strategy and the methods are developed and approved. Right now, based on the commitments that we've made, I would say we're in the range of 2 to 2.5, but those numbers will be refined as Could you talk a little bit more about how to make any could you talk a little bit more about how to make any potential transaction accretive? And specifically what I'm getting at is how do you think about potential partnerships and driving synergies out of any deal? Perhaps is there an opportunity to use the offshore cash back to invest into growth as a way to perhaps transform the business? Julien, I would say all options are on the table when we do a review of this sort looking for ways that we can streamline the business, looking for ways we can drive growth, optimize cash, etcetera. So I would say all options are on the table at this point. And as we progress and reach final conclusions, we'll of course provide an update. We're targeting end of 2014 early 2015 at this point. And just to be clear, a little nuance there, does the current hydrological situation drive timing or consideration of transaction, etcetera? No. Okay. Excellent. Well, thank you very much. Thank you. We'll now take our next question from Michael Lapides from Goldman Sachs. Please go ahead. Yes. Hey, guys. Just a couple of questions about the hi, Lynn. Just a couple of questions about the good old fashioned regulated side of the house. When you think about rate cases over the next year or so, what new ones do you anticipate filing across the system? Michael, in terms of looking at our rate cases, we had a lot of activity in 2013 in the Carolinas and Ohio as well. So we don't have any base rate cases planned for a while. Our settlement in Florida sets up a lot of trackers for significant costs, but keeps us out of base rates for a while. So we don't have any plans through 2016 for base rate increases. We may look at our Duke Energy Progress South Carolina jurisdiction as a potential area. We'll keep an eye on that. But nothing in the near term given all the activity that we concluded in 2013. Got it. One other question. There's and this is about the potential new projects you would develop down in Florida as well as the NC EMPA acquisition you've disclosed. On the Florida one, there's a lot of opposition to those developments because there still is Florida is one of the states where there's still a lot of non regulated or merchant combined cycles and peakers kind of hanging around guys who are obviously willing to sell into a utility either RFP or actually sell the asset to a utility like yours. Just curious in terms of how you think regulators will look that option, the kind of a cost benefit analysis? And also if you can address on the NCE MPA process, there was a lot of going back to the Progress merger, there was a lot of back and forth with the FERC about potential market power issues in the Carolinas. How would this acquisition kind of screen in terms of market power in the Carolinas? Taking both of those, Michael, on Florida, I think you've raised a key question on whether or not the investments that we've put forward represent the lowest cost option customers and that will be the centerpiece of the regulatory review in August. We believe that the process that we've undertaken, which included an RFP for the Citrus County combined cycle, will support that what we put forward is the lowest cost option. But I think that will be the centerpiece of the regulatory proceeding that will occur this month continuing through the final approval process. On market power, we've of course looked closely at this. We do not see a market power issue with the NCEMPA transaction. A couple of things I would note is we're acquiring generation and load of a comparable amount. So we're not acquiring excess generation. And the fact that we already operate these units has us in a position where the dispatch of the units will not change a part of the acquisition. So those are both, we believe key considerations in the market power analysis. Got it. Thanks, Lynn. Much appreciated. Thank you. And we'll take our next question from Jim Von Riesen from CRT Capital. Please go ahead. Hi, Lynn. Hi, Steve. Good, Jim. How are you? Good. Hey, I got a couple of simple questions. One is on the dividend. I know you have this target of 65% to 70% payout ratio. But as I do some of the math, it seems like you still have a little bit of room to grow it above the 2%. What do you think about raising the dividend better than the 2% that you've been doing thus far? Well, as we have said, we understand the value of the dividend to our overall proposition. We are now moving into our target range. We've been above it for a while. Right. So that gives us, as we've said, as time goes forward, if we can continue to earn as we should, that should give us more flexibility. And we will certainly be looking at increasing the dividend growth rate. Ideally, we would like to get it more in line with our earnings growth rate, but it remains to be seen when and how that happens. The second quick question is on the 4% to 6% thank you for the answer. The second question is on the 4% to 6% growth rate. Can you just refresh our memory as to what is the base year on that? Is it 13%? Yes. It's the midpoint of the projected