Good day. Welcome to the Duke Energy first quarter 2014 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Bill Currens. Please go ahead.
Thank you, Carrie. Good morning, everyone. Welcome to Duke Energy's first quarter 2014 earnings review and business update. Today's discussion will include forward-looking information and the use of non-GAAP financial measures. Slide two presents the safe harbor statement which accompanies our presentation materials. A reconciliation of non-GAAP financial measures can be found on duke-energy.com and in today's materials. Please note that the appendix to today's presentation includes supplemental information and additional disclosures to help you analyze the company's performance. Leading our call today is Lynn Good, President and CEO, along with Steve Young, Executive Vice President and Chief Financial Officer. After our prepared remarks on the topics outlined on slide three, we will take your questions. Other members of the executive management team will be available during this portion of the call. I'll turn the call over to Lynn.
Thank you, Bill. Good morning, everyone. Duke Energy's value proposition, as outlined on slide four, has remained consistent over time. We strive for excellence in our day-to-day operations and to deliver affordable and reliable services to our customers while leveraging our competitive advantages, including the additional capabilities we gained from the merger with Progress Energy in 2012. This focus gives us opportunities to deliver attractive returns to our investors through long-term earnings per share growth, as well as the dividend. Our financial objectives have remained consistent over time. We have a strong track record of delivering on our commitments. I'm very pleased with our overall strong first quarter. We reported first quarter adjusted diluted earnings per share of $1.17, supported by revised customer rates and strong weather-normalized retail customer load growth.
These results leave us on track to achieve our previously announced 2014 guidance range of $4.45-$4.60. We responded well operationally to challenging winter weather conditions and the Dan River ash discharge. I want to thank our dedicated team of employees who worked through these challenging conditions with great discipline and resolve. Before I turn the call over to Steve for more detail on the quarter, I'd like to provide some business updates, review the status of our strategic initiatives in our commercial businesses, and discuss our progress on our growth investment opportunities. Turning to slide five, let me start with Dan River. By now, you've heard a great deal about the accidental discharge of coal ash that resulted from a pipe break under an ash basin in early February. We have taken responsibility. We have moved aggressively on a number of fronts.
I'll talk about Dan River, the immediate actions we've taken, and the longer-term strategy we're putting in place. At Dan River, we moved quickly to stop the discharge at the site and have been working on remediation of the river. Our company, not our customers, will pay for the pipe break and associated cleanup. These costs were approximately $15 million in the first quarter. Drinking water has remained safe throughout this incident, and ongoing water sampling by environmental experts shows that the Dan River has returned to normal water quality conditions. Decisions regarding our remediation work will continue to be informed by federal and state environmental agencies. Our overall goal is to ensure the long-term health of the river and its ecosystems. We also continue to cooperate with ongoing investigations resulting from the Dan River accident and defend the company in pending litigation.
What happened at Dan River has led to a broader conversation about coal ash management in North Carolina, which calls for some context. Duke Energy has disposed of coal ash in line with prevailing standards and industry norms since the 1920s, when the company began generating power from coal. Coal ash management is an industry issue. There are currently a total of 676 ash basins across the nation. Duke manages 69 of these, 33 of which are in North Carolina. Establishing practices to safely and cost-effectively close our ash basins has always been a priority for Duke. The Dan River incident has accelerated a reevaluation of our ash management strategies, as outlined on slide six.
We are currently performing an engineering review of each of our ash basins in order to implement both near-term and longer-term actions, addressing the ongoing management and retirement for each of our coal ash basins. Near-term actions for North Carolina basins were outlined in a plan we submitted in March to the North Carolina governor and NC DENR. This site-specific plan involves basin retirement at four sites, Dan River, RiverBend, Sutton, and Asheville. The plan also addresses actions to convert to dry ash handling at our remaining active sites, the two units at Asheville and Cliffside Unit five. The North Carolina legislature has said it intends to introduce ash basin legislation in the upcoming short session in North Carolina, which begins May 14th. In preparation, the legislature, through the Environmental Review Commission, has conducted hearings with the express purpose of understanding more about the complex topic of ash basin management.
At a recent hearing in which we participated, we shared a broad range of cost estimates, which included a range of site-specific closure strategies for each basin, including cap-in-place, beneficial reuse, and movement to a lined landfill. We also discussed strategies for our active coal sites, including dry, fly, and bottom ash handling. By year-end, we expect to complete our comprehensive longer-term strategies for all of our 69 ash basins across all jurisdictions. We have a $5 billion to $6 billion overall environmental CapEx plan over the next 10 years, including estimated costs for pending air, water, and waste regulations. Our waste assumptions, including coal ash, represent about 50% of this range. Our plans, including costs, will continue to be updated and refined as options are chosen and engineering plans are completed.
These planning and cost estimates could be impacted by final regulations from the EPA, which are expected in December. We will work constructively with all key stakeholders on this important issue, including cost recovery. Our coal facilities have prudently served our customers with affordable and reliable power for decades. Cost recovery is currently determined by the State Utilities Commission. We are striving for prudent, environmentally sound, and cost-effective solutions. We will keep you updated on our progress in the months ahead. During the first quarter's extreme weather, our teams rose to the challenge and quickly restored service to our customers affected by two significant winter storms. As highlighted on slide seven, a devastating ice storm in February crippled the Southeast, resulting in over 900,000 customer outages in our Carolinas territories.
