Duke Energy Corp (DUK) — Q4 2017 Earnings Call Transcript

Thank you, John. Good morning, everyone. Thank you for joining Duke Energy’s fourth quarter 2017 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. Today’s discussion will include forward-looking information and the use of non-GAAP financial measures. Slide two presents a safe harbor statement, which accompanies our presentation materials. A reconciliation of non-GAAP financial measures can be found on dukeenergy.com and in 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.

Thanks, Mike, and good morning, everyone. Today, we announced adjusted earnings per share of $4.57, marking the close of a highly successful year for our company. We made strides on our strategic investments and delivered earnings at the upper end of our narrowed guidance range, showcasing our flexibility and cost management, which helped to mitigate the effects of mild weather. Our team pushed forward with our long-term transformation while continuing to address the daily needs of our customers. We also provided our adjusted EPS guidance for 2018, setting a range of $4.55 to $4.85, which factors in the effects of tax reform and planned equity issuances to strengthen our balance sheet. We are reaffirming our 4% to 6% growth rate through 2021, positioning us at the midpoint of our initial guidance range for 2017 and extending this growth rate through 2022. The growth from our investment plan, along with additional rate base from tax reform, will enable us to reach the guidance range by 2019 and maintain a position in the higher end of the range into 2020 and beyond. Steve will offer more insight into our financial results, discuss our capital growth strategy, and explain how we are integrating the impact of tax reform into our planning. But first, let’s take a moment to look at Slide 4. The industrial proposition introduced last year holds true today. Our business fundamentals are strong, allowing us to generate growth in earnings and dividends in a low-risk, predictable, and transparent manner. Given the capital-intensive nature of our business, maintaining a strong balance sheet remains a top priority. Our appealing dividend yield and proven ability to grow our regulated businesses create attractive returns for our investors, positioning Duke as a strong long-term infrastructure investment. Slide 5 highlights our reliable track record and commitment. Overall, 2017 was an outstanding year for Duke Energy. We delivered results, advanced our long-term strategies, and excelled in operations. We experienced solid growth in our Electric and Gas Utilities, including the addition of Piedmont Natural Gas. We also showcased our flexibility by offsetting unfavorable weather conditions with strategic cost management. These achievements allowed us to present robust earnings and increase our dividend by 4%. Our dedication to safety and exceptional operational performance persisted in 2017, with our employees achieving outstanding safety metrics, improving our total incident case rate by 10% compared to our industry-leading 2016 performance. For the second straight year, our nuclear fleet achieved a combined capacity factor exceeding 95%. In the aftermath of Hurricane Irma, our employees restored power to over 1.5 million customers in just over a week. Last month, Fortune magazine recognized Duke Energy in its 2018 list of the World's Most Admired Companies, reflecting our stakeholders' appreciation for the journey we're undertaking at Duke and the progress we've achieved. Lastly, we made advancements in our strategic investment program and collaborated with stakeholders to enhance our regulatory modernization efforts, ensuring a closer alignment between recovery and our investments. We witnessed positive outcomes from this approach in Florida with the approval of our multiyear rate settlements, as well as recovery in grid and solar investments in North Carolina following the passage of HB 589 and the addition of rider recovery mechanisms for renewables. Turning to Slide 6, we laid out our decade-long investment priorities consistent with the plan shared earlier in 2017. Our investments focus on strengthening our energy delivery system by directing $25 billion towards building a smarter energy grid, generating cleaner energy with $11 billion in natural gas and renewable investments, and expanding our natural gas infrastructure to double this segment's contribution. We will continue engaging with stakeholders on regulatory modernization and fundamentally transforming our operations to enhance the customer experience and achieve top-tier customer satisfaction. Everything we do is driven by our employees and their commitment to operational excellence. We will invest in infrastructure valued by our customers and ensure sustainable growth for our investors. Let me guide you through our plans to maintain momentum and execute our strategy in 2018. Slide 7 updates our grid modernization efforts. Our goal is to enhance system performance across the board—customer control, convenience, security, and reliability. In 2017, we launched the Power Forward Carolinas initiative, a 10-year, $16 billion plan to upgrade our grid in both Carolinas. This investment is expected to provide significant economic stimulus, generating over 17,000 jobs and more than $26 billion in economic output over the next decade. To recover this investment, we proposed a grid rider mechanism as part of our pending Duke Energy Carolinas rate case in North Carolina. We look forward to discussing this further during the evidentiary hearing scheduled for next week. In Florida, our multiyear rate plan incorporates rate increases to recover our grid modernization investments. Work is already underway; in October, we completed our first self-optimizing grid network. This automation allows the system to identify issues and reroute power to minimize outages for customers. As we expand this program in 2018, we aim to deploy 100 self-optimizing networks across our service areas. In Indiana and Ohio, we have been