earnings range for 2013. Right. Okay. Okay. And then the last question is on your slide number 4, you talk about the new growth investments of $16,000,000,000 to $20,000,000,000 over this period through 2018, one of which bucket of the buckets is new generation at $6,000,000,000 to $1,000,000,000 But if I just add the numbers up on the Florida combined cycle, Lee, and the renewables everything, I come up to a number that's less than $6,000,000,000 How should I think about that remaining $2,300,000,000 or so to get to the high end of that $8,000,000,000 range? Are those placeholders that you're just not ready to talk about publicly at this point in time? Well, I think you can think about our business as a whole and kind of zero in on some things. We're going to need to build some new facilities in the Carolinas to meet load growth in the back end of the year. At a 1.5% peak load growth, you're going to be growing 300 megawatts, 400 megawatts in the Carolinas every year. So every couple of years, you're going to need combined cycles or at least simple cycle CTs in the Carolinas. So there's a fair amount of generation that's going to come in that area as well. So that will fill in a lot of that gap there. Okay. So the gap is accounted for. It's not something that we should be looking for in subsequent announcements is what you're saying? That's correct. And also some other categories of spend that are in the total number compliance with EPA regulations a lot of math work to be done in the next few years and a lot of nuclear related expenditures, particularly related to Fukushima. So there's a number of those types of investments that help fill out the portfolio. Understand. Thank you. Thank you, Jim. We'll now take our next question from Kit Katnalich from DGC Financial. Please go ahead. Good morning, Lynn and Steve. Good morning. A couple of kind of scattered questions. First, the sale of Midwest Shen, you're obviously aware that DPL withdrew their plants from the market. Does that affect what you're doing at all? No, Kit. Our process has been part of a strategic evaluation that we undertook at the end of last year continuing into this year. And so we're moving forward with our decision and don't have any specific milestones to announce And how about on And how about on the North Carolina pipeline? Can you give us any details of timing on that? No, we expect to finalize the review of the solicitation within the next few weeks, Kit, and would make an announcement at that time. Okay. So that's obviously near to and how should we understand, Lynn, both with regard to the pipeline and to renewable investments, how should we assess Duke's degree of interest in either of those? I mean, are either of those areas going to become a major business segment? Or are these one off type of investments? I would think about the pipeline into North Carolina is a very strategic investment for the company, Kit. We see it as being strategic to not only the state of North Carolina, but to electric supply in the state of North Carolina as we continue to add gas. I think this will give us an important entry into pipeline. And if you think back to the Spectra spend, Duke has had a history of interest in pipeline investment. But I'm not foreshadowing any strategic shift. What we're focused on at this point is the North Carolina investment. I would say that renewables have been a part of our story for some time. We continue to add to our commercial renewable business as well as introducing renewables in our regulated jurisdictions. We see that as an increasingly important part of the portfolio. And I think we mentioned in the call that we have 400 megawatts of wind and 100 megawatts of solar under construction right now in support of our commercial businesses, another 300 megawatts of solar that we're negotiating under an RFP in North Carolina. So I would expect to see additional renewable investment in the years come. All right. And finally, in Florida, Steve, you were talking about no rig cases in the near future and so on. What I assume you're keeping an eye on the political situation down there. What would it do for your regulatory outlook in Florida if Charlie Crist made another stunning comeback year and became Governor again? Kit, that's a difficult question. We have to work with all stakeholders and all legislators, governors in our jurisdiction. So we're focused on running our business as well as we possibly can. We're also focused on making investments for the long term value that we can deliver to our customers. And we watch politics much like you do. As a spectator sport. That's how I watch it. I don't know about it. Obviously, it's more important for you. Yes. All right. Thank you very much. Thank you. And we'll now take our next question from Paul Patterson with Glenrock Associates. Please go ahead. Good morning. Hi, Paul. Hi, Paul. Hi. Just some really quick ones. A lot of my questions have been answered. But the growth avenues, Jonathan asked you about a specific potential acquisition, but I'm just wondering whether or not there's anything in general that you guys might be interested in or that you could share with us that some general area that you guys might be that sort of opened up that you guys might be pursuing or? And are you