In March, we confronted the third largest ice storm ever to hit our North Carolina service territory, causing over 800,000 customer outages. Our employees and contractors faced treacherous conditions caused by downed trees and power lines, but were diligent and safely restored service. These efforts resulted in about $80 million in storm restoration costs during the quarter. Our efforts with the February storm were recognized by the Executive Director of South Carolina's Office of Regulatory Staff. He declared that this storm was the most significant weather event in the state since Hurricane Hugo in 1989, and added, "When adversity strikes, we can count on Duke to serve the public and earn our admiration and respect." Again, I'd like to extend my appreciation to our Duke Energy teams for meeting these extraordinary challenges and helping to provide customers with the level of service they've come to expect from us.
The severe winter also demonstrated the value of our post-merger diversified generation fleet, in particular in the Carolinas. In January, we set an all-time peak demand at Duke Energy Carolinas and a new winter peak demand at Duke Energy Progress. Our Midwest utilities in Indiana, Ohio, and Kentucky also set new winter peaks during the quarter. This weather, coupled with fuel price volatility, highlighted our joint dispatch capabilities for our Carolina customers. As shown on slide eight, in the first quarter, we generated about $85 million in fuel and joint dispatch savings for our customers. That's the best quarter since the merger closed in mid-2012. Through the end of March, we had produced $275 million in cumulative savings toward the $687 million of guaranteed savings over the first five years after the merger.
We are on track to meet this commitment, having achieved or locked in about 80% of the total guaranteed fuel and joint dispatch savings through renegotiated contracts. As you may remember, one of the conditions of the Progress merger required us to execute eight transmission expansion projects to mitigate FERC market power concerns. These projects were committed to be placed in service over time by July 1st of 2015. To date, six of the eight projects have been placed in service. The remaining two projects are expected to be in service later this month, placing us ahead of schedule and under budget for this important merger commitment. Now let's turn to slide nine and our Edwardsport plant in Indiana, which began commercial operation last June.
Edwardsport is a large, complex project, and it has taken time to work out technical issues. Since the in-service date, we have been monitoring our success by progressing through GE's New Product Introduction protocol, conducting detailed performance testing and optimization procedures, and obtaining valuable operating experience with the new facility. As discussed during our last earnings call, the extreme winter challenged Edwardsport's performance in the first two months of this year. We took advantage of this downtime by accelerating a scheduled spring maintenance outage into February. Performance significantly improved in March and April. All major technology systems have been validated, and we continue to focus on final performance testing and optimization. We are on track to be within the total revised project estimate of $3.5 billion. The right side of slide nine outlines the upcoming regulatory calendar associated with the semiannual IGCC riders and quarterly fuel adjustment clauses.
In early April, the IURC issued its order approving our most recent quarterly fuel adjustment clause. In this order, the commission also approved a request by interveners to create a sub-docket to examine negative generation at the site in the fall of last year. A pre-hearing conference was held on April 23rd, and we are waiting on a procedural schedule. We will continue to provide updates on these important proceedings. Next, on slide 10, I'll update you on our process to exit the merchant generation business, which we announced in February. As you will recall, the businesses we are exiting include 6,100 megawatts of coal and gas capacity serving the PJM wholesale markets, as well as our competitive retail business, Duke Energy Retail. Given the price volatility in this market, these Midwest generation assets are not a strategic fit for Duke.
We have completed the required transfer of these assets outside of the utility. The marketing process has begun, and we expect first-round bids to be submitted this quarter. Our expectation is that final bids, approvals, and the closing process will likely extend into the first quarter of 2015. We expect the redeployment of proceeds to be accretive to our adjusted earnings per share. As a result of our plan to exit from this business, we recognized a pre-tax impairment loss of approximately $1.4 billion in the first quarter. Steve will discuss the accounting implications in a moment. Next, let's turn to our international business, as shown on slide 11. International includes 4,600 megawatts of generation in Latin America, about half of which is hydro generation in Brazil. This business represents between 10% and 15% of Duke Energy's earnings mix and has historically been a very good performer.
I'll start with an update on reservoir levels and rain conditions in Brazil. Reservoir levels were at about 39% at the end of April versus 62% last year at this time. Thermal generation units are being used to preserve reservoir levels and meet customer demand. In anticipation of low reservoir levels and high electric demand, we strategically reduced our targeted 2014 contracted percentage for our hydro generation. This strategy has supported our strong results to date by providing greater opportunities to sell power into attractive spot markets. We will continue to monitor conditions, and we'll keep you informed as the year progresses. Second, as announced earlier this year, we are conducting a strategic review of the international business. We are evaluating growth opportunities, including potential tax-effective strategies for domestic use of offshore cash.