recovering $600 million per year using our commission and distribution riders, focusing on hardening, resilience, and other grid improvements. The advancements in our service territories are also deploying smart meters, enhancing convenience for our customers. With 1.2 million meters installed in 2017, 40% of our customer base now enjoys this technology. We plan to add another 1.4 million meters in 2018 and remain on track to complete the program by 2021. We are tapping into emerging technologies to benefit our customers. We are installing over 500 electric vehicle charging stations across Florida in response to growing demand and as a potential new load. Additionally, we are implementing battery storage across many jurisdictions, with 185 megawatts of projects either in place or underway. Our major projects are crucial to establishing a foundation for a smarter energy future. We will continue engaging stakeholders to ensure that the pace and scale of our investments align with customer needs across our jurisdictions and maximize value for our shareholders. Slide 8 highlights the ongoing transformation of our generation fleet. We’ve made significant progress in reducing our environmental impact, lowering our carbon emissions by 31% since 2005. In 2017, we renewed our commitment to cut carbon emissions by 40% by 2030. With over 11 projects aimed at building more efficient natural gas-fired plants and enhancing renewable generation, we will diversify our generation portfolio while keeping rates competitive for our customers. As part of our evaluation of our changing portfolio's long-term impact, we announced our intention to release a new climate report in the first quarter of 2018. This report will detail our commitment to environmental stewardship and sustainable energy practices. Advancing our generation strategy, the W.S. Lee plant in South Carolina completed final commissioning this year and will soon start serving our Carolinas customers. You will also see construction progress on our Citrus County Combined Cycle project in Florida and the Western Carolinas Modernization Project in North Carolina, both expected to enter service in 2018 and 2019 respectively. We are increasing our investment in renewable energy as Florida's multiyear rate plan permits the construction of up to 700 megawatts of new solar capacity. Combined with the procurement of nearly 2,700 megawatts of solar in North Carolina under HB 589, we are clearly advancing toward our carbon reduction targets. Moreover, these regulatory and legislative successes in Florida and North Carolina reflect modern mechanisms for recovering these investments, demonstrating the effectiveness of our stakeholder engagement. Our nuclear plants are vital in providing carbon-free energy to our more than 4 million customers in the Carolinas. These units represent the largest regulated nuclear fleet in the country and are essential for achieving our long-term carbon reduction objectives. Looking forward, we are assessing license extensions for these facilities to serve our customers reliably for an additional 20 years. Moving on to Slide 9, let me share updates on our natural gas operations. October marks the one-year anniversary of our acquisition of Piedmont Natural Gas, and we're seeing the positive impact of this deal. Natural gas is set to play a crucial role in the transition to cleaner energy, and we are leveraging the synergies between our electric and gas businesses to enhance our customer service. We've added the Marshall Steam Station to our projects list targeting dual-fuel capabilities in North Carolina. Our three dual-fuel projects introduced last year represent a $500 million investment for both Duke Energy Carolinas and Piedmont, showcasing the benefits of our combined franchises and the advantages of collaborative planning. We will utilize a mix of coal and natural gas at Rogers, Belews Creek, and Marshall to lower carbon emissions and increase cost management flexibility, delivering savings to our customers. We’ve reached significant milestones in our midstream gas ventures, having recently completed the Sabal Trail pipeline and the Atlantic Coast pipeline, essential infrastructure projects that will provide much-needed gas supplies to the Southeast and stimulate economic growth in rural areas. During a period of record cold weather in early January, intense demand impacted homes, hospitals, and businesses, causing natural gas prices to spike due to transportation constraints in North Carolina. This situation underscores the importance of the Atlantic Coast Pipeline as a critical source of natural gas for our region and its potential to generate substantial savings for customers. We are pleased to report that work has commenced on the Atlantic Coast Pipeline following limited notices to proceed from FERC, allowing initial construction activities in permitted areas. After a comprehensive three-year study, North Carolina's Department of Environmental Quality issued key permits for the pipeline in late January. These approvals, alongside permits from the Army Corps of Engineers, progress us closer to commencing full construction of this 600-mile pipeline, with final permits from Virginia still pending. The permitting process has been rigorous and transparent, and we are aiming for the pipeline to be in service by late 2019. Future delays and stricter conditions in the permitting process are currently projected to increase total project costs to between $6 billion and $6.5 billion. As a reminder, Duke’s share of these costs is 47%. In closing, we have a clear vision of the path ahead for Duke Energy. With our customers at the heart of everything we do, we are transforming our company while ensuring reliable, safe, and affordable energy. Stakeholders rely on us to fulfill our commitments, and we succeeded in doing that throughout 2017. From our financial achievements to operational excellence, we generated value for our customers and shareholders, and this focus will persist into 2018 and beyond. Now, I’ll turn the call over to Steve.