referring to international? I am. I'm sorry. Yes, I'm referring to international to growth. I'm sorry. Yes, we don't have a specific project that we'd point you to. One of the underpinnings of the strategic review is we see headwinds in Latin America from currency and potential repricing that puts us in a position where the growth rate isn't as strong as we'd like it to be. So we're taking this undertaking a strategic review to look at all elements, including growth and efficiency and utilization of cash, but don't have any specific project that we would draw attention to today. Okay. And then with respect to the coal ash legislation, there seem to be 2 sort of competing bills that were sort of vying against one another. And I was wondering if there was any sense that we might have in terms of and I realize that obviously those are 2 potential outcomes and there could be obviously another outcome that could happen or no outcome I guess. And I know you guys are working at it regardless and you guys are sort of aggressively pursuing the Colash situation. But how should we think about those potential outcomes, I guess? And what potential impact it may or may not have on your projected growth rate in earnings? Paul, what I would say is that the legislature has been delayed. I think it's difficult for us to speculate at this point about either the timing of reconvening or the scope and approach the legislature would take. I do think there's a strong commitment on the part of the General Assembly to get the legislation right, and so they're being deliberate and thoughtful in their process. And we have given you some broad parameters around how we think about the potential costs. And the other thing that I would indicate that you should keep in mind with all of the ash is that this is going to play out over a number of years. So even if you look at the existing profile of the Senate and House bills, there were targets over 5,1015 years of deployment would be over a very long period of time. So that's all I would say at this point and we'll of course keep you informed as progress occurs. But is it safe to say perhaps that within the earnings range that you've given that these outcomes be would probably be within that range regardless of which one would happen or does that make sense to you, Paul, what I'm saying? Yes. Paul, I think the getting back to this range of costs that we've included on Slide 40. Right. So we have $2,500,000 and this is just North Carolina, dollars 2,500,000 on one end, dollars 10,000,000,000 on another end. So the more excavation of ash that could arise will increase the cost. Again, timeframe is important, 5, 10, 15 years to accomplish that. So I don't think based on where we are right now, we can't give you any more specifics on where we think it will end up. The legislation has been delayed and we'll have more to report as it progresses. Okay, fair enough. But I don't mean to focus too much on it, but it would seem to be that a lot of these costs would be ratepayer oriented that again is something that again is something that would be addressed over time. Okay. Thank you very much. Thank you. And we'll now take our final question from Ali Agha from SunTrust. Please go ahead. Thank you. Good morning. Hi, Ali. Hi. And then Steve, just wanted to clarify a couple of comments you had made earlier. First off, Steve, for planning purposes, that 32% to 33% tax rate in 2014, should we assume roughly the same in the next couple of years as well? No, I wouldn't try to be that tax optimization strategies. And we'll give that year by year as we have in the past. I see. So directionally though it could go up or down is the way to think about it? Well, it could. Yes, it could move. I don't think it would move dramatically either up or down, but I don't have any insight as to which direction it might move at this point. Got it. And Lynn, just to be clear, maybe you've said that and I may have missed that, but in your international review of all the options you're looking at, is a complete exit from international one of the options? Or is that off the table? I said it before, Ali, that all options are on the are on the table. But as we approach the strategic review, we did not approach it with exit in mind. We approached it with an objective of trying to optimize the portfolio, pursue cash, a more efficient use of cash and growth. So we always look at everything. But more to come as we complete our work and targeting end of this year or early next. Got it. And my last question also just to clarify, when you talk about exiting the merchant and using the proceeds and so net impact being accretive. Is that net impact embedded in the 4% to 6%? Or could that be upside assuming everything goes as planned? So it's contemplated in the range, Ali. As you look at I believe it would have been in Q1, it's also on Slide 45 of this quarter's deck, you'll see sort of the makeup of how we get to 4% to 6% and redeployment of proceeds is a potential item to consider. I will now turn the call back to Lynn Good for closing comments. So thank you everyone for joining us today. We look forward to our Q3 call in early November and to seeing many of you at the fall conferences and at EEI. So thanks again. This does conclude today's presentation.