We have an internal timeline to complete this review by late 2014 or early 2015, and we'll keep you informed on this process. Let me also comment briefly on our growth investment opportunities. We are continuing to actively pursue a number of projects that will support our 4%-6% earnings per share growth rate, including new generation, infrastructure projects, and environmental and regulatory compliance. For the period from 2014 through 2018, we are targeting $16 billion-$20 billion of growth investments, as outlined on slide 12. We're making excellent progress on all fronts, and I'll mention a few of these initiatives. First, in April, the South Carolina Public Service Commission issued a certificate enabling us to move forward with a new 750-megawatt combined-cycle natural gas plant at our existing W. S. Lee site in South Carolina. We expect the plant could enter commercial service by late 2017.
We had a very strong response to our request for proposals for regulated solar projects in North Carolina, including both PPA and ownership options. We announced in April that we received proposals amounting to nearly three times our goal of up to 300 megawatts of new solar capacity. Achieving this goal would almost double our available solar capacity in North Carolina. We are very encouraged by this response and expect to select the winning projects and complete negotiations in the fourth quarter. The selected projects should be online by the end of 2015. We continue to negotiate with the North Carolina Eastern Municipal Power Agency regarding our potential to purchase their minority ownership interest in certain Duke Energy Progress plants.
If we are able to finalize a purchase agreement as well as the terms of a wholesale power contract, potential next steps would include approvals by FERC, the Department of Justice, the NRC for transfer of nuclear licenses, and the Carolinas commissions. We also continue to move forward with plans for new natural gas generation in Florida. We are evaluating bids for combined-cycle baseload generation to be in service in 2018. These bids have been submitted through our RFP process, including our self-build option for 1,640 megawatts. The company has a need for additional generating resources in the 2016 to 2018 timeframe. We are analyzing whether to meet these needs with new peaking units, plant uprates, purchase power agreements, plant acquisitions, or a combination of these resources. We expect to make filings with the Florida Commission in the coming weeks outlining the most cost-effective options for our Florida customers.
Finally, in April, Duke Energy and Piedmont Natural Gas jointly issued a solicitation for proposals to build and operate a major interstate gas pipeline in North Carolina. This will help to meet the growing demand for natural gas in the Carolinas, now served by a single major interstate pipeline. Duke Energy and Piedmont Natural Gas would consider a wide range of ownership options in support of the selected proposal. We expect to choose the winning bidder by the end of this year. This slide also includes other investment opportunities that we are pursuing. Taken together, this diverse portfolio of investments supports our commitment to customers and our ability to grow and achieve our financial objectives. Now I will turn the call over to Steve to discuss our financial performance for the quarter.
Thank you, Lynn. Today, I'll focus on three primary areas. First, I'll discuss the key drivers to our first quarter results and update you on the status of our earnings guidance range for 2014. I'll also review the first quarter and full year accounting implications related to the exit of our Midwest Generation fleet. Second, 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. First quarter 2014 adjusted diluted earnings per share were $1.17. These results, as shown on slide 13, exceeded 2013's first quarter results of $1.02 per share. Our quarterly adjusted results were supported by revised customer rates and strong growth in weather normal retail customer demand. The impact of favorable weather was largely offset by increased storm restoration costs.
As Lynn mentioned in her prepared remarks, we have affirmed our 2014 earnings guidance range of $4.45-$4.60 per share. On a reported basis, the company experienced a quarterly net loss of $0.14 per share compared to $0.89 of per share earnings last year. Reported earnings this quarter were impacted by a pre-tax impairment charge of $1.4 billion, or a loss of $1.23 per share, associated with the exit of the Midwest Generation business. This impairment was based upon a fair value estimate for these assets and has been treated as a special item. Our fair value assumptions will be refined, if necessary, as we move through the sales process. A reconciliation of our reported results to our adjusted results is included in the supplemental materials.
Adjusted earnings at our regulated utilities business increased by $0.11 per share, primarily due to revised customer rates and strong weather-normalized retail customer load growth. Increased pricing and riders led to higher earnings of $0.12 compared to last year, primarily driven by our 2013 rate cases in the Carolinas and Ohio. The impact of this quarter's unusually cold weather led to higher adjusted earnings per share of $0.08 compared to last year, and $0.09 when compared to normal weather conditions. The Carolinas had the second highest number of heating degree days of any first quarter over the last 20 years, while the Midwest achieved its highest level over that same time period. Growth in retail customer demand led to higher earnings per share of $0.06 during the quarter. I'll provide more color on our customer load growth trends in a moment.
Our wholesale business added $0.03 per share in the quarter. This growth was supported by increased contractual commitments, older weather, and volume growth compared to last year. These positive drivers were partially offset by around $0.07 per share of higher depreciation expense, driven by prior year cost of removal amortization in Florida and additional depreciation in 2014 for new plants and service. O&M costs were around $0.05 per share higher during the quarter. Quarterly O&M was impacted by the additional storm restoration costs that Lynn highlighted of around $0.07 per share. Excluding these storm costs, O&M was slightly lower as a result of our ongoing cost management efforts and a $0.02 nuclear outage cost levelization benefit in the Carolinas. Interest expense was higher by around $0.03 per share, primarily due to lower post-in-service debt returns on projects now reflected in customer rates.