Thanks, Lynn. As mentioned, we had a solid year and delivered on our financial conditions. As you can see on Slide 10, we achieved adjusted earnings per share of $4.57, which was near the high-end of our narrowed guidance range. We are already seeing the benefits of our portfolio transition with the focus on stable, predictable, and regulated businesses. We grew our electric utilities through higher pricing in riders, organic loan growth, and ongoing investments across our jurisdictions. Our gas segment also demonstrated growth, driven by Piedmont's contribution and additional earnings from our midstream pipelines. Additionally, we achieved our cost management targets, which offset the majority of the below-normal weather we experienced during the year. Overall, we are pleased with the growth across our businesses. Turning to Slide 11, let me walk you through key implications of the new federal tax law. As you know, the tax reform has been a key focus for the utility industry. We were successful in advocating for industry-specific provisions that will benefit both customers and shareholders. As the holding company, the lower income tax rate will reduce the tax yield on interest expense, resulting in lower earnings beginning in 2018. At the utilities, tax reform results in lower accrued tax expense, which provides opportunities for lowering rates to customers. However, because Duke Energy is not a significant cash taxpayer, any reduction to customer rates will place downward pressure on our consolidated cash flows. Recall, we’ve been in the net operating loss position for tax purposes for the last few years due to bonus depreciation. We currently estimate we will be out of the NOL in 2019 and begin using our accumulated tax credits through the balance of the five-year plan. In response to these issues, state regulators have initiated dockets in our jurisdictions. In general, we are recommending that lower tax rates be used to reduce customer rates in the near term, as well as help offset future rate increases. We have made several proposals, including accelerated depreciation, recovering investments more quickly, or amortizing regulatory assets. This would allow us to recover certain costs and maintain utility credit quality while avoiding volatility in customer rates. In Florida, the commission has already approved using the benefits from tax reforms to offset the increase in customer rates with Hurricane Irma restoration and to accelerate depreciation of certain closings. Overall, we expect customers to see savings over time, which will vary based on the regulatory outcomes in each state. Tax reform also provides some benefits to cash flow. Due to the treatment of our alternative minimum tax spreads, the new law provides for a full refund with AMC credits over the 2018 to 2021 tax years. As of December 31, we had approximately $1.2 billion of credits subject to this refund. Another major impact of tax reform is the increase in the utility rate base. This occurs as the lower tax rate and the elimination of bonus depreciation resulting in lower deferred taxes, which, in turn, increases rate base. As a result, we will see higher rate base growth for the same level of capital spend, resulting in an increase in the company's earnings power. Given that these positive drivers will take some time to manifest, we are taking steps to further strengthen our balance sheet and fund our capital program. In 2018, we intend to issue $2 billion of equity, including our original expectation for $350 million of equity via the drip. We also have reduced our five-year capital plan by approximately $1 billion. I'll share more details about the capital and financing plans in a moment. On Slide 12, we have outlined more detail about the earnings impacts of tax reform. This morning, we announced our 2018 adjusted EPS guidance range of $4.55 to $4.85 per share. Earnings for 2018 will be driven by ongoing investment programs across our jurisdictions, low growth expectations, and the continuation of our regulatory recovery activities. We have bested the lower corporate tax rate with resolution from plant equity issuances, which will partially offset this organic growth. With this in mind, the midpoint of our 2018 guidance range is slightly below the 4% to 6% earnings per share growth rate we introduced last year. However, we expect to be within the range by 2019 and at the mid-to-high end of the range in 2020 and beyond, given that the rate base will now grow at a faster pace. Turning to Slide 13, our growth will be supported by our five-year $37 billion growth capital plan. Our investments align with our strategies to modernize the energy grid, generate cleaner energy, and expand natural gas infrastructure. In light of tax reform, we have lowered our total capital over the five-year plan by about $1 billion. We have expanded our cost management capability and applied this to capital. Furthermore, we are optimizing our operational capital around regulatory activities in the land. We have modestly increased our level of investment in commercial intervals, and we look to utilize tax equity partners to continue investing in solar and wind projects. The total capital plan is lower than originally outlined in 2017. Tax reform has added approximately $3.5 billion to our rate base by 2021. Earnings base now grows to a 7% CAGR through this timeframe, representing a 1% increase compared to what we presented last year. The new tax law will also provide additional headroom in customer bills, allowing us to continue making smart investments while also keeping rates as low as possible. Overall, we are taking a balanced approach, and we are confident we will continue to meet the needs of customers and investors. Moving to Slide 14, let me walk you through our 2018 financing plan. We are committed to maintaining the strength of the balance sheet as we look to finance our expensive capital plan over the forecasted year. As I mentioned earlier, in 2018, we plan to issue $2 billion in equity, including the $350 million we already expected to issue to the DRIP. We plan to raise this equity to a discrete transaction within the next few months and by selling shares under our recently filed ATM broker. We may utilize the forward structure to better align proceeds from the equity offerings with the timing of our actual cash needs. This will help to avoid unnecessary share dilution in 2018. We will be opportunistic in completing our incremental equity needs, with the goal of completing it by the end of the year. Going forward, we still expect to issue $350 million of equity per year through a combination of our DRIP/ATM programs. We continue to be disciplined with our approach to capital, reducing the level of investment versus a year ago. Additionally, we will maintain our focus on cost control, which I will discuss in more detail in a moment. All of these actions will improve our credit metrics over the five-year plan. Our balance sheet will be supported by the equity issuances and planned regulatory activity, which will turn our investments into cash returns. By 2020, we expect our FFO to debt ratio to be in the range of 15% to 16%, and our Holdco to debt percentage to be in the low-30s, both aligning with our targets. We believe the combination of the 2018 and the ongoing annual equity issuances will satisfy all of our equity needs and provide the balance sheet strength to execute on our business plan. Turning to Slide 15, our attractive service territories for constructive regulatory frameworks and our cost management efforts have allowed us to earn at or near our allowed ROEs. We’re seeing strengthened customer growth across our jurisdictions, particularly in the Southeast, and expect this to continue. This trend supports growth in our electric and gas utilities. We continue to plan for 0.5% annual retail loan growth in our electric utilities in 2017; weather-normalized retail loan growth is 0.4%, equivalent to 0.7% when excluding the impacts of the lead day in the prior year. This tracks with our planning assumptions. Several macroeconomic indicators support our loan growth projections. Overall, the U.S. economy is strengthening, and leading indicators point to continued expansion for the commercial and industrial segments. In addition, the U.S. dollar continues to support domestic manufacturing. Optimism for retail and small businesses is near an all-time high. Furthermore, a key objective of the new tax laws is to stimulate business investments, create jobs, and grow the economy. At this time, we’re not incorporating effects from tax reform into our volume growth planning assumption, but expect it could be an upside to our forecast. We are also managing our cost structure using new technology and rolling out data analytics to extend our commitment to keep non-recoverable O&M flat through 2022. The use of mobile applications is bolstering productivity, and we are keenly focused on identifying efficiencies throughout our operational and corporate structures. As we look to the future, we are developing our digital capabilities to foster a connected culture. Due to the modernization of our customer systems and grid infrastructure, we will see tangible benefits in savings. 2017 was a busy regulatory year for us. Slide 16 outlines our projected activity over the planning horizon to achieve timely recovery of our investments. We have a robust capital plan that involves substantial investment in electric and gas infrastructure over the next five years, and we have modern regulatory recovery mechanisms in place for many of these investments. In Florida, we have the multiyear rate agreement through 2021. In Ohio and Indiana, we have riders to recover transmission and distribution investments and are requesting the extension of the distribution rider in Ohio. In North Carolina, we now have renewable riders established under HB 589, and at Piedmont, we have distribution infrastructure riders. We will continue to pursue these types of recovery mechanisms to enhance our investment returns. Let me take a moment to discuss our pending base rate cases in North Carolina. We expect an order in the Duke Energy Progress case any day and no later than March 1. New rates will be effective soon after the order is issued. Our Duke Energy Carolinas rates cases progress with the evidentiary hearing scheduled to begin on February 27, with requested rates expected to be effective May 1 in that case, if approved by the commission. Shifting to Slide 17, we understand the value of the dividend to our shareholders and are dedicated to growing it responsibly. 2018 marks the 92nd consecutive year paying the quarterly cash dividend, demonstrating the steadfast commitment to our investments. We expect to maintain our annual dividend growth rate of approximately 4% to 6% through 2022, consistent with our long-term earnings growth as we target our payout ratio in the 70% to 75% range. Given the near-term impacts of tax reform, we expect the payout ratio will be higher than the targeted range initially. Therefore, dividend growth will be closer to the low end of the guidance range for the next couple of years as we work the payout ratio back in. The growth rate will increase as we are more solidly positioned in the payout ratio range. Before we open it up to questions, let me turn to Slide 18. Our history of operational excellence, coupled with a strategic plan that is already producing compelling results, gives us confidence as we continue to offer a solid long-term investment opportunity. Our track record of dividend yield combined with earnings growth from investments in our regulatory utilities provides a strong risk-adjusted return for our shareholders. We are positioned to deliver results for both customers and shareholders and are confident in the plans we have for 2018 and beyond. With that, we'll open the line for your questions.

