Earnings Call: Q1 2010

May 4, 2010

Day, everyone, and welcome to the Duke Energy Quarterly Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Stephen DeMay, Senior Vice President of Investor Relations and Treasurer. Please go ahead, sir. Thank you, Andrea. Good morning, everyone, and welcome to Duke Energy's Q1 2010 earnings review. Leading our discussion today are Jim Rogers, Chairman, President and Chief Executive Officer and Lynn Good, Group Executive and Chief Financial Officer. Those of you who are familiar with our earnings calls will notice that today's presentation will be more streamlined than in the past. Some of the detail we used to cover in the main section has been moved to an appendix that includes expanded disclosures to help you analyze the company's performance. By focusing the call on the major drivers of our results, we are able to reserve more time for your valuable questions, which we will take after our prepared remarks. In addition to Jim and Lynn, Jim Turner, the Head of our Franchise Electric and Gas Businesses and Keith Trent, the Head of our Commercial Businesses will also be available to answer your questions. Before we begin, let me remind you that today's discussion will include forward looking information and the use of non GAAP financial measures. You should refer to the information in our 2,009 10 ks and other SEC filings concerning factors that could cause future results to differ from this forward looking information. A reconciliation of non GAAP financial measures can be found on our website and in today's materials. With that, I'll turn the call over to Jim Rogers. Jim? Thank you, Stephen. Good morning, everyone, and thank you for joining us today and thank you for your interest and investment in Duke Energy. We had a strong Q1. As you saw in our news release this morning, we announced adjusted diluted earnings per share of 0.3 dollars for the Q1 of 'ten versus $0.28 for the Q1 of 'nine. Reported diluted EPS for the Q1 of 2010 was $0.34 compared to $0.27 for the first quarter of 2009. These solid results were primarily due to 3 factors: 1, favorable weather 2, an increase in weather normalized retail sales volumes and 3, the impact from the base rate increases approved in 2,009 in North Carolina, South Carolina, Ohio and Kentucky. When fully implemented, these four increases will increase base rates by over 4 $50,000,000 a year. During the quarter, we experienced colder than normal weather across our service territories. Actually, in the Carolinas, February was one of the coldest on record and on January 11, we set a new winter peak for power demand. Relating to the economy, the signs of stabilization we began to see late last year continued through the Q1. Even though we continue to believe the economic recovery will be gradual, This continued improvement gives us more confidence that the worst may be behind us. With these results, we are on track to achieve the 2010 adjusted diluted EPS outlook range of 1.25 dollars to $1.30 the guidance we reported at our February Analyst Meeting. Achievement of this year's EPS range assumes normal weather, continued success with our cost control efforts and maintaining our strong operational performance. And remember, our Q3 has historically our most significant quarter of the year. In addition to the base rate increases I noted, I'd like to highlight several of our key developments so far in 2010. 1st, we continue to make progress with our major construction projects. In our regulated businesses, Cliffside is over 60 percent complete and Edwardsport is over 55% complete. Last month, we filed a cost update for the Edwardsport plant with the Indiana Utility Regulatory Commission, which I will discuss later in more detail. Additionally, in our commercial businesses, we are on target to bring over 2 50 megawatts of wind generation online in 2010. 2nd, we continued our cost control efforts, including implementing voluntary employee separation and office consolidation plans. We're on track to achieve our target of maintaining our 20 10 O and M cost, net of deferrals and cost recovery riders flat with 2,009. 3rd, we remain focused on maintaining the strong operational performance of our generation fleet and grid. During the Q1, we continued our strong operational performance such as our nuclear capacity factor, which ended the quarter at over 98%. Finally, in Duke Energy International, we extended the joint venture agreement for National Methanol Company, NMC, by 20 years until 2,032. This joint venture, which was scheduled to expire in 2011, has historically generated 20% to 30% of international's earnings contribution. We are very pleased with being able to extend this earnings stream. Let me now turn it over to Lynn for a more detailed summary of the Q1. Thank you, Jim, and good morning, everyone, and you for joining us today. Let me begin with an overview of our financial performance. Slide 4 contains details on our adjusted segment EBIT results for the quarter compared to the prior year as well as the significant earnings drivers quarter over quarter. As you can see in the table on this our total adjusted segment EBIT increased over $200,000,000 when compared with the Q1 of last year. Both our U. S. Franchised electric and gas and international business segments showed improvement. While commercial power's results were generally flat with the Q1 of 2,009, a credit to the hard work of our Ohio team in a challenging market environment. The U. S. Franchise electric and gas segment increased adjusted segment EBIT by $187,000,000 Roughly half of this increase was due to rate increases approved in 2,009 in our regulated businesses. These include electric rate cases in both of the Carolinas, the electric distribution case in Ohio, and the gas distribution case in Kentucky. These rate increases reflect the recovery of investments in our systems significant drivers for the quarter. In the Carolinas, heating degree days were 22% above normal, while Charlotte experienced its coldest winter in over 40 years. While less extreme, weather was also favorable in the Midwest with heating degree days 11% above normal. I'll talk more about economic trends on our weather normalized sales volumes in a few minutes. In our commercial power segment, lower native margins, mostly due to customer switching pressures in Ohio, were offset by increased contributions from our Midwest gas assets. These contributions resulted from higher PJM capacity auction revenues. Additionally, the coal generation fleet experienced lower O and O and M expenses, principally due to fewer outages. Our Duke Energy retail sales customer acquisition efforts continue to mitigate the impact of customer switching. Our international segment's adjusted EBIT increased $47,000,000 over Q1 2019, primarily driven by favorable foreign exchange rates, primarily in Brazil and improved contributions from our investments in National Methanol, principally due to higher commodity prices. 2 additional drivers lowered our overall results. The first was increased interest expense of 26,000,000 dollars due to higher debt balances and the second was a charge of $17,000,000 related to changes in the tax treatment of Medicare Part D subsidies, resulting from the passage of healthcare legislation in March. For more detailed quarter over quarter drivers for each of our segments, please refer to the accompanying appendix. On Slide 5, I will review sales volume trends by customer class and our regulated business. As we enter 2010, we expected a slow economic recovery and forecasted of our service territories and vulnerability of industrial load in market segments like textiles, it was prudent to plan the year assuming that 2010 would look like 2 1,009. As you can see on this slide, however, our sales volumes for the Q1 of 2010 were higher than these original expectations. Overall, our weather normalized electric volumes increased approximately 2.5% when compared to the same quarter in 2,009. Due primarily to the strength in the primary metals and textile sectors, our weather normalized industrial sales volumes increased by approximately 9%. The primary metals sector experienced an increase of over 30%, while the textile sector experienced an increase of around 10%. Our primary metals customers tell us that they are running at production levels higher than anticipated at the start of the year, supported by strength in the automotive industry and a replenishment of inventories. Similarly, our textile customers are experiencing production levels in early 10s significantly above Q1 2019 production levels. While we are pleased with these production increases, we're cautious about sustained growth at these levels over the balance of the year. The appendix to this presentation contains additional details on quarterly industrial volume trends. As we have done in the past, we will continue to monitor industrial activities through our ongoing discussions with our customers. Let's move on to our commercial and residential sales activity. Our weather normalized commercial sales volumes declined slightly during the Q1 of 20 10 when compared to the Q1 of 2009. This decline is consistent with our expectations as trends in this customer class have historically lagged the overall economy. Our residential sales volumes remain a bright spot. During the quarter, residential weather normalized sales volumes increased our customer base. During the recession and into 2010, customer growth has been primarily focused in the Carolinas. And now for the first time since the Q3 of 2008, we are seeing moderate customer growth in the Midwest. Overall, based on these Q1 2010 trends, we are cautiously optimistic about the economy, but continue to believe that recovery will be slow and moderate. Although we see signs of recovery, high unemployment levels persist in many of our service territories. We will continue to closely monitor trends in each customer class as the year progresses. Next, I'll update you on competition in Ohio. You may recall that economic pressures mounted in early 2009, energy demand collapsed and wholesale power prices fell dramatically. This created a gap between Duke Energy's established ESP price in Ohio and the prevailing market price, providing an economic incentive for customers to switch energy suppliers. As a result, we began to see an increase in switching, primarily in our commercial and industrial customer classes. Our competitive retail arm, Duke Energy Retail Sales, quickly became active in the Ohio market and successfully acquired a large portion of Duke Energy Ohio's switched load. By the end of 2009, the gross switching rate was around 40%, while the net switching rate, net of customer load acquired by Duke Energy retail sales, was about 15%. The unfavorable financial impact for 2,009 was approximately $0.02 per share. As we entered 2010, market prices remained low and we expected switching to continue. In establishing our earnings outlook for 20 10, we estimated a year over year EPS impact in the range of 0 point $4 to 0 point 0 $7 and average gross switching at 45% for the year. Based on our experience in the Q1, we now expect gross switching to average 50% to 55% and to be in the upper end of the $0.04 to 0 point 0 $7 EPS range. Switching continues to occur primarily in our commercial and industrial classes. To date, residential switching has been moderate. However, we are seeing increased competitor activity in the residential sector in both government aggregation efforts and in the targeting of individual residential customers. Duke Energy retail sales is active in the residential aggregation market as well. We actively seek ways to maintain the highest level of profitability in the dynamic environment in Ohio. Our retail arm, Duke Energy Retail Sales, will territory or an offensive strategy in which we are selectively attracting customers outside of our service territory. Now let me move on to Slide 7, which summarizes our ongoing efforts and results from our cost control measures. We are continuing these efforts in 20 10 We are continuing these efforts in 2010. Our cost objective for 20.10 is to hold O and M, net of deferrals and recovery riders flat to 2,009. As a result, we must sustain the O and M cuts we achieved in 2,009 as well as absorb the impact of inflation. You can see on the accompanying chart that during the Q1, our O and M, net of deferrals and cost recovery riders, was slightly below the Q1 of last year. These results reflect the benefit of our ongoing cost control measures as well as lower storm costs compared to 2,009 and the timing of other expenditures. To date, we are on track to achieve our cost objective for 2010. Let me also spend a few minutes highlighting our voluntary separation and office consolidation plans. In the Q1, we offered a voluntary separation plan to our employees. The window for this offering has closed with approximately 900 employees selecting or electing to accept the offer. Additionally, we began the process to transfer and consolidate corporate functions to our headquarters in Charlotte, which will be completed over the next several years. Excluding approximately $15,000,000 of pension related costs, we expect recognize total charges related to these programs of approximately $165,000,000 We are targeting savings that will result in a 2 to 3 year payback period. During the Q1, we recognized approximately $68,000,000 in charges and expect to recognize most of the remaining costs in 2010. We remain committed to cost control measures, but be assured that we will spend the dollars necessary to ensure the continued reliability and quality of our service to customers. In the appendix, you will find details of our quarterly performance compared to our annual expectations for a few key operational metrics. Our focus on cost control and operational excellence is not merely financially motivated. Given our active regulatory calendar, it is important that we control costs and efficiently operate our plants to lessen the impact of price increases on our customers. In other words, cost control and operational excellence are very important in within the $1.25 to $1.30 adjusted diluted earnings per share guidance range for 20.10. We are encouraged by our strong start in 20 10, principally driven by favorable weather and volume trends. However, it is premature to adjust our expectations for the entire year based on 1 quarter's performance. We have 3 quarters ahead of us, including the 3rd quarter, which is historically our most significant one. With that, I will turn it back over to Jim for closing remarks. Thank you, Lynn. Over the next 3 years, we expect to invest between $14,000,000,000 to $15,000,000,000 to modernize our generation, transmission and distribution system, maintain our facilities and sustain the earnings and cash flow from our commercial businesses. Approximately 75% of these investments will be made in our regulated businesses, giving us the ability to replace some of our older, less efficient plants with new efficient and lower emitting units. This becomes even more important given our belief that every power plant we operate today will need to be replaced by 2,050 as a result of normal aging and technological obsolescence, with the exception of our hydro units and of course assuming no further nuclear relicensing. In keeping the appropriate long term focus, I am reminded that the decisions we make today will still be impacting the company decades from now as the power plants we are building will operate for 30, 40 or even 50 years or more. Let me now provide a summary of our major regulated construction projects. As I noted earlier, our cliffside project is over 60% complete and on budget. Through March 31, we have spent approximately $1,300,000,000 of the approximately $2,400,000,000 project total, including financing costs. As you all may remember, we made a commitment to North Carolina air regulators we will retire approximately 1,000 megawatts of older, less efficient coal fired generation through 2018 when Cliffside Unit 6 becomes operational in 2012. Also, the Cliffside modernization project involves the installation of a scrubber on our existing Unit 5, which will share a common stack with Unit 6. The Unit 5 scrubber is on time and on budget and it is scheduled to become operational this fall. The Edwardsport project Indiana is over 55% complete with final engineering over 90% complete. Through March 31, we spent approximately $1,600,000,000 on the project, including financing costs. This project is expected to become operational in 2012 and will give us the ability to replace the existing 160 Megawatts of 19 40s era generation located at the site. It will also help offset the required shutdown last fall of 3 units totaling 265 Megawatts at our Wabash River Station in Indiana. This shutdown stemmed from last spring's ruling in our new source review case. As I noted earlier, in April, we informed the Indiana Utility Regulatory Commission that the cost estimate of the Edwards Port project would increase to around $2,880,000,000 about $530,000,000 higher than the previous estimate. The main drivers for the increase this plant. This is the first time a plant using this advanced cleaner coal technology has been built anywhere in the world at this scale. Unlike a plant design that has been constructed many times, this project is essentially a custom design, so existing guidance is limited on the project scope and the amounts of materials needed. 1 of the larger items contributing to the cost increase is the need for a graywater treatment system at the plant, a cost of approximately $125,000,000 We are presenting to the commission a complete and detailed explanation of what is driving the higher estimated cost. Meanwhile, we are working hard with our vendors and contractors in all facets of the project to find ways to mitigate these on this issue in August. Finally, let me comment on our Buck and Dan River combined cycle gas fired projects in North Carolina. We have broken ground on Buck and are making progress on our preconstruction efforts at Dan River. Both are on track and expected to come online in 2011 2012, respectively. These two projects are estimated to cost a total of approximately 1 400,000,000 including financing cost. Before I close, let me take a moment to give you our point of view on the status of the Energy and Climate Change legislation in Washington. The conventional wisdom today in Washington is that there is a low probability that a bill will be passed this year. Congress faces several options at this juncture. First, they can start over in the next session of Congress and leave it to the EPA to act in 2011 if Congress fails to act by year end. Secondly, they could attempt to pass senators Kerry and Lieberman's bill and as you all know, Senator Graham stepped away for a variety of reasons 2 weeks ago from the support of this bill, but this bill is currently being modeled by the EPA and they should complete their work in 5 to 6 weeks. And as can be expected, numerous other senators are drafting a variety of related bills. Some are discussing the pursuit of a utility only energy and carbon bill. It would be with provisions that would reduce further the emissions of sulfur dioxide, nitrogen oxide and mercury. Certainly, this would give the utility industry a complete and clear roadmap as to its future admissions requirements, I suspect that this is a low probability outcome in the coming months. Every week seems different. With the oil spill last week, the probabilities and possibilities seem to change yet again. So my report to you is more to come as we move forward addressing this issue in Washington. Turning to Slide 9. This is a slide we will come back to throughout the year to demonstrate the progress we continue to make to fulfill the short and long term commitments we made to you at our February Analyst Meeting. As you can see, with the Q1 behind us, we're on track for our short term commitments such as achieving the 2010 adjusted diluted EPS range of $1.25 to $1.30 and continuing our plans to finance the business. Although it is important to focus on our short term objectives, our business makes it imperative that we stay focused on the longer term. This is why we have been active in Washington as well as at the state and local levels fighting for fair and reasonable legislative outcomes for both our customers and investors. Our long plans support achieving a 4% to 6% compounded annual growth rate and adjusted diluted EPS off a base of 2,009 over the next few years. Additionally, we are targeting continued growth in the dividend, but at a rate slower than the growth in our adjusted diluted EPS. 2010 represents the 84th consecutive year that Duke Energy has paid a quarterly cash dividend on its common stock. 2nd, allocating capital 2nd, allocating capital efficiently and earning competitive returns. In our regulated businesses, the mitigation of regulatory lag, closing the gap between our allowed and earned returns is job 1. In our which supports our ability to execute on our business plans. Overall, our long term focus on modernizing our fleet and grid makes Duke a solid value proposition for investors. Before we take your questions, I would also like to refer you to our 2,009 and 2010 sustainability report, which we recently published. This report has extensive metrics on our operational and environmental performance over the last year. It also describes how we make decisions, balancing the need for affordable, reliable and increasingly clean energy. 1,009 was the 4th consecutive year that Duke Energy was named to the Dow Jones Sustainability Index for North American Companies in the Electric Utility Sector. You can access our sustainability report on our website at www.dukeenergy.com. Now, let's open up the lines for your questions. And we'll now take our first question from Lisanne Johan with RBC Capital Markets. Thank you. Great quarter. In Duke, Ohio service territory, you're losing regulated customers, so to speak, and gaining competitive customers. But typically, there's a margin difference in the 2 customers. Can you kind of give us a sense of what you're gaining versus what you're losing on a margin basis? What I would direct you to, and this is Lynn, is the $0.04 to $0.07 that we put out there in terms of comparative impact between years. And as we indicated in the remarks just a moment ago, we see that trending to the higher end of the range. Okay. But the customer acquisition and loss has been relatively down 15%, correct? We're reporting that we expect switching to be in the range of 50% to 55% on average for the year. And our experience up to this point has been that we're retaining about 60% of that switched load. So all of those things taken together is really the underpinnings for the $0.04 to $0.07 that we've shared with you. I see. Any plans for putting generation into Duke Energy Retail's service to kind of hedge out unexpected changes in weather? It's a good question. We have evaluated at various times over the period that Ohio has been deregulated, pulling our assets out of Duke Energy Ohio into a competitive entity. We have not done so at this point, and in fact, we're precluded from doing so in the last ESP, but it's something that we continue to evaluate. Then can you give us a sense of how you mitigate or how you hedge out your portfolio for the Ohio retail business? We do hedge in the market. We'll now take our next question from Hugh Wynn with Sanford Bernstein. Hi, and congratulations on some impressive cost controls. I had a question though about Edwards Port, which I find the developments there somewhat worrisome and I kind of wanted to get your forward look at possible outcomes. My concern stems from the size of the cost increase, the fact if I remember correctly that it's the second one, and that it reflects this problem of design evolution and scope growth. And you're trying to pass it through at a time of course when the economy is weak and unemployment is high and some of the pressure around advancing technologies like this one due to CO2 legislation is easing off, Should we be concerned about the potential outcomes in the review of that latest cost increase? Hughes, thank you for joining us this morning. You have correctly characterized the escalation and the estimate of our cost. We have detailed information provided to the commission with respect to these additional costs. As you may know, the commission has hired Black and Veatch, a separate engineering group, to work with Yes, this is a difficult period and our overall expectation is that these cost increases given the complexity of the project are unfortunate, but explainable given what we're trying to achieve here. Jim, do you want to add to that? Yes. Good morning, Hugh. First of all, Hugh, I'd encourage you if you haven't seen it to take a look at the testimony and exhibits that we filed on April 16 with the Indiana Utility Regulatory Commission. The other parties will file their testimony in June and we'll have a hearing in August on the case. You asked about concern, you always have concern when you go back for an estimate increase and it's unfortunate and we wish we didn't have to do it. The one thing that I do feel good about at this point is the engineering is essentially complete. Most of the equipment has now been ordered and a lot of the design evolution and scope growth that drove this particular increase came as our vendor was finishing up the engineering work on the project. We really saw a lot of the scope growth and design changes happen that impacted the size of the project. And if you want to think about it this way, we're essentially building a plant that's half again as big as the original FEED study, which was done in early 2007 contemplated, but a lot of that now is locked in. Now the thing we're really focused on is managing engineering work pretty much behind us. So your question is a good one. The incremental rate impact we identified in the testimony is about 3% over where we thought the project was going to be. And what we did in our testimony is we also did a brief summary integrated resource planning exercise, which showed that the plant continues to be a cost effective option for us in Indiana even at the increased price. This project has enjoyed huge support from Indiana so far. It's one of the largest construction projects in the state's history. It's obviously employing a lot of people in the state now. I think it continues to enjoy political support in Indiana and will continue to enjoy political support even at the increased estimate. That was a 3% increase in system average rates to recover the $530,000,000 is that what you meant? Yes, average bill impact. And that's on top of what was the prior increase? Well, it's going to make the entire bill impact of Edwardsport be around 19%. 19% increase in system average rates? Yes, in the average bill impact to customers. Okay. Can you perhaps go a little bit further to the potential adverse outcomes? I understand that there are reasons to be optimistic. I can also imagine an intervener coming in and saying, these fellows forgot to include a water treatment plant in their design. Are we meant to cover emissions like that? I can certainly see both sides of this relatively clearly. And I wonder if you could perhaps comment on outcomes that perhaps are fall short of potential outcomes or perhaps fall short of full recovery, what the implications might be for you all? Hugh, you can't speculate as we sit here today and you can't you never say never about what regulators and what the regulatory process might prove out. The one thing I'd say and I'd reinforce what Jim said earlier, which is the commission has had Black and Veatch on staff as an advisor since about mid-two 1008. They have been on-site at Edwards Port literally every step of the way with us in project reviews with our major vendors as we've gone through the construction process. So there are clearly no surprises in that sense with the project. What we your question about the wastewater treatment system, I'll address specifically. We believe that both from the standpoint of the chemical components of the water in the wastewater as well as environmental regulations that seem to grant an exception, even if the water was considered hazardous, that we would be able to dispose of it in a deep well for an IGCC plant. Now we're now we're needing to design a first of a kind wastewater treatment system. Again, the parties to the case certainly Black and Veatch is well aware of this design evolution and the need to address those kinds of things. Great. Thanks very much. Thank you. We'll take our next question from Ali Agha with SunTrust Robinson Humphrey. Thank Jim, just to follow-up on addressable board for one more sec. I mean, is the construction schedule pretty much on track as you're building the plants right now and waiting for the hearing, etcetera? And given how much you've spent and where you are in the process, I mean, is it fair to say that the best case scenario is you get the recovery, but if you don't get the recovery, you're going to have to build the plant anyway, given how far along you are. The construction is on schedule. We have not backed off construction with this estimate increase. We continue to push very hard on the construction of the project, working very closely with Bechtel, our principal EPC and General Electric, the equipment vendor to drive this forward. So we as we said in our testimony, we continue to believe this is a very good project for the state, for our customers, and yes, we are committed to driving it forward. And Jim, a separate question. This is for Jim Rogers. I was wondering your comments on the recent transaction in see share on the price or what you saw there or did not see there or how you saw that play out? Good question. We did participate in the process. We worked hard win because we felt there were a lot of reasons why that asset was contiguous to our assets in the Midwest and it made sense. From an operational standpoint, it made sense from increasing our scale perspective. But at the end of the day, we lost to PP and L and we wish them the best of luck with their proposed acquisition. Jim, fair to say, we should expect utilities space? We today are a combination of 3 companies. As you look at where we are today in our industry, I think we're in the beginning of another wave and there's been a series of waves of consolidation over the last 2 decades. And I think we're in the beginning of another wave of consolidation. And you can trust the fact that we will be very opportunistic as we look at the opportunities, but we'll be very disciplined in our approach to any opportunity that we might find. Fair enough. Thank you. Thank you. Thank you. We'll take our next question from Jonathan Arnold with Deutsche Bank. Hey, good morning. Good morning, Jonathan. A quick question on demand and the numbers you had in the Q1 obviously look encouraging versus the expectations you laid out for the year. What's holding you back from upping that sort of annual outlook just sitting here sort of almost midway through the Q2? Jonathan, it's a good question. I think as much as we said in our remarks, it's 1 quarter. We do see some strength in the industrial demand based on conversations with our customers through the Q2, but there's a lot of cautiousness about the back half of the year, and that's something that, of course, can turn around with a cool July. And that's something that, of course, can turn around with a cool July. So it's just something we'll continue to monitor. We're very pleased with the way we started the year. Focusing on the normalized numbers, is that implicit in your answer a sense that you're not quite sure what normalized is or? I think that's fair. I think that's fair. Okay. And maybe if I may on just one other topic, could you give us an update on what you see in your renewables development space, specifically on the wind side and speak to kind of how you see the market around PPAs currently and your positioning therein? Sure. Jonathan, as we've shared in the past, our target is to grow at a pace of 2 50 megawatts a year. That has come in, in a lumpy way. And by that, I mean in 2,009, we added about 3 60 megawatts. We're on track in 2010 to achieve our 2 50 megawatt goal. But as we look to 2011, we're still working on that pipeline, I'd say the same about 12. And so some of the things that you've been reading about states or municipalities and utilities pulling back a bit because of lack of clarity on renewable standards, softness in demand, perhaps low gas prices, we do find the PPA market as a result of those factors to be a bit more challenging than they were in 2,009. But I think with the size of growth aspiration that we have, we still think 250 megawatts is a reasonable target for us to shoot at. So in terms of the 10 target, do you have I mean, what's the status of the contract? We do. We're fully contracted for 10. We're under construction. Okay. Thank you. Thank you, Jonathan. We'll hear next from Michael Lapides with Goldman Sachs. Hey, guys. Can you talk about in the Midwest, which of your industrial subsectors you're seeing strength in demand and which of the industrial sectors where you're actually still seeing a bit of lagging of demand? Good morning, Michael. It's Lynn. Primary metals are the sector that's really driving Midwestern growth. You can see that in the appendix slide that we've attached, about 30% growth Q1 'ten over Q1 'nineteen. In terms of softness, I would say we're seeing stability in chemicals, but not a lot of growth. We are hearing from customers that perhaps the back half will look better than the first half of the year. Okay. 2nd, when we think about your guidance for 20 20 10 guidance? Michael, what we shared in connection with the rate increases is that we believe the rate cases will give us an opportunity to earn 50 basis points to 100 basis points above where we were in 9%. So I would think about it in the range of 9.5% to 10%. Okay. Thank you very much. Thank you. We will go next to Paul Patterson with Glenrock Associates. Good morning, Paul. Good morning. I wanted to touch base with you with Jim on a comment that I think was made when you got the World Citizen Award with respect to you perhaps partnering with China to buy a utility. And just in general, if you could sort of give us a flavor for what kind of opportunities you might be seeing with respect to that? I mean, are you thinking internationally? Just in general, what how should we think about the potential sort of follow-up, I think on Ali Aga's question? Thank you. That's a good question. And let me just briefly summarize our game plan with respect to the Chinese companies who are working with. First, our objective is to share technology and share people and as you know, they are scaling technology very fast, driven by their economic imperative as they have vast millions of people moving from rural to urban areas. So we believe that they will scale things also seeing a lot of growth in the U. S. And we're seeing a lot of 24 nuclear plants today. There's a lot of learnings that are going on there with respect to the building of nuclear. They are the of ourselves and we are in the infrastructure business and they are building out infrastructure faster than anybody in the world. So we see a great opportunity to learn particularly with our generation as we are on a mission to retire and replace all our in projects in both North and South America. We see opportunities for them to partner with us that's assets both in the U. S. As well as in South America. So we are working very closely with them with respect to those kind of opportunities going forward. Is that specific enough for your question? Well, I'd like it if you got more specific, but I don't know if you feel comfortable doing that. I mean, I guess this discussion about possibly buying a utility that was discussed in North Carolina, I mean, at some award from what I've read. Any thought there in terms of what they bring to the table there as a cost of capital? What should we think about what we heard there or what was reported? I would think of it this way. Yes, they bring a very low cost to capital, as you might imagine, they hold maybe $600,000,000,000 in U. S. Treasuries and so any kind of return greater than that would be an improvement for them. And so one, they have low cost of capital. 2, they have demonstrated a great ability to build new facilities and build them standpoint, we see partnerships making sense. Standpoint, we see partnerships making sense. I do envision over a longer period of time that they could participate in the joint ownership of ownership of a utility within the U. S. So again, I do think that these are opportunities that are on the horizon and we're certainly not ruling any of them out as potential opportunities. Okay, great. And then finally the offensive strategy that you guys are thinking of employing more of. Could you give us a flavor as to what service territories would be particularly attractive to you guys on the retail competitive side in the offensive strategy that you're thinking of? Paul, I'm not going to speak specifically about our strategy because as you can imagine, Ohio is a particularly competitive environment. So, I would just like to leave it at outside of our service territory. And we'll see more of that, you think? Or is it going to be pretty much what we've seen so far in proportion to the defensive? I don't think that we should forecast anything more rapid than what we've seen up to this point. What we are doing is trying to participate actively as the market develops. Thanks a lot. Thank you. We'll move next to Stephen Huang with Carlson Capital. Hi, good morning guys. I just had two quick questions. The first one is on the NMC extension. Congratulations on that first. Thank you. The question I have for that is, when we look into 2013, I know the ownership comes down. But should we is it fair to assume that you guys with LEs hold flat? It's a good question. And as you might expect, the earnings of NMC are a bit difficult to project given the volatility that we experience as a result of commodity prices. We would expect our ownership interest to decline probably beginning in 2014 at the completion of the new plant. And overall, we don't expect the new plant to be a significant contributor to NMC's earnings. So if commodity prices were to remain the same as they are today, you would expect the contribution to decrease somewhat. But I think it's premature to give any guidance around 2013, 2014. Okay. And then the second question was back to the Ohio competitive markets. You talked about this year to the higher end of the 0 point $4 to 0 point 0 $7 When should we expect that that should return back to you guys when the ESP rolls off or when should maybe I'll stay out there forever the $0.07 loss. I don't know. And can you help us understand that a little bit better? It's a good question. The two things I would point to is that our ESP does expire at the end of 2011 and we will begin discussions and negotiations with the commission in late 2010, early 2011 about how we move forward and set prices into the next phase of our ESP. Our bias has been to use the ESP mechanism and that continues to be our position. But the pricing of an ESP in 2012 at the renewal date will be impacted by what market prices are at that point. And so as we think about perhaps a 3 year extension, 'twelve, '13 and 'fourteen, you should be considering sort of an average market price out in that period as a proxy for the range that we would be targeting in our negotiations. But that $0.04 to $0.07 should roll into $0.11 then because the ESP continues to the end of $0.11? That's correct. Great. Thank you. Thank you. And we'll take our last question from Lisandro Huang with RBC Capital Markets. Thank you. I was wondering if there were any quick changes or updates on Lee? On Lee Nuclear, Jim? Yes, sure. I mean, we're still working our way through the NRC process with respect to our Cola on the Lee plant. We are working with DOE with respect to loan guarantees. That potential is still in the horizon. We still have plans to file a CPCN in the Q1 of next year. So everything is on track and our goal line is to bring this online in 2020, 2021. At this time, there are no further questions. I'll turn the call back over to Mr. Stephen Demay for any closing or additional remarks. Thank you, Andrea. Let me close by thanking everyone for joining us today. As always, the Investor Relations team is available to take your follow-up questions. Thank you and have a great day. And ladies and gentlemen, that does conclude today's conference. We thank you for your participation.