I'll address International's results, which were $0.04 per share higher than the prior year quarter. These results were impacted by higher earnings in Latin America of $0.06, mostly in Brazil. A reduced contracting strategy that Lynn discussed resulted in more sales volumes into the spot market at higher prices. These favorable results were partially offset by unfavorable foreign currency exchange rates, a $0.02 drag compared to last year. Moving to Commercial Power. Adjusted results for this segment were flat during the quarter. However, there were some offsetting drivers. Results from our renewables business were $0.01 per share higher than last year, driven by increased wind production and lower development costs. We expect this business to generate around $50 million in net income this year. Let me discuss Midwest Generation.
Results for the Midwest gas generation units were around $0.01 higher, driven by higher realized power prices. These results were substantially offset by lower earnings from the Midwest coal fleet of around $0.01 per share due to outages experienced during the extreme cold weather. As a result of these outages, we were required to purchase high price power to meet our hedged commitments. Duke Energy Retail also had unfavorable earnings in the quarter of $0.01. Our retail business hedges its contracted volumes, assuming normal weather. When demand surged in January, Duke Energy Retail was forced to buy high-priced power in the market to meet this increased demand. Let me spend a moment discussing some important accounting changes that will occur with our Midwest Generation fleet.
Since we've started a process to exit this business, the plants are classified as assets held for sale in our financial statements as of March 31. As a result of this classification, for the remainder of the year, there will be no further depreciation expense recognized on the plants. Since the assets have been reduced to their estimated fair market value, any future maintenance capital expenditures will likely be expensed as incurred. We expect these two changes to largely offset each other. We will continue to recognize any earnings from these plants in the company's adjusted diluted earnings per share, until a sales transaction is closed. Slide 14 highlights our retail customer volume trends for the quarter and the economic conditions within our service territories. Quarterly weather normal retail customer load was 2.6% higher than 2013, along with a 1.6% higher trend over the last 12 months.
This was the third consecutive quarter we have experienced strong retail load growth. We are very encouraged and are seeing more signs of sustained economic improvement throughout our service territories. The economic recovery has expanded as credit has loosened, household income has increased, and overall unemployment rates have declined. In fact, over the past year, the unemployment rate in the Carolinas and Indiana has declined by around 2%, well in excess of the national average decline of around 0.8%. These trends have resulted in higher consumer confidence, which has led to higher electricity consumption by our customers. Duke's service territories remain attractive for business expansion. During the quarter, our commercial and industrial customers announced significant capital investments for new facilities or the expansion of existing ones. These investments are expected to add over 3,000 jobs across our regulated territories.
Let me highlight some of the trends we are seeing in each of our customer classes. First, our residential customers, where we had quarter-over-quarter growth of 2.9%. We experienced higher usage per customer of around 2% as compared to negative usage customer trends at this time last year. Some of the first quarter growth in usage per customer can be explained by the extreme weather across our service territories when customers were forced to stay at home and use more power than normal. However, improved economic data leads us to believe this strength is more sustainable rather than a one-time event. We also continue to experience growth in the average number of customers across our service territories. Since the first quarter of 2013, we've added approximately 70,000 new electric customers, an average increase of around 1%. We haven't seen this level of new customer percentage growth since 2008.
Our commercial class experienced growth of 3.6% in the first quarter, primarily supported by strong activity in the Carolinas and Florida. Employment rates and real income levels have continued to improve, leading to growth in retail sales for this segment. Office vacancy rates are also favorable throughout our service territories. In the first quarter of 2014, we also experienced significant growth in demand from data centers in the Duke Energy Carolina service territory. Higher sales were also seen in the hospitality, healthcare, education, and professional business services sectors when compared to last year. Finally, the industrial sector continues to experience steady improvement. Industrial production remains above expectations due to strong demand for manufactured durable and non-durable goods. We are seeing continued strength in the automotive, construction, and metal sub-sectors.
Industrial demand in the first quarter was tempered by factory shutdowns and delays in the delivery of raw materials due to the impact of the winter weather. We are optimistic about the sustainability of the economic recovery across our service territories and encouraged by the growth we have experienced over the last three quarters, as well as over a rolling 12-month basis. We will continue to monitor these trends and provide updates throughout the year. I will close with our financial objectives for 2014 and the longer term, as outlined on slide 15. I'm very pleased with our financial performance through the first quarter of 2014. Based upon our results to date and assuming normal weather for the remainder of the year, we are evaluating opportunities to accelerate some O&M expenses from future periods into 2014. We will update you on our plans later in the year.
The balance sheet remains strong. We recently conducted annual meetings with the rating agencies. These discussions were constructive, and our ratings outlook is stable at all three agencies. Our strong balance sheet allows 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. We expect to achieve our long-term payout ratio of 65%-70% in 2014, allowing greater flexibility in future dividend growth. Finally, we continue to make progress on our growth initiatives and cost savings projects. We remain well positioned to grow longer-term earnings within our targeted range of 4%-6%. We continue to execute on our overall financial objectives. I'll turn it back over to Lynn.