Good morning, guys.

Good morning, Pourreza.

Just a quick modeling question. Can you elaborate a little bit on the drivers of growth from '18 to '19, Steve? I mean, to take you back within that previous 4% to 6% range by '19. You sort of would need a lot of growth year-over-year, almost 8%, just using the midpoint of the 2018 guide. I know it's not linear, but are we thinking about this step-up in earnings correctly? Should we think more bottom end in '19? Just remind us how you are closing that gap?

Well, let me discuss some of the drivers here for 2019, and that really is pretty similar to the drivers that we have in our businesses each year. We've got rate riders and rate cases that take into play. We've got our normal volumes growth, which has been pretty strong as well. And then there is AFUDC on various investments. When you look at 2019, it will have the full-year impact of the Carolinas rate cases, and then in 2019, we expect to see accelerated spending in Atlantic Coast Pipeline. Those will be a couple of big drivers towards the earnings that you might see in that particular year, Shar.

Okay, that's helpful. And then just we'll take on ACP; it's good that it's moving sort of the head here. But at what point sort of in the construction cycle should we think about incremental growth opportunities? Is it sort of post-state approvals or where the later part of the construction phase? Like how are you thinking about the next leg of growth with ACP 2 and 3?

Shar, thanks for that question. We are proud of the progress that we've made over the last couple of months with state and federal permits. Our focus is ramping up construction to hit a late 2019 in-service date. I think about additional investment opportunities in ACP; there is expansion that would occur in the form of compression, a very cost-effective way to add capacity, and then extension would be another opportunity. I think at this point, our focus is on building the initial project as it's established. Then our attention to compression expansion will be really driven by the needs of our customers, and then following that, we'll look at opportunities to expand.

