Earnings Call: Q4 2016

Feb 16, 2017

Good day, ladies and gentlemen, and welcome to the Duke Energy Fourth Quarter Earnings Conference Call. As a reminder, today's call is being recorded. And now for opening remarks and introductions, I'd like to turn the conference over to Mr. Mike Callahan. Please go ahead, sir. Thank you, Catherine. Good morning, everyone, and thank you for joining Duke Energy's Q4 2016 earnings review and business update. Leading our call today is Lynn Good, Chairman, President and CEO along with Steve Young, Executive Vice President and Chief Financial Officer. Lynn will cover the key milestones we reached in 2016 as we completed our portfolio transition. 10 years. Steve will then provide an overview of 2016 financial results, insight into our 2017 earnings guidance and visibility into our expectations for future earnings growth. Today's discussion will include forward looking information and the use of non GAAP financial measures. Slide 2 presents the Safe Harbor statement, which accompanies our presentation materials. A reconciliation of non GAAP financial measures can be found on duke energy.com and to today's materials. Please note the appendix for today's presentation includes supplemental information and additional disclosures. With that, I'll turn the call over to Lynn. Thank you, Mike, and good morning, everyone. Today, we announced adjusted earnings per share of $4.69 closing out a very successful 2016. We delivered strong operational and financial results, ending the year at the high end of our guidance range. We completed our multi year transition of our business portfolio with the well executed exit from our international operations and the acquisition of Piedmont Natural Gas. Through it all, we maintained strong earnings growth in our core businesses and continue to increase our dividend. 2016 was clearly a pivotal year for Duke Energy and is a key indicator of 2017 with premier electric and natural gas franchises operating in constructive jurisdictions and with a demonstrated track record of strong execution. With our scale and portfolio of complementary businesses, we benefit from a wide range of investment opportunities. And as you will hear today, we're excited about our 5 year $37,000,000,000 growth capital plan, up approximately 25% from last year. We have strong growth in every segment, underpinned by capital, delivering value to our customers. Today, we extended our consolidated growth rate of 4% to 6% through 2021, which is off of the midpoint of our 20 17 adjusted EPS guidance range of $4.50 to $4.70 Our capital plan and regulatory strategy has been designed to produce earnings within this range each year of the 5 year plan. And as the investments build and recovery accumulates, we're even more confident of our ability to reach the high end of the growth range. The assets we have, coupled with a strategy that produces real results, offer a solid long term investment opportunity. We are positioned to deliver growth in earnings and dividends in a low risk, predictable and transparent way, providing an attractive risk adjusted shareholder return for our investors. As a capital intensive business, our growth is supported by the scale and strength of our balance sheet, which remains the continued focus for our company. In short, our attractive yield and demonstrated ability to reliably grow our regulated businesses positions Duke Energy as the leading infrastructure investment. I want to spend I want to spend the next few minutes offering insight into our long term vision for Duke Energy and where we plan to take our company in the next decade. Our industry is undergoing transformation from increasing customer and stakeholder expectations to rapid technology development and new public policy requirements. The companies that succeed in this dynamic environment are those who anticipate and adapt. We see great opportunity in this period of transformation and our focus is highlighted on Slide 6, investing in infrastructure, our customers value and delivering sustainable growth for our investors. Slide 7 shows how that vision is manifested. We will invest in areas that position us well for this transformation, strengthening and modernizing our energy grid, generating cleaner energy through natural gas and renewables, and building natural gas infrastructure to support the growing need for this important resource. And by building on a foundation of customer satisfaction and stakeholder engagement, everything we do begins with customer service and we also understand that working collaboratively with our stakeholders is critical to our success. To paint a clearer picture of where we're going, we've pulled back the lens and outlined on Slide 8 our aspirations for the next 10 years. We will relentlessly pursue our goal of achieving and sustaining top quartile customer satisfaction, placing the customer at the center of everything we do. We will strengthen our energy delivery system, investing $25,000,000,000 to create a more modern, smarter energy grid. We will generate cleaner energy through natural gas and renewables, investing $11,000,000,000 as we move to a lower carbon future. It will expand our natural gas infrastructure to meet customers' needs, doubling the earnings contribution of our natural gas business. And we will enable more timely recovery of revenues in all of our jurisdictions as we work to improve regulatory cost recovery mechanisms. Of course, any success we achieve is grounded in our commitment to maintaining industry leading safety standards and operational excellence remains as the foundation of all we do. Our success starts here. Today, Duke Energy leads the industry in employee safety and we will continue that leadership in the years ahead. This is our path, it's ambitious and it's achievable. Let me spend a few minutes on each investment area. 1st turning to Slide 9, I will discuss grid modernization and our objective to improve system performance and enable additional capabilities to better serve our customers and to better serve our customers and to better serve our customers and to better serve our customers and to better serve our customers and to better serve our customers. Our transmission and distribution network is the largest in the nation. And on its own, our Carolina system is the 6th largest. Our scale requires constant capital investment. But in this era of transformation, the demands on our system have never been greater. And while the system is reliable, recent events such as Hurricane Matthew have highlighted opportunities to strengthen the grid. We have outlined a 10 year, dollars 25,000,000,000 plan to modernize, building a more flexible, reliable system. We have already begun this important work in the Midwest with plans to expand it into our other jurisdictions. We're using data analytics to inform our investment plans, delivering the highest value to our customers. This work will direct our targeted undergrounding programs as well as a number of other reliability and integrity upgrades. Additionally, new technologies available today will advance our energy grid and deliver services our customers and communities increasingly expect. Our initial investment will focus on enhancing basic services with smart meters and communications technologies, increasing power quality and improving reliability. These investments will also support more distributed energy resources on our system. Subsequent capital spending will integrate emerging technologies such as storage and improved remote monitoring, communications and control. We expect to reduce our outage frequency and duration rates by 50% and significantly reduce our O and M expenses through the deployment of more advanced technology. Much of this work will also support our goal of moving the company into the top quartile for customer environmental footprint, including reducing our carbon dioxide emissions by 29% since 2,005. As you can see on Slide 10, our retirement of more than 40 older less efficient coal units coupled with the addition of clean natural gas plants and renewables is driving our emissions reductions. Our emissions reductions. In the next 10 years, we will invest $11,000,000,000 increasing new highly efficient natural gas generation to 35 percent of our portfolio and cleaner renewable energy sources to approximately 10%. These renewable energy sources include hydro, wind and solar. With these investments and our carbon free nuclear generation, by 2026, we will reduce carbon emissions by 35% from our 2,005 levels. In addition to regulated renewables, we will also invest in commercial renewable assets as we continue to pursue projects that meet our return criteria. Reducing our carbon footprint is important to many in our communities. We remain focused on being a leader with environmental stewardship at the forefront of our plans. Moving to Slide 11, our 3rd area of investment focus is natural gas infrastructure. We look at the future of this industry and the future generation needs of our company, natural gas will continue to play a major role. With the acquisition of Piedmont, we now operate a 5 state gas distribution business and have investments in midstream natural gas pipelines. We rank 2nd nationally for natural gas consumption across our utilities and LDCs. This underscores how these business will continue to complement one another. With more than 90% of our margins in the LDC business mostly fixed through decoupling and weather normalization mechanisms and our low risk natural gas pipeline investment portfolio, we have very little exposure to volumetric risk in this business. Similar to our electric businesses, our LDCs, which serve more than 1,500,000 customers, are located in states with strong customer growth of over 1% over the last 5 years, including customer growth of 1.5% at Piedmont. Our growing midstream business is anchored by our investments in highly contracted pipelines such as Atlantic Coast, Fable Trail and Constitution. This infrastructure will bring much needed gas supplies to the Eastern U. S. For an economic growth and helping us grow our customer base in the Southeast. Atlantic Coast Pipeline is a prime example of the tremendous overlap between our electric utilities, LDCs and midstream pipeline investments. Driven by transportation contracts with our natural gas fired plants and Piedmont, ACP will provide opportunities for industrial and manufacturing growth and infrastructure investment in our Eastern Carolinas communities. This growth as well as combined heat and power, coal to gas conversions and dual fuel projects will boost our gas business. We look forward to benefiting from coordinated infrastructure planning between our electric and gas utilities as we prepare for new gas fired generation facilities that will maximize this new gas platform. We also anticipate continued economic development opportunities across the region as up from 8% today as we expand and scale our natural gas business. Before turning to Steve, let me turn to Slide 12 and touch on a few policy issues that are top of mind for investors. We are engaged with Congress and the new administration as they begin to address important policy issues impacting our company and customers. The President and congressional leaders have an ambitious agenda that includes a few particular areas of focus for us, including tax reform and infrastructure policy. While it's early as a process and much work remains ahead, Duke Energy supports many of the goals of comprehensive tax reform, which could benefit our customers and support critical investments needed for economic growth. No specific legislation has been introduced, so we are working with the administration's campaign tax plan and the House GOP blueprint. We've analyzed a number of scenarios to evaluate the range of potential impacts to our business. Our preliminary analysis shows that the administration's tax plan, which would allow the option to retain interest deductibility and forego immediate expensing of capital, is neutral to slightly accretive for our company on a consolidated basis. On the House GOP plan, the range of potential outcomes will be impacted by a number of factors, including the treatment of existing debt and other transition rules. The loss of interest deductibility and immediate expensing of capital will impact our utility rate base over the long term. But given our NOL position, it's not expected to have a material impact over the next 5 years. It's important to recognize, however, that loss of interest deductibility will permanently impact the cost of capital to our customers, whereas expensing is the timing difference. The most significant impact from the House GOP plan is on our holding company. If we assume the loss of interest deductibility on new and refinanced holding company debt and a lower cap shield on existing debt, the impact could be approximately 5% dilutive by 2021. We all recognize that we're in the very early stages of this matter and we will continue to update our analysis as more specific information becomes available. We're also actively engaged in advocacy on tax reform, along with EEI and other industry CEOs. Given the capital intensity of our industry and the relatively high leverage percentage supported by regulation, we believe better tax policy should retain interest deductibility and forego immediate expensing of capital expenditures. This approach is recognized in the administration's plan and we will continue to meet key stakeholders to advocate for our position on behalf of our customers and investors. Turning to infrastructure, the regulated electric industry invests more than $100,000,000,000 annually in critical infrastructure and Duke Energy accounts for nearly 10% of that figure. Welcome efforts to streamline the siting and permitting of infrastructure projects such as grid investments and natural gas pipelines necessary to meet the long term needs of our customers and communities. These topics are complex and will take time. We will be actively engaged with congressional leaders and administration officials to advocate on behalf of our customers and investors, emphasizing the critical role of low cost energy in driving America's economy. So that's a brief overview of our longer term strategy. Now let me turn it over to Steve to walk through our 5 year financial plan. Thanks, Lynn. As mentioned, I'm going to spend the majority of my time walking you through our 5 year financial plan. Turning to slide 13. We are introducing our adjusted EPS guidance range of $4.50 to $4.70 per share today. In addition, now that we have successfully closed on the Piedmont and International transactions, we will anchor our long term growth rate off of the midpoint of our 2017 guidance range of $4.60 Over the next 5 years, we anticipate growing our adjusted EPS by 4% to 6%, consistent with the historic growth rate we have achieved in our domestic businesses. In 2017, our results will be driven by our ongoing investments in electric and gas infrastructure and retail and wholesale customer growth. Positive results in the electric business will also be driven by our base rate increases in Duke Energy Progress South Carolina and the generation base rate adjustment mechanism in Florida. These positive drivers will be partially offset by higher depreciation, interest expense and other taxes as we continue to place new assets in service. Given that we have completed the international sale in December, we will not have results from that business in 2017, but we'll have an approximate $0.05 benefit from the use of proceeds from that sale and another $0.05 contribution from National Methanol, which we retained and is now reported in other. Moving to Slide 14. We have a robust 5 year capital plan of nearly $50,000,000,000 in place to drive our 4% to 6% earnings growth. In fact, we have increased our growth capital plan to 37,000,000,000 dollars an increase of $7,000,000,000 largely driven by grid modernization investments in the Carolinas and our growing gas platform. This investment plan will drive earnings based growth in our combined electric and gas businesses of approximately 6 percent over the next 5 years. As we look at each of our segments' contributions, Electric Utilities and Infrastructure, representing 89% of our adjusted earnings, is well positioned to grow at 4% to 5% over the next 5 years. Our Gas Utilities and Infrastructure business will contribute approximately 8% to our 2017 results with a 5 year growth rate of 10% to 12%. And our Commercial Renewables segment, which includes owned wind and solar Renewables segment, which includes owned wind and solar assets as well as our operating services and third party contracts, will contribute approximately 3% with a 5 year growth rate of 8 percent to 12%. We are confident these businesses will generate stable earnings and cash flows, delivering solid results in 2017 and beyond. Turning to Slide 15. Growth business will be supported by our 5 year $30,000,000,000 growth capital plan. Investments align with our strategy to modernize the energy grid and to generate cleaner energy. Our plan also reflects environmental compliance cost of over $4,000,000,000 including approximately $3,000,000,000 to safely close ash basins across our system. These significant investments drive a strong earnings base CAGR of over 5.5 percent for our electric business through 2021. Now let me walk you through additional details of our 5 year plan for our electric business. On Slide 16, you will see our focus on upgrading our transmission and distribution system. We have allocated nearly 60% of our 30,000,000,000 dollars plan to transmission and distribution, which includes $10,000,000,000 for modernizing our grid infrastructure to make the system smarter and more reliable. The other $7,000,000,000 will be devoted to investing in our system for additional customer growth. Nearly 45% of the capital we invest in the grid will be devoted to storm hardening to ensure our system is better prepared for severe weather events. We will focus on key projects, such as elevating substations located in vulnerable or low lying areas and making our Power Poles more resilient. We are also identifying areas more susceptible to frequent power outages using data analytics capabilities. This information will be used as we develop our targeted undergrounding programs where we have allocated 25 percent of our grid investment to increase the reliability of our system for our customers. Another part of the program will include installing smart meters to provide better information services for our customers as well as additional cost efficiency. To date, we have completed this effort in Ohio and will be moving forward with smart meter installations in our other jurisdictions. We expect to fully deploy all smart meters across our system over the next 5 years. This accelerated deployment will allow us to offer additional products and services and help to reduce our overall O and M costs, given that the advanced technology will avoid the need for many manual processes. Moving to Slide 17. We are committed to further reducing our environmental footprint with plans for new natural gas generation and renewables. Our 5 year plan includes investment of $3,300,000,000 in highly efficient natural gas fired combined cycle plants. This will include completing our Lee combined cycle facility in South Carolina, our Western Carolinas Modernization project in North Carolina and our Citrus County plant in Florida and beginning work on plants with in service states beyond 2021. We are pursuing additional generation projects such as dual fuel capabilities and combined heat and power facilities to increase the flexibility of our system as we continue to meet growing energy demands in a dynamic environment. We will also increase our focus on additional renewables in our regulated utilities. Our $1,300,000,000 investment plan for carbon free utility owned renewables will be led by investments in Florida and the Carolinas. Moving on to Slide 18. We operate in attractive service areas where customer growth remains strong, allowed us to earn our ROEs even without significant rate cases since 2013. We are committed to earning these ROEs and generating stable earnings growth for our shareholders, while we invest in infrastructure our customers value. In 2016, weather normalized retail load growth was 0.2%. This was largely driven by lower than expected results in the industrial sector. 1 of our large Duke Energy Carolinas customers in the metals industry is reorganizing and plans to begin returning to full operations in 2018. And some other industrial customers saw similar pullbacks from operations but expect to ramp up as we go forward. Looking ahead, we continue to expect approximately 0.5 percent load growth in our long term planning assumptions. Several factors give us confidence that this assumption remains true. We are experiencing consistently strong customer growth, especially in our Carolinas and Florida regions, given a recent uptick in construction in our service areas and greater housing permit applications. We've also seen a recent shift away from starts of multifamily homes to single family homes. This shift is highlighted by the fact that 4 major cities within our service territories recently ranked among the top 16 in the country with a number of single family building permits filed. 2 of these metro areas ranked in the top 5. The decline in the government sector has leveled out a bit, and we are cautiously optimistic about increased business investment in manufacturing as inventory levels have declined from previously elevated levels. Based on current and expected economic trends, we are also optimistic about potential for the industrial sector to pick up in the next few years. These positive factors will be partially offset by the continued adoption of more efficient building codes and standards and utility sponsored energy efficiency programs. While these programs do offset some of our customer growth, they also contribute to earnings through our approved energy efficiency riders. Overall, we believe all of these factors will allow us to achieve 25% load growth during our planning horizon. Regarding cost control, we have held O and M flat since 2014 and we'll look to continue that trend going forward, creating headroom in customer bills for important energy and infrastructure investments. 2016, we reduced our O and M costs even with unusually high storm costs compared to the prior year and after replanning O and M activities on behalf of our customers to take advantage of the above normal weather. We committed to reducing our O and M cost in 2016, and we clearly delivered on that commitment. We have outlined our economic growth plan and significant capital investments that we will make over the next 5 years. Now let me take a few minutes on Slide 19 to discuss our plans for cost recovery as we balance our growing business and maintaining competitive rates for our customers. We will be very active in the regulatory space over the next 5 years. As we have done in the past, we will continue to work constructively with key stakeholders to achieve results that benefit our customers and shareholders while managing our costs to keep bill increases at a moderate level and overall rates below the national average. Investments we have planned will drive economic growth in our desirable service areas and support additional customers and new technologies. As you can see, we will file 2 base rate cases with the North Carolina Utilities Commission in 2017, one for our Duke Energy Carolinas utility and the other for Duke Energy Progress. Both North Carolina cases are scheduled to be filed in the summer of 2017, anticipating new rates effective in the first half of twenty eighteen. These filings will be the first in North Carolina in 4 years to recover costs associated with our capital investments in more efficient generations such as the Lee combined cycle facility, nuclear projects and coal ash basin closure activities. Looking beyond 2017, we are making substantial investments in the grid As we look to accelerate those investments over the next 5 years, we will be engaged in the regulatory and legislative process to pursue recovery mechanisms, such as multiyear rate plans and trackers, which are better suited to grid infrastructure. As these regulatory modernization initiatives move forward, we will also evaluate more frequent base rate cases in the interim to ensure timely recovery and more moderate rate impacts to our customers. Updated constructs would avoid the need for filing larger rate cases and level out the rate impact to our customers. Turning to Florida. We are also planning investment and additional renewable projects as we look to 2019 and beyond. The regulatory construct in the state of Florida, which includes generation base rate adjustments, solar base rate adjustments and multiyear rate plans, is well suited to our investment plan. We will continue to make significant investments in the transmission and distribution systems in Indiana and Ohio with timely recovery of the investments through previously approved riders. As we turn to our Gas segment on Slide 20, we have outlined a 5 year $6,000,000,000 growth capital plan to expand our natural gas infrastructure and further develop this platform. Our plans are split evenly between investments in our LDCs and our midstream gas pipelines. As part of our larger 10 year plan to grow this business, as part of our larger 10 year plan to grow this business to 15% of earnings. Growth in this segment will come from strong organic growth opportunities in our LDCs and midstream investments. We expect to deploy approximately $3,000,000,000 in our gas LDC systems, with Piedmont accounting for more than 2 thirds of our LDC's earnings base and the Midwest accounting for the remaining third. Our LDCs will continue to invest in infrastructure for our growing customer base as well as integrity management programs that maintain the safety of our system. These integrity investments are recovered efficiently through well established riders in several of our jurisdictions. Moving to our midstream investments. We plan to invest an additional $3,000,000,000 in our pipelines during the 5 year period, much of which will contribute to the completion of ACP. This project is now anticipated to cost between $5,000,000,000 $5,500,000,000 and is still expected to meet the second half twenty nineteen in service date. We look forward to growing this platform as we expand our natural gas infrastructure and leverage the expertise of our Piedmont team. Turning to Slide 21. I have already mentioned our $1,300,000,000 investment in regulated renewables. In addition, we will also invest $1,000,000,000 in commercial renewable assets. This expands upon the more than $5,000,000,000 we have already invested in our contracted commercial renewables commercial renewables business since 2007, focusing on entering long term power purchase agreements with creditworthy counterparties. Our commercial renewables business continued to expand its wind and solar portfolio, ending the year with nearly 3,000 megawatts in 14 states. These commercial investments plus our growing regulated renewables footprint have positioned us as a top 5 renewables company in the country and our plan will continue to advance that position. Though we do not currently pay significant cash taxes due to our corporate net operating loss tax position, we will continue our disciplined approach to capital deployment in our commercial business, focusing on projects that meet our return criteria. Given the more attractive tax credit profile from the production tax credit or PTC, we will explore wind projects more aggressively solar in this segment. In 2016, we invested in approximately 1,000 megawatts of new wind projects that qualify for the 10 year PTC under safe harbor rules. This gives us flexibility to bid on RFPs over the next several years. Historically, we have not employed tax equity to finance our renewables projects, given that we have had more efficient and less costly options. We are always seeking the most cost effective means to develop and finance these projects and will continue to evaluate other capital sources, including tax equity structures when appropriate. Strong balance sheet and credit quality are foundational to our overall financial objectives. Slide 22 shows our high level 2017 cash flows and financing plan. With our portfolio transition complete, we have a better risk profile with more predictable and stable earnings and cash flows. We are supporting the balance sheet with $350,000,000 of DRIP equity per year from 2018 to 2021, which will advance our efforts to fund the increasing level of growth investments in our business. We expect the frequent rate case activity and equity through our internal plans to strengthen our financial metrics over the 5 year plan. I would also like to highlight S and P's recent affirmation of our ratings and revision of our outlook from negative to stable. This action reflects the strength of our balance sheet and confidence the rating has in our ability to execute on our commitments. Before I turn it back over to Lynn for closing remarks, let me turn to Slide 23. We understand the value of the dividend to our shareholders and are committed to growing the dividend responsibly. We have paid a dividend for 91 consecutive years, demonstrating this steadfast commitment to our shareholders. Moving forward, we expect to maintain our annual dividend growth rate at approximately 4% to 6% through 2021 as we target a payout ratio in the 70% to 75% range. With that, I will turn it back over to Lynn. Steve, thanks. And thanks to all of you who've joined the call today. We are excited about the future and remain confident in our ability to deliver strong growth and financial results. We have an ambitious and achievable strategy focused on investing in the grid, cleaner generation and natural gas infrastructure, all while modernizing our cost recovery mechanisms and providing customers with the service they value. As this slide shows, we bring many advantages to this conversation, including scale, constructive jurisdictions, a track record of execution, and importantly, we are unencumbered by the challenges that we have successfully put behind us. In conclusion, our vision for where we want to take Duke Energy is clear and compelling. Our strategy to achieve the vision is well underway. We have the right plan and are working the plan. It is producing results and we enter 2017 with That is a compelling investor proposition, representing a solid long term holding for our shareholders. Foundational to this proposition is the strength of our dividend and with an adjusted earnings growth plan of 4% to 6%, we feel confident in our ability to continue to grow the dividend. The Our first question comes from Jonathan Arnold with Deutsche Bank. Thank you for the all the detail and the update. It's pretty helpful. I just have a question on just the financing and the split between HoldCo and utility and project financing this year. It looks like it's a little over 40% holdco. Is that on a net basis, is that something we should anticipate going forward? Stick with that structure? Or is HoldCo a little above where the trend will be? I don't know that it's necessarily going to be a trend. It will be related to timing of maturities and other investments. So I don't think that there's any trend in that, Jonathan. So, Jonathan, our target, as we've laid out on the credit metrics slide, is to have low 30 percent overall holdco debt to total. So that's the long term trend you should be thinking about. So I mean, I guess that was the thrust of my question that it seems in 2017, you'll be moving away from the target. And then it only comes down a little bit by 2021. So how should we think about the 34 is do you consider that to be in the target range? Or is it more sort of back end of the decade that you can you get further back down towards it? Well, as Lynn said, our target is in the low 30s, and we're a bit above that as we work through this transition of our portfolio. But we'll be looking to move the HoldCo debt into our target range, and we're making progress through our 5 year plan, and we'll continue to strive to get it to that point. Okay, great. And then if I may, just on tax, what gives you confidence that the sort of downside scenario under the house GOP is that the interest deduction would only apply on new debt? Jonathan, this is a fluid situation, as you know, and we've looked at a variety of scenarios. We thought presenting the new holdco debt would give you a sense of where the exposure is. We recognize we do have downside exposure under the GOP plan. And as this continues to develop and legislation is introduced and we learn more specifics, of course, we'll update that. But we thought it was a reasonable planning assumption to share with you at this point based on our understanding of how things are developing. Okay. But if we wanted to think about what the implications of losing it on the embedded the existing debt, we'd take the $557,000,000 of Holdco 2017 interest plus the $87,000,000 in commercial renewables and eliminate the 20% tax yield? Yes, I'll give you a quick one. It's closer to 7%. Okay. All right. So I'll let someone else go. Thank you very much. Thanks so much. And we'll go to Stephen Byrd with Morgan Stanley. Hi, good morning. Good morning, Stephen. Good morning. I thought that was a very thorough and thoughtful update on your strategy and growth outlook. I want to just follow-up on, Jonathan, on tax reform, which I imagine is a popular topic. When you look at potential levers, I'm thinking first about the potential loss or the potential immediate expensing of CapEx. You obviously have a lot of growth levers at your disposal. How would you think about potentially changing your spending profile to the extent that that actually got enacted that you immediately expensed CapEx? Well, if you move in that direction, with the immediate expensing of CapEx, one thing I'd say, we're currently in an NOL position throughout the majority of our 5 year planning horizon. So the immediate expensing to CapEx would deepen that NOL position at the back end of our plan. So it's not a significant rate base change for us during the 5 year plan. Broadly speaking, I would say, as you heard from our capital planning as a whole, we have a lot of investment opportunities as we rebuild the grid and decarbonize and produce cleaner energy. And then Thank you. And then shifting over to solar and energy storage and grid modernization. I think you're pretty clear in your plans, but let's assume that costs for solar continue to fall and storage continue to fall. Later in the decade, is there a potential for accelerating spending there? How do you think about solar and storage for your I'm really thinking for your regulated territories in terms of the potential for additional spending there? Stephen, I think that is a developing area that we continue to pursue. I think you're aware we have an RFP out now for 400 megawatts in the Carolina, the western part of the state. And we're also in discussions around our avoided cost filing, which could provide a pathway for additional solar. We believe there is a wealth of investment opportunities and putting forward $1,300,000,000 we're targeting a substantial investment, but I could see scenarios in which it can go higher. Our objective is to own some amount of the solar in the state of North Carolina and Florida and our other service territories and we're working to move in that direction. A role is there a role for storage anytime soon? Or is it really just premature given the fairly low penetration of renewable energy in your territories? It's modest, Stephen, over the next 5 years. We do have probably half a dozen to a dozen sites that are under development, where we have batteries in place on our system ranging in size from small residential all the way up to a 35 megawatt battery paired with a wind farm in West Texas. As we look at this planning horizon, we do have some battery megawatts in our plan, but we see it as being a greater contributor 21 to 25 than we do over the next 5 years. Understood. All right. Thank you very much. Thank you. Thank you. Our next question will come from Steve Fleishman with Wolfe Research. Lynn, hi, good morning. Hi, Steve. In your I think in your early prepared remarks, you mentioned something about potentially being at the high end of the 4% to 6% growth rate over time. Could you just give I missed the intro of that. Could you repeat that? And just what would you need to see to kind of be looking more at the high end? Yes. So Steve, what I talked about is it's really successful execution of this plan, which includes ramping up investments such as the grid investment in the Carolinas, coupled with timely recovery gives us greater confidence at the higher end of the range. So we feel like we've got a plan that gives us that potential and our assignment is to execute it. Okay. And I guess, I mean, one thing might be just getting maybe through resolution of some of these rate cases to get better visibility on those? Sure. Okay. We have rate cases filed this year. I think better visibility might present to you how we have addressed rate cases for historical investments. Steve, I think it's important to recognize that we have a demonstrated track record of successful execution of regulatory outcomes. If you look at what we've accomplished around our jurisdictions, whether it's related in Florida, the new generation, Crystal River and Levy in Indiana, rate cases in the Carolinas, we have confidence that we can find the right balance between customers and investors and putting capital to work in jurisdictions in a constructive way. So we come at this with a plan that we believe we can execute. Okay. And just should we assume the earned ROEs that you're kind of assuming in 2017 for the different states, so is that roughly kind of the range for the 5 year plan? I think that's a reasonable assumption. Okay. And then one other question just on the coal ash. In the 2017 guidance, what are you assuming on how that is treated, just to continue deferral at a debt return or an equity return or? So for GAAP purposes, Steve, there will be we only record a debt return. That's correct. It will be a debt request coal ash recovery in the upcoming cases here in 2017. Great. Okay. Thank you very much. Thank you. Our next question comes from Michael Weinstein with Credit Suisse. Good morning, Michael. Hi, good morning. How are you doing? Good. Just to follow-up on Steve's question a little bit. So are you saying that successful execution of the plan gets gets you to the higher end or the upper end of the range and that even if there were some problems, you would still be at the midpoint? Is that a good way of looking at it? Yes. So we've put together a plan exactly, Michael, that if we successfully execute, we'll position us at the higher end of the range. Got you. And in terms of the could you discuss like the impact of the NOL position on the renewable growth plan? So remember, it is a little bit slower now and it sounds like you're more focused on wind going forward. How is that being impacted by the NOL position? And also what's the status of the 500 Megawatt plant for Florida Solar? Yes. Regarding our NOL position and how it's impacting our commercial renewables, we've talked about this a bit in the past. We've been in an NOL position for a while. And under current rules, we're projecting to come out of that in 2020. And that affects the timing of the ability to monetize the various tax credits that these projects generate. In spite of that, we've been able to land projects and bring them in very efficiently and economically. As we move what we've seen over the past years is that it's a competitive landscape with some narrowing margins there. We've still been able to put in service 500 megawatts of commercial renewables in 2016. So as we look forward, what we wanted to do is give an indication here that recognizing our NOL position, we will look at tax equity partnership arrangements as a possible financing tool. We've looked at that in the past. We haven't found anything that was acceptable and we found other options that were more beneficial to us. But we will be open and continue to examine those possibilities. Michael, a couple of additional things I would point to. As we get toward the end of the decade, we are planning at this point to be out of an NOL position. Now that's setting aside tax reform, which could of course change the landscape. So we believe we'll become increasingly competitive as we enter the latter part of the decade under current tax law. And the other thing I would point to dollars 1,300,000,000 in the Carolinas and Florida, which we believe will be underpinned by increasing economics, improving economics of those investments in those states and we will look for ways we add that form of renewable, which has a better return profile for our investors. Okay, great. Thank you. And also just one last question on taxes. I don't think you made any comments on the border adjusted tax and how that might affect your operations at all? So Michael, we do have some exposure to border adjusted tax within our regulated businesses. I'd point to our nuclear fleet as being impacted with fuel and so on. I think what's important to recognize is that our nuclear fleet is regulated. So this would become a part of our cost of service. And we are, of course, as we advocate around to customer rates, the benefits of low cost energy and other items, we are pointing this out in our advocacy plan to our key legislators as important to Duke Energy and Duke Energy customers. All right. That's great. Thank you very much. And by the way, the presentation looks great. The new slides look very well done. So congratulations to who did that. Thank you. Thank you very much. We'll go to Chris Turnure with JPMorgan. Good morning. You've touched on a couple of things around the rate cases that you're going to file for in North Carolina this year, but I wanted to try to get some more detail there. If we think over the last kind of 4 years, what has changed since the last filings and decisions there? I'm wondering, how we can think about that. You've had some load growth. You definitely had rate based growth, but a big chunk of that's deferred with the coal ash expenses. So are we kind of looking at you guys pretty much earning your authorized ROE right now and the main benefit of these cases being just a cash recovery on coal ash? Chris, I would point to a couple of things. I think the other variable, and what has happened over the last 4 years is we have executed very effectively on cost management, which gives us some headroom in order to put capital investment in and recovery in without raising prices in a significant way for our customers. And that's very important as we enter in a rate case. We do have capital investment we intend to recover, nuclear, lead combined cycle. We have deferred costs in the form of Hurricane Matthew. And of course, we have recovery of ash. So it will be a mix of cash recovery and returns. And as we get closer to filing, of course, we'll give you more specifics on what we're filing for and the composition and you can expect 5 years. You already talked about commercial renewable growth 5 years. You already talked about commercial renewable growth in there. But are there any placeholders that we should be aware of for kind of large lumpy projects that are not yet approved or kind of maybe even aspirational on the pipeline side or things of that nature for pipelines or other? We do have growth capital in the plan, Chris, and I would think of it in kind of the $500,000,000 range over this 5 year period. And we typically maintain some level of growth capital if you look at us historically because you think about 5 years, there's time to develop and we want to put those aspirations out there. So there is some growth capital kind of $500,000,000 to 700,000,000 dollars in the gas plant. Okay. But nothing kind of particularly large that would move year to year if you were not successful in getting them? That's correct. Okay, great. Thanks. And Praful Mehta with Citi. Your question next, please. Thank you. And yes, the slides do look great, so appreciate it. Thank you. I had a quick question on holding company debt and tax reform. So I want to just quickly come back to that. If the interest deductibility does go away, do you plan to change the target holding company level that you want to have in terms of debt? And if you do, what are the levels you have in your toolkit right now to think about how you reduce that level over time? I think, let me start and I'm sure Steve has some thoughts on this as well. I think as we think about tax reform, we've turned the discussion to the holding company because of the impact. But I think as you face tax reform, you also have to look at what's happening to the underlying earnings power of the utilities and what options we have there. And that would be a part of the decision process on how we would address the holding company. Certainly, delevering could be something we would consider, but I think there's a lot of work to do before we would reach a conclusion like that. And so as this develops, we will continue to keep you informed and we understand the assignment of mitigating impact to the extent we can. And that's one of the benefits of looking at scenarios that is underway right now. Got you. Thank you. And then on the utility side, the growth profile you provided was very helpful through 'twenty one. But if we had to look at retail customer rates, and I know there was a slide you provided with the rates in 2017, but just to get a sense for what kind of load growth you're looking at over that time frame and how do you think rates would go or increase over that time frame to get a sense for sustainability of that growth over time? So we focus very keenly on customer rate impact. And you'll have more visibility and specifics as we think about the plans in 2017 as we announced rate cases. But over a longer term, we target kind of rate of inflation for CAGR for customer rates. So that might be in the range of 2% to 3.5% depending on the jurisdiction. And we actually use that as a governor when we think about capital deployment and our cost of service because of the importance of keeping competitive rates. I think you recognize that we operate in a very competitive environment where our rates in the Carolinas in particular are 20% below national average and that is an advantage to our service territories if we can continue to perform in that way. And we've seen rate reductions due to fuel over the past several years to our customers. So that's part of the overall picture as well. Got you. That's very helpful. Just a quick follow-up. So if there is, in fact, tax reform that reduces customer bills just because of lower tax rates, does that mean you have more headroom to spend more CapEx during that time frame? Yes. In general, if income taxes are lowered, like any other operational expense. That provides an opportunity for a utility to make further investments in infrastructure under the same rate scheme. So those can be beneficial situations that we have taken advantage of in the past. And we'll go to Brian Chin with Bank of America Merrill Lynch. Hi, Brian. Hi, good morning. I guess following up on Praful's earlier questions related, on the Holdco debt, does the 5% dilutive comment on the house plan, does that incorporate expected changes to the Holdco debt structure? Or is that just holding the Holdco debt outlook in your plan constant and then you could react to it later to mitigate that 5% dilution? It's the modeled level of Holdcojet in our 5 year plan. Also considering cash flow impacts that we can see in a very preliminary way from the utilities up to the parent. And so that's about a 5% dilutive, Brian. Got you. Okay, great. And then, one other thing, the grid modernization CapEx update is pretty helpful here. What proportion of the grid modernization spending, is subject to legislative approval? I think based on the last couple of conversations I've had with you, there were some legislation in Carolinas, for example, that was necessary for some of that spending. Can you just give a little bit of color on that? There's nothing subject to legislative approval, Brian. We believe the compelling customer value for this is quite strong. And so we have been discussing the importance of infrastructure growth in our jurisdictions, Carolinas in both the regulatory and legislative level to inform them of the opportunity that exists here and the value we think we can deliver. We also see it as an economic development driver in our service territories. As we set out a long term plan where workforce could be developed to work in areas that are rural areas of the state, we think there's a compelling business case for the leaders of the state. Great. Appreciate the clarification. Thank you. Thank you. And we'll take our next question from Michael Lapides with Goldman Sachs. Hey, guys. Congrats on a good start to the year. Thank you, Michael. I have a question just I'm looking at the detail you provide on in Slide 18 and you show the adjusted book ROEs by state. And then you talk about O and M cost management and the need to file rate cases in North Carolina. And I'm just I'm a little confused only because you're kind of expecting to earn a 10% to 10.5% or so ROE in the Carolinas. And you're also managing O and M in the Carolinas as one of your bigger jurisdictions. So just curious what drives the need for a case, especially in a state that typically uses historical test years? Yes, Michael. We've got a number things occurring here. We've been deferring a lot of costs on our balance sheet that we need to start getting some recovery on. Coal ash is certainly one of those items. We've spent about $900,000,000 on coal ash to date. We requested and have deferred Hurricane Matthew costs to the tune of about $150,000,000 as well. So we'll be seeking recovery in some form or fashion of those types of costs. Additionally, we have had infrastructure buildup, nuclear uprates and the Lee combined cycle plant are 2 good examples there that we'll be incorporating into rates. Got it. But wouldn't those things be weighing on, right, you'd already have if they're already in service, you would have lost the AFUDC. Wouldn't they be weighing on the earned returns? And yet it seems like you're doing a great job of actually earning your ROEs there. We have been. To the extent you make capital investments and put them into plant and service, they will weigh on the earned returns. But that's where we have worked very diligently to control our O and M costs, to expand our wholesale sales, to keep our regulated ROEs up. But now as we move forward, it's time to catch up that rate base growth. And also we do have the singularly combined cycle plan as an example that will be timed with rate recovery, which will be moving from QIP to in service. So there's a number of factors, as we mentioned earlier, some deferred cost, cash recoveries and some earnings uplift potentials as well, a mix of the 2. Got it. And last thing, just thinking about the O and M cost management, when you're saying a 5% reduction, and I'm still on that kind of same slide, Page 18, is that a 5% reduction on the total kind of GAAP level of $6,200,000,000 or a 5% reduction on that smaller number, the $4,600,000,000 or $4,700,000,000 It's on the nonrecoverable O and M number, the smaller number there. The larger number has recoverables in it, pass through type items as well as some cost to achieve type items. So we're looking at the nonrecoverable lower number. Got it. Okay, guys. Thank you, Lynn. Thanks, Steve. Much appreciated. Sure. We'll go to Robert Song with SunTrust. Hi, good morning. Good morning, Robert. Hi. Just a really quick question on the 4% to 6% across the 5 years. Should we think about it, linear across the 5 years? Or is it more front end or back end loaded? As we said in our prepared remarks, we have designed this plan to deliver within the range every year, both the capital and the recovery mechanisms. I see. Okay. That's all I have. Thank you. Thank you. Thank you. And we'll go to Lassan Jahan with Anvila Research Consulting. Thank you. Couple of questions on the tax issue. 1, Steve, I thought what you said was very interesting. If the corporate tax rate goes down, it sounds like you were suggesting that Duke gets to keep that benefit and then take that money and reinvest it in new infrastructure. Is that kind of right? Or I would have thought that the rates would be reduced to compensate for the lower tax rates? Well, not necessarily. There's a number of options that can be put forth here as we work with the various stakeholders. But we've had cost O and M items drop in the past. There's a number of things that can be done. You can reinvest in capital and keep your ROEs the same under the current rates but advance your infrastructure for customers. You can use situations like this to accelerate amortizations of regulatory assets and things of that nature when an O and M cost declines and keep current rates where they're at. We've done that in the past. So there's a number of strategic opportunities that exist out there. I think the important point is if customer rates are otherwise going down for a reduction in tax rate, that gives you the opportunity to deploy capital without an increase in pricing. So that's the point we're trying to emphasize here. Okay. That's excellent. Gas LDC M and A, is that something that is still in the mix? So this plan does not contemplate M and A. We feel like with the portfolio of businesses that we have that we've got a good growth trajectory. Asset acquisitions, if we saw something that fit with 1 of the businesses, we of course would be opportunistic. But there's no what I call corporate M and A contemplated here. Got it. Personal tax rates going down, I would assume if that happens, your 4% to 6% growth rate would start to look very low, correct? If personal tax rates go down? More money to the consumer, consumers spend more and more household formations, therefore more electric connections and gas connections. No? We love low growth. We do. Exactly. That's probably the best thing that can happen to our business. So let's move to the Southeast. Let's build industrial in the Midwest. We're all for it. But to the extent the economy picks up based on various tax initiatives, whether corporate or personal and discretionary spending increases. Well, that will certainly help our business. And certainly, our Southeast jurisdictions are very desirable areas with a lot of growth. We'd love to see that uptick. Got it. Last question is, if you're going to Washington to influence the outcome of the tax results, why not push for deduction of dividends? It's interesting question because we had that raised by a legislator actually in an early conversation. So all things are on the table, I guess. Okay. Thank you very much. All right. Thank you. Thank you. And now I'd like to turn the conference back over to Ms. Lingood for any additional or closing remarks. Well, thank you everyone for joining us today and for your attention during a slightly longer call and set of prepared remarks. We will be available as we always are for additional discussion and feedback, our Investor Relations team, and we look forward to seeing many of you in the days ahead. So thanks again for your investment in Duke Energy. Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.