Thanks, Steve. I'm proud of how our team responded to the operational challenges of the first quarter, while remaining focused on our mission to provide customers with safe, reliable, and cost-effective service. We also made great progress on our 2014 and longer-term financial objectives and have taken important steps on our strategic initiatives to build a stronger future. We will continue to execute on our mission to deliver exceptional results to benefit our customers, communities, and investors. Now let's open up the lines for questions.
If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is *1 at this time to ask a question. We'll go first to Dan Eggers with Credit Suisse.
Hey, good morning, guys.
Good morning, Dan.
Good morning.
Just following up on maybe Steve's closing comments about load growth and what you're seeing. First quarter represented yet another quarter of better-than-planned load growth, and the trailing 12 months is pretty supportive of a higher growth rate than what you talked about. When are you guys going to decide that maybe growth is at a higher level, and what bearing will that have on how you're prioritizing the growth CapEx you laid out in the slides today?
Dan, I'll take a stab at it, and Steve, I'm sure, will have something to add to it. We're optimistic about what we're seeing with three quarters. I think when we look at a really weather-impacted quarter, however, the science to pull weather out isn't perfect, we'd love to see another quarter of strength before we formally revise estimates. That's how we're looking at it, but we feel like we've seen some strength here that gives us some optimism about the future. In terms of prioritization of investments, we continue to focus on deploying about 85%-90% of our capital into our regulated businesses. We're also continuing to focus on building our commercial renewables business. I would think about those initiatives progressing, and the timing will really be dictated in many ways by regulatory approvals and as these opportunities develop.
That's where I'd leave it on the prioritization.
I guess on your commercial ops with the impairment this quarter, can you give us an update, A, on where that process sits, when you expect something to be announced or formalized? With AEP and FirstEnergy both talking about the idea of long-term contracting or some sort of reregulation in Ohio, is that going to prospectively change your timing for moving forward with the sale?
Dan, we are continuing to progress with the sale process. We are targeting first-round bids here in this quarter, so second quarter, would expect the process to continue. We'll update as we go and meet milestones on that process. In parallel, we're of course monitoring what's going on in Ohio. AEP in particular has put forward an ESP that has a non-bypassable charge intended to provide customers with some stability around what could be market volatility. I think they've introduced the OHVAC asset and potentially others. We'll continue to monitor that. I think Ohio has begun to recognize that extreme weather conditions such as the polar vortex may be creating reliability concerns for the state, we'll monitor how that conversation progresses.
Could that change your decision to sell if it looked like there was an alternative to contract in Ohio or some sort of other structure?
Dan, we're not thinking about it that way at this point. We're moving through the sale process. We think that fits with our strategic objectives to reduce that volatility in those assets. We'll update you as that process progresses and as we have more to say about how it's progressing.
Okay. Thank you.
Thank you.
We'll take our next question from Julien Dumoulin-Smith with UBS.
Thank you. Good morning.
Good morning.
Perhaps to follow up a little bit on the last question, shifting over to Indiana, could you perhaps give us a little bit of an update as far as you see recovery of both O&M and purchase power, and how do you see the latest sub docket working out as far as Edwardsport goes?
Actually in the slide deck, Julien, there are a couple of slides, nine and 25, that lay out the sub dockets that are pending in Indiana. A sub docket has been opened on fuel recovery, really focused on the latter part of 2013 and the issue raised by interveners on negative generation. We do not yet have a procedural schedule on that, and we'll need to just progress that and update as it occurs. Our focus in Indiana is really on continuing to ramp up and complete our performance testing, optimizing the asset, and moving through this important transition. I'm pleased that generation has improved in March and April, and the team is very focused on continuing to deliver strong results out of the asset.
I think we'll have to move through the regulatory process in the weeks and months to come, and as we have items to update, we'll certainly do that.
To clarify, rather, is it that both purchase power and O&M is at risk, or is one versus the other? Just if you could perhaps elaborate a little bit on that.
Julien, there are two types of riders, right? Fuel is the one I just spoke about, where the commission has opened a sub-docket on fuel and focusing specifically on this negative generation in the fourth quarter. That proceeding is specific to fuel. There are also ongoing filings in the IGCC riders, which address return and address O&M recovery. I believe the commission has approved through IGC 11. We have 12 that we're waiting for approval on, and we are filing 13. Those would be the dockets in which interveners could challenge costs and O&M and so on. I think that's something we'll have to monitor over time.
Great. Following up on the results in the quarter here in Brazil, especially given the hedging, how does this meet your plan that you've articulated earlier this year? How are you feeling about that? Ultimately, how do you think about the energy rationing as it stands today and the prospects for that, and how would that impact you or what have you?
The Brazilian operation is off to a strong start for the first quarter, Julien, and we actually benefited from the hedging strategy because we had the opportunity to sell generation into a high-priced spot market. As we continue to look at the balance of the year, we're watching this very closely. We like the fact that we have a little bit more flexibility in our contracting position, which gives us some protection if the regulator or government were to move into a rationing or voluntary rationing situation. We do not have any further information on that at this point. I think given the political environment in Brazil, the World Cup, the elections, I think that's going to be reviewed very closely by the government and by the regulator. We're watching it every day. We're watching rainfall.
We are looking at dispatch, we are looking at spot prices, Of course, also looking ahead to 2015 and how that could impact our contracting strategy for 2015.