Got it. That's helpful. And then just, Lynn, one strategic question. Duke falls in and out of M&A chatter, especially recently with some of the jurisdictions that you've been active in, which is Indiana and the Carolinas. Can you just sort of refresh your thoughts on how you are thinking about additional growth through inorganic opportunities in light of what you are seeing as far as tax reform and sort of maybe even the stress on the balance sheet?

Our focus, Shar, is on organic growth at this point. We feel like we've got a very robust set of investments within our jurisdictions and very attractive jurisdictions that give us an opportunity to deliver benefits to customers and investors. With the steps we've taken around the balance sheet, the equity issuance, that also positions us to support that organic growth. M&A is not a part of our strategic plan to achieve what we've laid out before you. We view that as opportunistic, but we're really comfortable with the organic plan we have set forth.

Excellent. Thanks so much. I'll jump back in the queue.

Thank you.

Thanks, Lynn. As mentioned, we had a solid year and delivered on our financial conditions. As you can see on Slide 10, we achieved adjusted earnings per share of $4.57, which was near the high-end of our narrowed guidance range. We are already seeing the benefits of our portfolio transition with the focus on stable, predictable, and regulated businesses. We grew our electric utilities through higher pricing in riders, organic loan growth, and ongoing investments across our jurisdictions. Our gas segment also demonstrated growth, driven by Piedmont's contribution and additional earnings from our midstream pipelines. Additionally, we achieved our cost management targets, which offset the majority of the below-normal weather we experienced during the year. Overall, we are pleased with the growth across our businesses. Turning to Slide 11, let me walk you through key implications of the new federal tax law. As you know, the tax reform has been a key focus for the utility industry. We were successful in advocating for industry-specific provisions that will benefit both customers and shareholders. As the holding company, the lower income tax rate will reduce the tax yield on interest expense, resulting in lower earnings beginning in 2018. At the utilities, tax reform results in lower accrued tax expense, which provides opportunities for lowering rates to customers. However, because Duke Energy is not a significant cash taxpayer, any reduction to customer rates will place downward pressure on our consolidated cash flows. Recall, we’ve been in the net operating loss position for tax purposes for the last few years due to bonus depreciation. We currently estimate we will be out of the NOL in 2019 and begin using our accumulated tax credits through the balance of the five-year plan. In response to these issues state regulators have initiated dockets in our jurisdictions. In general, we are recommending to use the lower tax rates to reduce customer rates in the near-term as well as help offset future rate increases. We have made several proposals including accelerated depreciation, recovering investments more quickly, or amortizing regulatory assets. This would allow us to recover certain costs and maintain utility credit quality while avoiding volatility in customer rates. In Florida, the commission has already approved using the benefits from tax reforms to offset the increase in customer rates with Hurricane Irma restoration and to accelerate depreciation of certain closings. Overall, we expect customers to see savings over time, which will vary based on the regulatory outcomes in each state. Tax reform also provides some benefits to cash flow. Due to the treatment of our alternative minimum tax spreads, the new law provides for a full refund with AMC credits over the 2018 to 2021 tax use. As of December 31, we had approximately 1.2 billion of credits subject to this refund. Another major impact of tax reform is to increase the utility rate base. This occurs as the lower tax rate and elimination of bonus depreciation result in lower deferred taxes, which, in turn, increases rate base. As a result, we will see higher rate base growth for the same level of capital spend resulting in an increase in the company's earnings power. Given that the positive drivers will take some time to manifest, we are taking steps to further strengthen our balance sheet and fund our capital program. In 2018, we intend to issue $2 billion of equity including our original expectation for $350 million of equity via the drill. We also have reduced our five year capital plan by approximately $1 billion.

Thanks, Lynn.

Hi, good morning.

Good morning, Steve.

Good morning.

I just want to touch on what you've mentioned in terms of further growth in renewables and the commercial segment. Just at a high level, I'm curious about your thoughts on the competitive environments for renewables, and the degree of growth potential there. What are you seeing out there on the competitive playing field for that business?

Steven, I think the business is a competitive business. I think there is some adjusting as a result of the tariffs that have recently been imposed. We'd like to see how that landscape plays out. We also are pacing the lower tax rate. We have to determine how capital-equity markets perform, although we still expect them to be there. So we believe we have a very solid business, a business of scale; we believe we're capable of competing. So we have also been appropriately conservative with our assumptions around returns and are not going to chase it unless it’s delivering a return above our cost of capital. And that will be our approach as we go forward. I would point to regulated renewables as well, so we’ve got 700 megawatts from building within Florida. HB 589 in North Carolina represents an opportunity for either our commercial or regulated business, and we're working closely with those opportunities as well.

That's helpful. And thank you. And then just thinking high-level around Amazon and the potential for them to put HQ number two in your service territory, without getting too specific, I’m just curious, how you’re thinking at a high level regarding what will be required to accommodate what kind of incremental capital or operational changes you need to make to accommodate that?