Great. The last detail, have you delineated O&M versus capital costs for coal ash in Carolina and elsewhere?
We have not. What we have put forward are ranges of costs around closure, around investment to dry handling. The installation of certain of these capital costs will drive O&M, but we've not provided specific ranges on the O&M at this point.
Great. Thank you.
Thanks, Julien.
Our next question comes from Steve Fleishman with Wolfe Research.
Yeah. Hi, good morning.
Hi, Steve.
Hi, Lynn. Just a few questions on the coal ash issues. The independent engineering report that you're doing, that's going to be done by the end of May, are you going to make that public right then to us, or how's that going to get released?
Steve, we are moving through the third-party engineering in a sequential way, kind of working through all of the basins. To the extent there are items identified that we should address from a maintenance standpoint, we are addressing those. What we've committed to do is provide periodic updates on our short-term and longer-term actions when we reach specific milestones. We are also updating the regulators on these milestones. We haven't made a specific commitment on what we'll do around May 31st, but you can expect us to make updates on the progress on our short-term plans as the year progresses.
Okay. Just on the legislative session, you said there's a short session. Just what are the proposals that you're expecting to hear, and how long is the session?
It should wrap up in early July. Steve, May 15th to early July?
That's correct.
Okay.
I think proposals will develop as the session gets started. I referenced in my comments that there's been a lot of work by the legislative body on education, trying to understand the complex topic. I think as the session starts, we'll have more information on specifics. I think you're aware we've put forward a plan that lays out specific actions around certain plants. We've also laid out a plan to accelerate investment in dry fly ash handling, also moving forward with dewatering certain of the retired ponds. We're moving forward on those actions and would expect those to be considered, although we can't speak fully to how the legislature will address the issue broadly. Certainly, that plan would be considered, I think, as part of the go-forward strategy.
Okay, just last question. Where do you stand overall on your coal piles? Maybe you can just give some color there, and are you having to take any actions to kind of preserve coal into the summer?
Steve, we're in good shape. It has been a challenging delivery time during the first quarter, but we feel comfortable with where our inventory is across the system.
Okay. Thank you.
Thank you.
We'll now take Jonathan Arnold with Deutsche Bank.
Good morning.
Morning, Jonathan.
Morning. A couple of questions. First, on Edwardsport, Lynn, it's good to hear that it's running better March and April. Can you be a bit more specific? What type of range of cap factor have you been able to achieve more recently? Are we just talking about the combined-cycle, or is this also the gasifier piece of it as well? Just a bit more color on what you mean by running better.
Jonathan, when I talk about running better, I'm talking about running on the gasifiers. The month of April was the third-best month since the plant has been in service. I don't have a specific capacity factor in front of me. Kind of trending up, March was a strong month, and then April stronger still. We do provide monthly updates to the IURC on our generation statistics. I think if you follow up with IR, we could probably give you a little more specifics on how that generation is occurring.
Okay. You feel confident that it's going to sort of ramp from here, or is there another sort of period where it has to sort of go through more testing and step back a bit, or as we track this now?
We are finalizing performance testing with General Electric, hopefully in the month of May. We have taken the outage in February to address some of the issues that we experienced from severe weather earlier in the year. I think at this point, Jonathan, it's continuing to improve performance. It's optimizing procedures, and I think the team, if they were on the call, would tell you they have increasing experience on the operating profile of the plant. It's improving over time. There's greater confidence in operations. It's a complex project, and we're learning every day. I feel like we have the right resources devoted to it, and we're working hard to continue to improve operations.
Is there something about the technology and very cold weather that might impair its performance in the future, in wintertime, or was it just because you were in startup?
Jonathan, I do think we learned some things from the weather in Indiana, which was 30 degrees below what we would normally experience. My hope and expectation is that we saw the worst of the worst this winter and have been able to address operational challenges as a result of that. Let me turn it over to Keith Trent or Dhiaa Jamil, who've been very involved in this, and see if they have anything to add to that.
Sure. Jonathan, I would just add one thing, and that is, there's nothing that was unique about the technology that was impacted specifically by the cold weather. As Lynn said, it was extremely cold, 30 degrees below what we'd seen in the past. It was more exposure of components to extreme cold, like transmitters, those sorts of things that are not any kind of unique technology. We learn from that, and we can apply heating methods, which we have done, so that we can remedy that. There's nothing unique about the technology that's causing us concerns.
Great. Thank you. Lynn, if I might, on another, just big picture, if another quarter confirms what you seem to suspect, which is that your sales have begun to tick higher, how should we think about that as it would impact your overall plan? Does it push out rate case timings? Does it mean we're going to have to step up capital spending in certain areas? How would uptick in sales sort of change what you've laid out for us?
Jonathan, I feel like an uptick in sales is the best possible thing that can happen not only to Duke Energy, but to the economies that we serve. When you see improvement in the industrial base and commercial and new customers being added, I think it's all around a good outcome. I think it will give us some things to think about in terms of timing of rate cases and capital deployment, and we have begun some of that thinking, and when we're prepared to share it with you, we'll give you some more feedback on it. Generally, I think this is a very good thing.
Yes. I think that we're in the process now, Jonathan, of updating our forecasts. We go through this process every year for the Integrated Resource Planning Process, which is our long-term planning mechanism that we share with the commission, and that drives a lot of our generation planning and rate case planning and so forth. We'll be putting through those mechanisms and these changes and see what it yields.
What would the timing of resource plan updates be?
It varies per jurisdiction. We'll typically do it in the spring and fall in the Carolinas, as an example.
Thank you very much, guys.
Thank you, Jonathan.
Our next question comes from Chris Turner with J.P. Morgan.
Morning, Lynn and Steve.
Morning.
Could you guys give us a little bit more color on the RFP process in North Carolina for the new pipeline? I'm thinking kind of along the lines of total cost, and then when we would actually see incremental information as to whether or not you're going to offer any soft bill proposal.
Chris, we're early in the process. We've announced a solicitation with an expectation and a timeline that would put us in a position to announce a winning bid, if you will, by the end of this year. We're evaluating a range of options, which would also include ownership interest on the part of Duke and Piedmont. We will update you as we go. We have not disclosed, nor do we have a broad range of investment at this point. We are anxious to talk with the various bidders about what they see the potential to be. As we have more information, we'll share it with you. I think this is a terrific opportunity, not only to underpin infrastructure for electricity, but I think it's an opportunity for economic development in the eastern part of North Carolina.
We are at work putting together a project that we think could be very strategic for the state.
Great. Any updated thoughts on M&A, given what we've seen in the past couple of weeks here in utility land?
Nothing different than what we've said previously. We like the business mix that we have. We like the complement of jurisdictions that we serve. We would consider M&A, it would need to be an opportunistic type thing. It's certainly not something that we see as a must-have from a strategic standpoint. We're monitoring all of it, Chris, and would consider opportunities, but nothing beyond that at this point.
Great. Thanks.
Thank you.
We'll now take Brian Chin with Bank of America Merrill Lynch.
Hi, good morning.
Hi, Brian.
Good morning.
Going back to the coal ash issue, would it be reasonable for us to think about the projections you've given on the different options for North Carolina, that's roughly comparable to how we think about the costs of coal ash remediation in other states where you have similar pond issues? Is that sort of the right way to think about it? Or are the North Carolina coal ash issues so site-specific that it wouldn't be reasonable to broadly assume those cost assumptions for other ponds?
Let me try to jump in on that, Brian. I'm sure in the back of your mind, you're referencing the testimony that we presented to the commission or the Environmental Commission in the legislature. We have put out our $5 billion to $6 billion estimate for the 10-year environmental plan, that has included addressing ash pond closure. It's also included addressing conversion to dry bottom ash and fly ash in anticipation of where the Steam Effluent Guidelines will go. We have, as part of our short-term action plan, modified that estimate for four sites in the Carolinas by evaluating a closure option that actually moves all the ash to a lined landfill. That has added roughly $500 million to our estimate. It's moved from $4.5 billion to $5.5 billion to $5 billion to $6 billion.
Further refinement of the estimate around waste will be accomplished as we complete our strategic review, site by site, of all of our ash basins around our system. It's really premature for us to give you more specifics on the estimate or how it'll be implicated in other jurisdictions, because it'll be dependent upon a couple of things. First of all, our strategy, and in the case of North Carolina, what we expect to be legislation in the state. As we talk about our other jurisdictions, we do not see an immediate push around legislation or change in policies in the same manner as we're seeing in North Carolina.
Understood. Very helpful. On that last point about other jurisdictions, is it right now your expectation that resolution in North Carolina will likely lead how other states and your conversations will be resolved on coal ash? Or is there a possibility that the discussion with those other jurisdictions has been accelerated given what's happened with North Carolina, and you could see resolution in other states potentially setting a precedent for how North Carolina looks at this?
At least among our jurisdictions, Brian, North Carolina is in the lead in terms of this discussion. I think if you think back into the earlier part of the 2000s, North Carolina put forward an industry-leading set of legislation called Clean Smokestacks, where they were instrumental in accelerating investment in environmental around air. I think this represents an opportunity for North Carolina to do the same around ash. As we move through this short session, we will have a better sense of how the policy will be developed for the state. I do think we have an opportunity in North Carolina to lead.
Very good. Then one last quick one. For the strategic review on the international front, in the past when the strategic review has concluded, basically we haven't seen a major confirmation from the company in terms of direction one way or another. With the conclusion of this strategic review, is it the intention of the company to provide a positive conclusion regardless of what the decision is, or is it more likely that it will simply be concluded privately and no more future mention of that will happen until the next strategic review?
We intend to disclose when the strategic review is complete and what our conclusions are.
Thank you very much.
Thank you, Brian.
We'll now take Angie Storozynski with Macquarie.
Thank you.
Morning, Angie.
Good morning. Given that you are in the process of selling your plants in the Midwest, should we expect that this process will impact your bidding strategy into the PJM auction?
Angie, I have not spent any time on bidding strategy for the PJM auction.
I do not think that will impact our strategy. The sales process, it will not change any strategic intent there.