So Steven, I think we’re capable of serving Amazon today with a really robust system in North Carolinas. We have the pleasure to serve and expand our facility in Northern Kentucky that we’re working closely with them on. The triangle area around that has been an important growth area for the company for some time. So we’ll be anxious to put infrastructure in place as additional infrastructure is needed. I think about our approach to economic development in general; we’ve been very aggressive in our service territories making investments to attract businesses. That will be our approach here as well if we get that opportunity for the Carolinas.

Thank you so much. If I could just maybe one more on changes to the grid. You’ve been spending a lot of time and effort thinking about grid modernization in a number of ways. I’m just curious, as you see it now; do you see incremental investment opportunities from grid modernization over and above which you’ve already laid out? Or is that likely to be a relatively long evolution in terms of changes to be making there?

I believe we have a robust plan where we have been disciplined in establishing business cases for each of these investments to deliver benefits to customers, whether it’s regular customer experience or reliability metrics. We do have the ability to change the timing, accelerate, or slow down depending upon the needs of customers in the jurisdictions. I would expect as the system continues to grow— which we would see it doing over the next 10 years—the Southeast is attracting an incredible number of new citizens. People are migrating to this area that will create continued opportunities to expand our system. We have a team of people focusing on modernization as a full-time assignment to ensure that we’re growing the infrastructure that our system can rely on—in Indiana, Florida, and Ohio.

Okay. Thank you very much.

Thank you.

Thank you.

To what extent do you see the increase in earnings growth in the 2019-2020 period driven by the rate base increases coming from deferred tax amortization? In terms of—does that give you increased confidence in being able to get back up to the mid-high range, because this portion of the rate base growth is—not—it's uncertain right?

Yes. And you know, Michael, I think you can see the front end impact with the loss of interest shield and resolution. But as you look at our acquired debt— looking at rate base growth, you can see $2.5 billion to $3.5 billion of rate base over that period. That's about spending at all of capital. If that rate base grows in the fundamental business that we operate, low risk, high-quality jurisdictions, it gives us the confidence that we need to maintain the 4% to 6% growth rate, especially as it relates to tax reform in '18, getting back within the range in '19, and at mid to high in '20 and beyond. So the point you are making around the strength of the rate base curve is exactly right.

Great. And also maybe you could just comment a little bit about the tax equity market around renewables after the big provisions in the tax reform package?

We believe we'll be successful in that market with our size and credit profile. I think all of this is something that we'll continue to monitor. We’re actually in the tax equity market right now with projects and are seeing success in bringing that together. So we are optimistic.

Are you seeing any additional opportunities, maybe coming your way as a result of smaller players having a harder time gaining access to that market now?

Michael, there is a lot of opportunity flow that comes through, and I compliment the team for their diligence in this regard, as they approach this in a disciplined fashion to identify projects that make sense for us, but we do see good opportunity flow.

Thank you very much.

Thank you.

Thank you.

Good morning, guys.

Hi, Jonathan.

Good morning.

When you talked about what you have assumed for the cash treatment of tax reform with regard to customer rates, it sounded like you were saying you've assumed you'll flow it back reasonably quickly, but then you talked about several things that would do the opposite. Is there any way you can give us a sort of high level what's assumed in this FFO target versus the range of potential outcomes?

Yes, Jonathan, we've looked at a number of outcomes and they may vary per jurisdiction. Certainly we have a constructively outcome in Florida. In general, what we are thinking about here is that the impact of the rate decrease from the 35% to 21% will work its way back through perspective rates and give that aspect to customers. We're looking at the excess deferred tax piece; the protected piece will go back slowly, and we’re looking at utilizing the other excess deferred taxes to balance against the rate base increases that are coming as well to help reduce the volatility. That’s a general way to think about the way we've incorporated this into our plans.

So, for example, where you have rate cases pending at that point of 35% to 21% would be part of that case, and in other jurisdictions, it would be later, is that right?

Jonathan, I think—I’ll try to graph it out; the Carolinas, as Steve will try here too. We’re not expecting tax reform will be a part of the DEP case that we are expecting an order on anytime. There is a separate docket this tradition has established. Testimony will be presented in the DEC case around tax reform, and I think it's really an open question on whether or not itself can fit within this case or in a separate docket. But I think in all events, there is an opportunity here to use tax reform; there may be an impact on rising prices or investments in the state. The other states, some of them will automatically incorporate the riders, so in Indiana and Ohio, where there is a rider tracking mechanism, those tax reform impacts will go to meaningfully. T- mark would be another example of that. And then we'll tailor other jurisdictions based on general rate case timing or separate dockets established and fee settlements will really be customized jurisdiction by jurisdiction.

And can you just touch on ACP in that context?

The ACP project has benefited from tax reform. Again, we've got several agreements with our customers on ACP. And if this—it's not a formula-type rate there, and so that will be one of the things that benefits us more with the quotation to ACP.

You may remember it was a very competitive process early on with negotiated ranges that came out of the competitive bidding process. ACP was selected as the most cost-effective solution and continues to be the most cost-effective solution for customers.

To see that anticipate an adjustment there?

That's correct.

Great. Thank you. And then could I just on—when I look at the FFO to debt slide you show '18 then you showed '20 to '22, does that—should we assume like '19 is sort of part of a bridge to that new number? Or does it go down a little of that improve? What's the sort of '19 profile as you fill in that gap?

We will be improving on our metrics throughout the plan, Jonathan. I don’t want to give you year-by-year guidance, but we do see an improvement throughout the plan.

It trends up from 2018, Jonathan.

And have you had the opportunity to sort of download with the agencies on how the plan looks, now you've framed out some—your equity piece?

Yes, we visited with all three of the agencies, Jonathan, in advance, sharing with them our perspective, the actions we've taken—not only the equity, but the reduction in capital, our focus on cost management, demonstrating a track record in pursuing regulatory recoveries. We've had very comprehensive discussions, and we believe we put forward an incredible plan to the agencies that support our ratings. Of course, they will deliberate and publish the guide in the coming months, but we feel like we've had very good discussions about an incredible plan like this.

Great. Thank you. And if I may digest the '18 you have 15% to 16% targeted effective tax rate. Is that the right bolt-on going beyond '18? Or is it still low—is that lower than you think it will be?

I think that's certainly what we see for '18. We typically don’t project beyond that. I don’t know that it's going to change a lot going forward.

Thank you, Steve. Thank you, Lynn.

Thank you.

Thank you.

Good morning, Lynn.

Good morning, Julien.

I just wanted to follow-up and clean up a few items from past questions here. First, on the growth into ’19 and then ’20 beyond, just to make sure if I heard you right, mid to high-end in ‘20 and beyond. Is the right way to think about this that basically you’re targeting a 7% rate base growth off of 2018 such that that gets you close to 2019, the midpoint of that range, as I think Shar initially asked. And then, again, as you roll forward take 7% net out a small amount of equity dilution and then again that’s how you outperform the 4% to 6% from ’19 into ’20. Just want to make sure we’re hearing the puts and takes appropriately here.

So, Julien, I would think about 2019 as being within the guidance range. I think the lower end of the guidance range would be the way to think about ’19 as we’re still getting into that recovery of the increased rate base investment. You should think about ’19 earnings having to address rate cases prosecuted in ’18 in certain of those jurisdictions. We will see the rider impact and other things. But within guidance, that’s the way I think about ’19, and then by ’20 mid to high, because we have an opportunity for another year of securing that revenue stream built on that rate base growth. $3.5 billion of additional rate base growth without spending an additional dollar of capital in these jurisdictions, we believe underpins our ability to get to that range by 2020, mid to high.

Great. Excellent. And then coming back to the prior question on the commercial side of the business, specifically renewables, can you elaborate a little bit on what’s driving? I think in the commentary you suggested that you would actually increase the size of investment, but then perhaps in some of the Q&A, if I hear you right, a little bit more cautionary on tariffs, etc. Are you looking to expand this or is this really a statement around HB 589 and the opportunities there? Is this something beyond the Carolinas here that you guys are really seeing out there?

Julien, there is about $1 billion of investment in commercial and renewables last year. It is modestly higher than that this year. We have introduced half equity for the first time, you may recall. Before tax reform, we thought we would be a tax payer and someone who could use credit sooner than what’s going to happen. We have looked at that business through the lens of tax equity. We do see opportunities from HB 589. As we just clamp the implications of HB 589, we put that capital into the commercial business for planning assumptions. So I think our message here has been consistent. We like the business; we have scale in the business. We believe we can invest in a manner that’s profitable for our investors. The modest increase in capital is HB 589 and other market opportunities.

Got it. Excellent. And just last nitpicking on the FFO to debt question real quickly, the 2018 number you show. Is that inclusive of the equity or should we be thinking about the jump, the ratable improvement from 14% up to the 15% to 16% range, the equity being a big chunk of that improvement? Just want to make sure what level of debt here?

The equity is in the FFO...

Yes. The equity...

Yes. That’s correct.

Is reflected in that 14% already?

Yes.

Again, Julien, I think, as you know, an equity issuance impacts the denominator, right. So it's going to have an impact on FFO, but it has a more dramatic impact on our holding company debt, which, of course, will be declining over the five-year period. So roughly, its 71%, so more aggressively than what we shared with you last year. The engine for the production of FFO is our regulatory businesses, and that has not changed in tax reform. We will go after investment and delivering returns in a way that we historically have by delivering returns in regulated profits, and that’s the engine that drives the FFO growth over the period.

That’s right. And our ability to execute in our cost management has helped us to exceed the original estimates we have for 2018 in our credit metrics.

Right. Excellent. Thank you.

Okay. Thanks, Julien.

Good morning. Just going back to the growth question, so looking on slide 12, when you say mid to high end of the growth target in 2020, is that the growth over 2019 earnings or is that a compounded average annual rate of the midpoint of your 2017 guidance?

It's all for '17, David.

Okay. Great. Thank you.

Thank you.

Hi, guys, more of a longer-term question. How are you thinking about the jurisdictions where you have the most lag? What you can do to structurally change that to reduce that lag outside of just continuing the bi-annual cases on a pretty frequent basis?

Hi, Michael, I appreciate that question because we have drawn our attention to what we are calling regulatory modernization, which is trying to look at the regulatory mechanisms and match those mechanisms to the way investment occurs. So Indiana, Ohio, multiyear rate plans in Florida, all of those are very well-suited to work with the type of investments that we're making in the grid and renewable, clean energy, etc. The Carolinas is where we have a little bit of work to do. We're pleased with the result of HB 589, which puts trackers in place for renewables and for approved contracts both of which were important. As you may recall, we have also filed for a tracker around grid investment in our DEC case. Our intent is to follow on a dual path as we did with HB 589. The commission, how far they believe they can go and then pursue legislation if need to finalize that work. I believe it’s a win-win; the type of investments that we're making will deliver immediate customer benefits. It minimizes the impact on price to customers. I believe with tax reform is another tool we should be able to find our way that something works for customers and for the investments we are trying to put in place. The focus of modernization is throughout all the jurisdictions, but we have some specific objectives we are trying to achieve in the Carolinas.

Got it. And when you are looking at the Carolinas, what’s in the feedback in the rate cases regarding the grid modernization tracker?

So publics have produced some testimony. They have some questions about what is modernization; really questioning the type of investments. They like some of them better than others. We believe that there is a strong case throughout the program around modernization, but they also introduced the notion of the cap if the commission board will approve the tracker. So I believe there was a good start to a conversation that we will continue as part of this case.

Got it. Thank you, Lynn. Much appreciated.

Thank you.

So I guess just bringing together both the growth trajectory that you've talked about here and the credit that you've laid out. I wanted to understand how tax reform and the discussion with the regulators fit in because you've highlighted discussions around regulatory asset recovery, accelerated depreciation. If any of those variables change and the discussions with regulators are, I guess, better than expected or worse than expected. Which variable should we look at that can impact either your earnings trajectory or your credit or putting more pressure on the balance sheet? How should we track that?

Praful, I'll get started and turn it over to Steve. He and his team have worked extensively on the implications of tax reform really dating back into 2017. You can appreciate that any time you put a five-year plan together, you're putting it together with a range of assumptions and that's the case here as well. We won't have complete certainty on the way the commissions are going to address tax reform until later into 2018. But as Steve indicated, we are assuming an immediate return or reduction in rates around the tax rate of 35% to 21%. I think that's a reasonable assumption that should play out in '18 and beyond in each jurisdiction. Then on the accumulated deferred taxes, the protected ones go back overlaid consistently with normal repayment. We propose that the unprotected deferred go back quickly; again, depending on our jurisdiction and the nature of what's at stake remains subject to negotiations which we will check and adjust, and we always do it depending on how that plays out. We believe we have reasonable planning assumptions. Steve?

Right, I think, Lynn covered it very clearly there; that's kind of how we look at it. I think that makes sense. This is an opportunity to reduce customer rates pretty quickly, but we also have an opportunity to utilize some of this to offset some of the rate base increases that are coming, and we will be looking at excess deferred taxes as a tool for that. That was what was done in Florida, I think, a very constructive settlement there. We will see how it plays out on the other jurisdictions.

So how big is the unprotected piece that needs to be refunded? And what assumption is being need on the timing of that refund?

Unprotected deferred taxes are about—for the total corporation—about $1.8 billion; protected are about $4.5 billion.

I got you. And the assumption on the return of the unprotected, I'm assuming, is quicker, obviously, because it's not the average life of an asset; you have some unprotected foundries that are connected with any. But for the rest, is there— is it like a five-year period just to get a sense of what kind of timeframes just that refinance to take place in?

Praful, I would just say a reasonable timeframe at this point. We're early in the process of this discussion with our jurisdictions, and it's going to be jurisdiction by jurisdiction. As I said a moment ago, some of the riders' mechanisms will be treated differently in the general basis rate case. So as we've learned more in these dockets that are opened in front of the jurisdictions, we will be prepared to share more specifics on that, but we believe we've put together a plan here with a reasonable set of outcomes.

Understood. Fair enough. And just quickly, just one last point on the holding company debt. It’s going from 31% to 32%, I guess, in the 2020-2022 timeframe. That percentage, is that being achieved because the underlying denominator that is the total debt of the company is growing? Or is that being achieved because the holding company debt has been paid down during that timeframe?

It’s really reflecting the benefit of the equity issuance, Praful. So we are delevering the holding company with the equity issuance.

I got you. So apart from the initial pay down, there isn’t anything incremental happening post the ’18 timeframe in terms of delevering at the Holdco?

So there is a modest trending up ACP and other things and then down again. So that's the starting point in ’18 and the ending point is relatively flat.

I got you. So I’m just trying to confirm that post ’19, is there any assumption of debt paydown at the Holdco or no?

Relatively flat end-to-end. We can probably take you through financing schedules after the call, Praful, if there is more detail that we can help you with.

Understood. That's super helpful. Thank you very much.

All right. Thank you.

Great. Thank you. Thanks everyone for joining us today. We’ll be available by phone and have an opportunity to meet with many of you over the next couple of weeks. I want to extend my thanks to the team who has put all this together. With tax reform coming late in the year, it’s been an all-out effort. We’re really excited to put it forward today. Thank you for your investments in Duke Energy.