Let's follow up on that with the IR team.
Okay
specific PJM bidding strategy to the extent
Okay
we're going to disclose bidding strategy.
Secondly, on the load growth, I do see the numbers. They do seem impressive. However, they tend to be significantly skewed towards the residential and commercial load, the strength, and those two groups tend to be most impacted by the weather, right? I mean, the fact that there's such a big discrepancy in the industrial load growth versus residential and commercial That could suggest that, as you said yourself, that those weather normalization models are a little bit off, or it could be that your service territory is simply different, meaning less industrial. How would you describe that?
I think there are a couple of things I would point to. Steve can certainly add to this. We did see an increase in usage per customer, Angie. In addition to strong customer growth, we saw an increase in usage per customer. It's hard to know exactly why that's occurring, but frankly, because of the extreme weather, we had parts of the Carolinas that were home for days at a time, and we do think we had a little bit of additional usage on a per-customer basis as a result of that. The other thing I would point to is when I look at the residential trend, third quarter was up 1.1%, fourth quarter was up 0.7%, both of which are pretty strong numbers. Similarly, commercial was up 1.6% in the third quarter and 1.2% in the fourth quarter.
The other thing I would point you to is over a rolling 12-month period, we're kind of at a 1.6%. I don't have a perfect answer to, do we have a little bit of weather in the volumes? I think there's a possibility we have some weather. That's why we're continuing to monitor this. Second quarter will give us another good indication. It will not be as weather-influenced. When we look at all of the factors together, including the performance in third and fourth quarter, we believe we're seeing a trend.
That's right. We have added 70,000 customers, so that's a stronger number than we've seen. Some of the data that we look at, median household income, that's looking at middle income growth, is stronger than we've seen before in the past. The unemployment rate changes are significant as well. It feels like the economic recovery is broadening and deepening a bit and getting into the pockets of smaller businesses and middle-income residences.
My last question, about your coal plant. You're showing us this very high potential CapEx associated with coal ash remediation. Then we are approaching June 1st when the EPA is supposed to issue carbon dioxide emission rules. I'm trying to understand, given that both of these are actually going to probably result in a pretty significant uptick in your electric rates, how do you think can all of this CapEx and additional costs be recovered without actually a rate shock?
Angie, I think the thing to keep in mind on ash is that that expenditure is going to occur over a very long period of time. Even on the short-term action plan that we put forward of $500 million, it is going to occur over two to five years. If you look at some of the higher-end numbers that we put forward, assuming that all ash gets moved, those numbers are over 20 to 30 years. It'll just physically take that long to accomplish. I think that's an important consideration for you to think about when you think about ash. I think on greenhouse gases in general, we're going to have to evaluate how those rules come out, how they come forward, what kind of flexibility is offered in the states.
I do think there's a lot of focus on the part of the EPA on reliability and giving the states flexibility. I think we'll have to evaluate where those rules come out before we can conclude what the implication will be to rates.
Your current RFP for solar in the Carolinas and potentially putting it into the rate base is not in any way related to potential carbon regulations in your attempt to offset your carbon footprint?
Yeah, it is in connection with both a customer demand for solar, but also we have a renewable energy portfolio standard in North Carolina, Angie, and this would be a part of the compliance with that standard.
Okay. Thank you.
Thank you.
We'll now take Michael Lapides with Goldman Sachs.
Hey, guys. Congrats on a good start of the year.
Thank you, Michael.
Thank you.
You're welcome. A question, one for Steve, one for Lynn. Lynn, can you talk about just the range of options when you think about a strategic review of the Latin American business? What's off the table?
Michael, I'm not sure that there's anything off the table. What we try to do when we come to a strategic review like this is consider all options. We've got a great business, a great position, profitable businesses that have been a strong contributor to the company over time. We have some headwinds in the form of foreign currency. We don't see the growth that we'd like to see in that business. We're really solving for two things. Is there a way we can better position the business for growth? Is there a better way we can position the business to optimize cash flow? Over what timeframe and what are the trade-offs that we need to consider to accomplish that? I wouldn't say there's anything off the table at this point.
We're trying to be open-minded and explore as many options as we can think of.
Got it. Steve, you made some comments about O&M both in the quarter, also about maybe moving forward some O&M. I know you had the storm-related O&M during the first quarter of this year. Can you just talk about O&M trajectory, how 2014 looks like versus what your original guidance for O&M was in 2014, then what does that mean for beyond 2014?
Certainly. The O&M trajectory has not changed, we intend to keep non-fuel O&M flat through 2016. We see very positive trends thus far in 2014. When you pull the storm cost out, we actually see O&M down a bit. We are continuing to find, through integration projects and moving people to similar processes and platforms and IT systems, additional benefits to offset emergent costs. We feel very good about our O&M trajectory.
Got it. Thanks, Steve. Thanks, Lynn. Much appreciated.
Thank you, Michael.
That does conclude the question and answer session. At this time, I would like to turn the conference back to Lynn Good for any additional or closing remarks.
Well, thank you, everyone. Thank you for your interest and investment in Duke, we look forward to seeing many of you in the weeks and months to come. Thanks again.
Once again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation.