Duke Energy Corp (DUK) — Q1 2020 Earnings Call Transcript

Thank you, Derek. Good morning, everyone, and welcome to Duke Energy's First Quarter 2020 Earnings Review and Business Update. Leading our call today is Lynn Good, Chairman, President, and Chief Executive Officer along with Steve Young, Executive Vice President and CFO. Today's discussion will include the use of non-GAAP financial measures and forward-looking information within the meaning of the securities laws. Actual results could differ materially from such forward-looking statements and those factors are outlined here and disposed in Duke Energy's SEC filings. A reconciliation of non-GAAP financial measures can be found in today's materials and on dukeenergy.com. Please note the appendix for today's presentation includes supplemental information and additional disclosures. As summarized on Slide 4, during today's call, Lynn will provide an update on our response to COVID-19. She will also discuss progress on our strategic initiatives and the company's long-term outlook. Steve will then provide an overview of our first quarter financial results and share an update on key regulatory activities. We will also provide insights into our economic and growth outlook before closing with key investor considerations. With that, let me turn the call over to Lynn.

Bryan, thank you, and good morning everyone. Let me open our call today by focusing first on our response to COVID-19; I know it is top of mind for all of you. First and foremost, our thoughts are with those who have been personally affected. I also want to express my heartfelt thanks to the healthcare and government workers, as well as those working countless hours to support frontline professionals. This pandemic has created barriers that have permeated the globe, our country and the states in which we operate. It's altered our day-to-day lives from how we interact to the way we operate and serve our customers. But despite these dynamic conditions, Duke Energy and its employees have risen to the challenge, continuing to provide reliable service to our nearly 24 million electric and gas customers. The safety of our communities, customers, and employees is our top priority and we took a number of steps to protect them. In March, we shifted nearly 18,000 teammates to remote operations. For teammates in critical roles who could not work remotely, we deployed the best available personal protection equipment, created disinfecting steps between shifts, initiated split operations between primary and alternate locations to limit exposure, plus additional restrictions on those accessing our facilities and implemented social distancing policies. These new safety protocols were particularly important during spring storm restoration and generation outages. So far, our teams have completed three nuclear outages and more than 30 fossil hydrogeneration outages, all while maintaining focus on safety and delivering on time and on budget. In mid-April, our transmission and distribution teams quickly responded to more than 900,000 outages across the Midwest and the Carolinas after severe thunderstorms and tornadoes. But Duke Energy’s response extends well beyond supporting our internal team. We were one of the first utilities in the country to suspend service disconnections for nonpayment and waive late payment and other fees for our customers. In addition, we donated approximately $6 million from the Duke Energy Foundation to fund relief efforts across our jurisdictions and provided critical PPE to several community organizations within our territory. We also accelerated the flow back of fuel adjustments and over collections in Florida, resulting in a 20% reduction in residential bills in May. We are working directly with our commercial and industrial customers to provide a system with payment options for those most impacted by current economic conditions. Our employees have been steadfast in ensuring our communities have power as they also respond and adapt to these changing times. The collective work of the healthcare and government professionals, as well as utility and other essential workers demonstrates the power of working together to serve our communities. Now let me take a moment to walk you through Slide 6 that summarizes where our company stands financially during these uncertain economic times. Today, we announced first quarter adjusted earnings per share of $1.14, in line with our expectations but reflecting milder weather compared to normal and storm costs this winter totaling approximately $0.15 per share. We began to take cost mitigation actions in February as we saw the impact of the mild winter, and we are building on those actions to address COVID-19. Our communities are experiencing a slowdown, and we are beginning to see the impact of electric load in our jurisdictions. In a few minutes, Steve will share more on these customer load trends focusing on the month of April, and a range of potential load trends over the balance of 2020. We are presently projecting a $0.25 to $0.35 reduction in revenue from COVID-19, which is consistent with stay-at-home policies for midsummer and a gradual economic recovery beginning in the third quarter and continuing over the balance of the year. In response to the pandemic and in recognition of mild weather entering the year, we are executing on a series of cost-saving initiatives totaling approximately $350 million to $450 million or $0.35 to $0.45 per share. We’re also keeping our regulators informed about the specific costs we are incurring related to COVID-19. For example, a potential increase in bad debt expense, and we'll seek recovery of these costs at the appropriate time. Taking these measures into consideration, we are affirming our 2020 adjusted earnings per share guidance range of $5.05 to $5.45. We will continue to update you as we move forward. It's important to recognize that we are only two months into this event. We are and we will continue planning for a range of outcomes, and we will know more if the economies that we serve reopen. The third quarter, which is our most significant one is also still ahead of us. Over the long term, we maintain our confidence in the strength of the communities we serve and in our ability to deliver on the $56 billion infrastructure investment plan, which is critical to our customers and communities. I will speak more to our business fundamentals in a moment. Turning to Slide 7, we remain committed to our long-term vision and value creation for our communities and our shareholders. We're putting our five-year, $56 billion capital plan to work as we generate cleaner energy, modernize the energy grid, and expand natural gas infrastructure. Since announcing this updated plan in February, we've made progress advancing these goals. Last September, we announced our comprehensive plans to address carbon across our footprint, reaching at least 50% reduction by 2030 and net zero by 2050. Our updated climate and sustainability reports issued in April provide more clarity and detail around the measures we're taking to achieve these milestones, including doubling our renewables portfolio over the next five years. Our climate report outlines our plans over the longer term to retire more coal, further expand renewables, energy storage, and natural gas. We also emphasize the importance of research and development, focused on those following carbon-free resources. We believe these new technologies are essential to reach our net-zero goal by 2050 and plan to share more updates in this area when we host our ESG day later this year. On the grid in April, we filed our 10-year, $6 billion Florida storm protection plan. These investments will generate meaningful customer benefits by enhancing reliability while reducing restoration costs and outage times associated with extreme weather events. Further details on the progress we're making in these areas are outlined on the slide. Before I close, let me touch on the Atlantic Coast pipeline. You can reference a status summary on Slide 18 in the appendix. We expect a decision from the Supreme Court regarding the Appalachian Trail crossing in the coming weeks. We're also awaiting the biological opinion and incidental take statement from the U.S. Fish and Wildlife Service as their detailed analysis continues to ensure that a durable permit is issued. We expect the agency to reissue the permit in mid-2020, and to date, have not seen any significant delays in the progress of the work from COVID-19. Successful resolution of both of these items will be important to reach our construction. Importantly, the ACP has finalized revised commercial terms with the major pipeline off-takers balancing value to customers and fair returns to project owners. Finally, we are also monitoring developments on the nationwide Permit 12. The recent decision related to the Keystone pipeline by the district court in Montana has potential implications for the ACP. Just yesterday, the judge amended his April 16 ruling limiting new oil and gas pipeline projects. He also denied a stay pending appeal. We're evaluating this ruling and the impact it will have on the existing timing and cost of the project. Assuming the issue is resolved in a timely manner and we can take advantage of the November through March pre-selling season, we believe ACP can maintain existing schedules and cost estimates. We remain committed to this important infrastructure project and the economic benefits we expect it will drive for our communities in the Carolinas, and we'll continue to update you as progress is made. As I reflect on our long-term strategy, I'm confident in our industry priorities. They continue to deliver value, capitalizing on the complementary nature of our electric and gas franchises to meet our customers’ growing and evolving energy needs. Looking ahead and in the context of the uncertain economic environment in our country, we will be thoughtful in the pace at which we deploy capital, balancing affordability for our customers with value creation for our investors. Turning to Slide 8, even in the midst of the economic impact of the stay-at-home orders, the fundamentals of our business remain strong. Importantly, our employees’ commitment to our customers and communities shines through during the hardest of times as we generate and deliver reliable increasingly clean energy across our service territory. There are several distinguishing factors that make our company an ideal long-term investment for shareholders. First, our size and scale and diversity of operations are unmatched, allowing us to deliver consistent short-term returns and long-term investment opportunities. Furthermore, we operate in constructive regulatory jurisdictions that oversee our operations in arguably the most attractive communities on the East Coast. Our five-year $56 billion plan to address cleaner energy grid improvement and other infrastructure that’s critical to the customers and communities we serve will create meaningful shareholder value for many years to come. These are the strong business fundamentals that give us confidence to deliver on our long-term earnings growth rate of 4% to 6%. And with that, I'll turn it over to Steve.

Thanks, Lynn and good morning, everyone. I'll start with a brief discussion on our quarterly results, highlighting a few of the key variances compared to the prior year. For more detailed information on various drivers and a reconciliation of reported to adjusted results, please refer to the supporting materials in the company's press release and presentation. As shown on Slide 9, our first quarter reported earnings per share were $1.24 and our adjusted earnings per share were $1.14. This is compared to reported and adjusted earnings per share of $1.24 last year. The difference between reported and adjusted earnings was due to the partial settlement in the DEC North Carolina rate case permitting recovery of 2018 severance costs. Within the segment, the electric utilities and infrastructure was down $0.06 compared to the prior year. We saw the expected benefits from base rate increases in South Carolina and Florida, and higher rider revenues in the Midwest, along with forecasted regulatory lag in North Carolina. However, these fundamental improvements in our segment results were offset by mild winter weather along with severe storms that impacted much of the Carolinas. Shifting to gas utilities and infrastructure, results were $0.03 higher, driven primarily by new retail rates in North Carolina and higher margins at the LDC. These items were partially offset by the one-time income tax adjustment related to ACP, which favorably impacted the prior period results. In our commercial renewable segment, results were up $0.06 for the quarter. The increase was primarily due to ongoing benefits from projects brought online in 2019, as well as favorable wind resources and pricing this year. Finally, other was down $0.12 for the quarter, principally due to planned costs of borrowings and lower investment returns and non-qualified benefit plans causing an approximate $0.06 year-over-year difference. The returns on these planned assets especially rebounded for the month of April. Overall, our first quarter financial results were not materially affected by the COVID-19 pandemic. Aside from the unseasonable weather and related storm costs, the first quarter was consistent with our internal plan. Given the soft weather, we began planning mitigation actions in February and further enhanced and accelerated those plans upon the full onset of COVID-19, which I'll describe in detail in a few moments. Turning to Slide 10, we continue to execute on a regulatory agenda. As Lynn mentioned, we recently filed our storm protection plan in Florida that provides much-needed storm hardening in the state. We also have modernized regulatory mechanisms for investments in both Florida and Ohio that are providing timely recovery of our investments in clean generation and a more modernized grid. We currently have three rate cases underway. Our Duke Energy Indiana case continues as planned. The hearings were held in January and the record is now closed, and we expect an order around midyear, the Duke Energy Carolinas, and Duke Energy Progress. The written pre-hearing record is substantially closed. In the DEC case, we reached a partial settlement for storm costs, allowing us to pursue securitization as well as other adjustments. The hearings for both cases have been delayed. We continue to work with all stakeholders to identify options to safely and efficiently conduct the hearings, and we expect to revise the procedural schedule to be released in the coming weeks. Just last week we filed with the commission a proposal to combine the hearings of the two cases in July, which is supported by the public staff. If this procedural schedule is approved, it will help to limit the delay in obtaining the general rate case orders. A slight delay in the decisions for both of the North Carolina cases is not expected to have a significant impact on our 2020 financial plan, and the commission has a variety of mechanisms that they can implement to help balance the interests of customers and shareholders. With regard to COVID-19 and expected impacts across our jurisdiction, we’re tracking the financial effects on our utilities, including elevated bad debt expense and late fees for customers. This is an extraordinary time that has and will continue to require our utilities to incur costs on behalf of our customers and the employees we operate our business. Similar to what others are doing across the country, we'll work with our regulators to identify the best solution to recover these costs, to support the ongoing financial health of our utilities while also recognizing the unique needs of our customers during this unprecedented time. Shifting now to our response to the COVID pandemic, Slide 11 highlights the well-timed steps we've taken to bolster our liquidity and financial strength to position us to manage through a variety of potential outcomes. As of April 30, we have a strong available liquidity position of $8.2 billion, which provides the company valuable flexibility as we plan our remaining capital markets transactions in 2020. In addition, provisions within the recently enacted Cares Act provide meaningful cash benefits in 2020 by accelerating our remaining AMT credits of approximately $285 million into the current year. This additional cash benefit will help to mitigate lower revenues and give us added confidence in our ability to deliver our consolidated credit metric targets for the year. Finally, our 2020 capital and financing plans remain on track. We will closely monitor the capital markets and strategically time our issuances to achieve the best outcomes possible for both our customers and shareholders. Moving to Slide 12, in addition to our large size and scale, our retail customer mix is diverse, anchored by our growing residential customer front. The Southeast remains a very attractive part of the company that continues to experience strong growth with new residential customers at a rate of approximately 1.7% year-over-year. With the recent sale and policies, volumes in our residential customer class have been strong, particularly in Florida, and we expect this trend to continue into the summer cooling season. The higher residential volumes provide a partial offset to declines in the commercial and industrial classes. Within commercial, much of the service sector has been closed or limited operations, including schools and universities, bars and restaurants, and other retail establishments. Certain sectors within commercial remain resilient, such as data centers and hospitals that continue to provide frontline services to fight against the pandemic. The temporary closures and curtailments of certain industrial customers are beginning to ease as plans to restart production emerge, with states in our service territories relaxing stay-at-home policies and workers preparing to come back to work gradually. Turning to Slide 13, as we compare build sales in April to the prior year, we're able to see how the full stay-at-home policies have impacted retail electric volumes across each of our customer classes. Commercial and industrial usage was down 10% and 13% respectively for the month. But as expected, the higher margin residential class was up 6%. Overall, retail sales were down 5%, and these results are slightly favorable to our revised forecast for the month. As a reminder, the earnings sensitivities do vary across retail customer classes, and we've included those here for you. Looking ahead, we expect a 3% to 5% decline in total retail volumes for the full year. We are forecasting the deepest declines in volumes compared to 2019 in both the second and third quarter, with a gradual economic recovery beginning in the latter half of the third quarter and extending beyond the end of the year. With these forecasted ranges and on a weather-normalized basis, we are forecasting a full-year 2020 negative EPS impact of $0.25 to $0.35. As our communities begin measured reopenings, we're hearing from a large number of our industrial customers that they are planning to increase their level of operations in the mid to late May timeframe. At the same time, we expect higher residential volumes until stay-at-home policies are fully relaxed. Moving now to Slide 14, we've activated several initiatives to mitigate the impact of COVID-19. Our annual non-rider O&M budget is nearly $5 billion, providing us with formidable leverage to address revenue headwinds. As I mentioned, we began our mitigation plans in February and have greatly expanded those efforts with the COVID-19 onset. Over the past five years, we have demonstrated a core competency in managing our O&M, absorbing increases for inflation as well as nearly $300 million of O&M associated with the Piedmont acquisition. We have also demonstrated the ability to strategically manage costs between years, taking advantage of strong earnings in some years to strengthen periods when expected costs rise. Based on the tremendous focus and commitment of our teammates, we are confident we can reduce our O&M and other expenses by approximately $350 million to $450 million in 2020. Our target is not merely inspirational but is underscored with discrete actions for which we have had clear line of sight and are already taking action. For example, as our generating assets are expected to run less during the year, we are optimizing the timing and strength of our 2020 planned outages. In addition, we are aggressively managing all expenses, including our contract labor, overtime, nonessential projects, and a broad range of discretionary spending. We are also suspending external hiring while sharing existing resources in a virtual manner to optimize labor costs. Let me be clear; we are highly confident in our ability to deliver on this goal of achieving $350 million to $450 million in 2020 cost reductions. Although we are still early in the year, based on the forecast of a gradual economic recovery beginning this summer and the significant cost mitigation actions that we have put into motion, we are affirming our 2020 targets of delivery within our original earnings per share guidance range. Finally, we understand the value of the dividend to our investors. Approximately 40% of our retail investors, many of whom count on our dividend as a source of income during these uncertain times. 2020 marks the 94th consecutive year of paying a quarterly cash dividend. Throughout the past nine decades, including during the financial crisis of 2008 and 2009, we have protected our quarterly cash dividend. Our excellent businesses that operate in some of the best jurisdictions in the country give us confidence to continue paying and growing the dividend consistent with our long-term target payout ratio of 65% to 75%. Before we open it up for questions, let me turn to Slide 15. Our attractive dividend coupled with our long-term earnings growth from investments in our regulated utilities provides a compelling risk-adjusted return for shareholders. As a company, we're well positioned and confident our vibrant and growing communities will resume strong economic growth as we emerge from this pandemic. With that, we will open the line for your questions.

So the mitigation plan that was announced, how much of the $0.35 to $0.45 is sort of cemented and if COVID is more protracted in the current 3% to 5% low degradation. Do you have incremental levers? And I do have a quick follow-up.

I'll start and Steve you can add. We have definitive plans for the $0.35 to $0.45 as well as upside potential. I think at some point, depending on how this economic downturn plays out, we would continue to be more aggressive not only in the cost categories we've identified but really within a broader context of transformation. This is where we'd be more aggressive around corporate center, outsourcing, real estate footprint, digital tools, early plant retirement, just a variety of things and that work is already underway. I'm particularly proud of the fact that we've demonstrated the ability to understand our cost drivers significantly over the last five years. We've also put infrastructure in place to drive transformation, and the plans are underway for a range of economic outcomes.

And then just focusing on the element side of the $350 million to $450 million in the mitigation plan. Can you touch on how much of this could be ongoing or perpetual in nature as you sort of think about the shaping of your O&M profile post-2020?

I would say, there will be elements of the cost reductions that are sustainable and there will be elements that move with timing. For example, when you put a hiring freeze in place, we will enter 2021 with a lower headcount than we would have originally projected. We will begin bringing skills in at the appropriate time, depending on the needs of the business. I think outages, because we're running our assets less, we've been able to defer some of those, but we'll be thoughtful about maintaining assets that are important to customers and feather those back in as needed. We're also spending a lot of time on what we've learned around remote work and the activities underway from COVID-19. I believe there will be permanent savings from the way we are using resources. We're trying to get our hands around quantification of that as we look at remote work policies and we look at our real estate footprint. You can expect to hear more about that as we think about 2021 and beyond. Steve, would you add to that?

I believe Lynn articulated it very well. I am confident that we are gaining valuable insights from this pandemic regarding remote work and the technology tools that we weren't fully aware of before. This knowledge will be beneficial as we move forward. We will combine this with the digital capabilities that our business transformation center is leveraging and data analytics. We have discovered a new way to improve efficiencies based on what we are learning during the COVID-19 pandemic.

I wanted to touch this first on ACP. I think we expect and many expect that you will be victorious at the Supreme Court. From there, I guess I'm thinking about the Montana litigation and potential impact in terms of decision to restart the project or ability to restart the project. I think there's a chance there that that litigation could be fairly extensive. How does that factor into sort of the decision-making around restarting work on ACP?

Stephen, this is an important consideration. As I said in the remarks, assuming that we can get this resolved to hit the preselling season, we’ll be in position to move forward, maintaining cost and schedule. Given the fact that that really happened yesterday, we’re catching up in the very early stages of our evaluation. We would expect the Army Corps and the Department of Justice to appeal, and we'll be monitoring that closely as I know others will be in the industry and other infrastructure companies. We will, of course, learn more from the Army Corps and DOJ as we move forward. So it's something to keep on the radar screen and we will continue to monitor and update as we learn more.

And so it is clearly relevant, such as you're thinking about the overall plan for the project…

Yes, it’s returned from it.

And then maybe just a quick one on the credit statistics that you Steve that you’ve laid out kind of your pretty clear path. I maybe sort of overthinking or just looking at the discussion here, in terms of the 15% FFO to debt level that you're targeting versus sort of the 15% to 16% level. Would you mind just touching again on the dialog with rating agencies? Your overall sort of sense for where you want to be over the next several years in terms of your FFO to debt?

Well, our targeted range for credit ratings is to have FFO in the 15% to 16% range. We’ve taken steps to make that happen in our plan and in the past we have good dialog with the rating agencies. Moody's reaffirmed our rating; S&P pulled the entire sector onto a negative outlook. Everyone's looking at the impacts of this pandemic. We will continue that dialog. We're seeing some erosion in top-line revenues and that affects FFO, but you can see the mitigation impacts that we have put in place that moves in the opposite direction. So we will continue the dialog. We'll continue to work to meet our financial plans, both earnings and on the credit side. A couple of things that are unique to us: we've got these AMT credits that accelerated monetization helps us quite a bit here. We're also taking advantage of deferring a corporate portion of payroll taxes, which is about a $100 million cash flow benefit. Our pension plans are in good shape in terms of funding, and we’re not a cash taxpayer until 2027 in any significant way. So we've got some solid strength in our balance sheet that helps us. The continued regulatory activity of getting recovery of costs is essential there. So we'll continue that dialog with the rating agencies, and we'll keep them abreast of what's moving forward.

And just lastly, if I could, just on the O&M cost control impressive results in terms of being able to cut costs. It's an interesting point about sort of some of the learnings that you're engaged in. When you think about sort of the EPS growth guidance in the longer term that you've laid out in the trajectory. Is there a potential that some of these learnings that could last and be beneficial, could that have a meaningful benefit in terms of as you think about your overall trajectory? Or is it a little too early to say? How are you thinking about what you've been able to learn here?

Stephen, I think O&M agility and the ability to lower the cost structure is a tailwind to growth because it puts us in a great position to deploy capital without raising prices to customers. I do think about it as something that is important to the long-term growth of the company.

And it sounds like at least the portion of these cost savings are things that could be more permanent in nature and be beneficial longer term, whereas other things like outage timing are more transitory in nature, so it sounds like it's a mix of the two.

I think that's right, Stephen. But I think it's important that you're hearing from us that lowering our cost structure is not only a core competency of ours but a strong objective. We think particularly during this time of economic uncertainty, moving early and aggressively is a smart thing to do, and that's how we are positioning ourselves in 2020 and also for 2021 and beyond.

We are learning techniques to utilize our workforce much more efficiently in this situation. We can virtually shift engineers within functions. We have shifted financial people from budgeting to accounting to audit services, and IT people to different functions. The virtual capabilities as we learn more about them are going to help us utilize our workforce more efficiently. I think that's going to provide longer-term savings capabilities.

So just could you, if you don't mind, just remind us kind of the North Carolina rate cases, when you expect outcomes and just if that does get delayed further. How much do we have to worry about the timing of that exactly in terms of your range for this year?

So, Steve, we made a filing maybe a week ago, suggesting or recommending the consolidation of the two cases in the Carolinas supported by the public staff, setting hearings in July of this year. We think the commission will give that close consideration and it will put us close to the timing we’d originally planned. We feel like we've got some flexibility within our financial plan for 2020 regarding that timing. I also think it's fair to say that there are tools associated with these cases, whether it's deferrals, accounting orders to get back deferred income taxes, interim rates, and a variety of tools that could be used to support the health of the utility. We'll evaluate all of those considerations as we go, and many of those tools are available to the commission as you know.

And any updated thoughts on whether you have control likely potential to settle those cases or expect them to be fully litigated to the end?

Steve, we've entered into a settlement on a handful of items in the DEC case. We will have similar discussions on DEC. Between now and July, we'll continue to keep lines of communication open with the parties to see if there are other opportunities. I think this is an important time as you recognize customers of course are working through the economic downturn, but the health of the utilities is also extraordinarily important. I'm not sure that there's another time when the essential nature of our services has been underscored more than this. We’ll continue to have discussions; it's hard to forecast whether or not we'll reach any further settlements at this point, but we'll keep you posted.

And then lastly, I think you mentioned that there have been the initial meeting and the North Carolina energy plan, or I think the initial meetings there. Could you just give color on where that stands and when we might start seeing any outcomes from that?

There have been two stakeholder work streams established in 2021, focused on climate policy. This is a group of stakeholders focused on retirement of coal, CO2 markets, and clean energy standards. They have continued to meet even remotely talking about these various items. We would expect a draft report from those discussions in the second quarter, a public draft for the third quarter, and then a recommendation going to the governor by the end of the year. You may recall that the objective is to get to at least a 70% carbon reduction by 2030, and it's actually greenhouse gas not carbon. Some alignment around base years and other things are being worked on to figure out exactly how to do the accounting. We're comfortable with this objective, as you know, from our climate strategy where we're aiming at least for a 50% reduction by 2030. That stream of work is very engaged. They’ve also held meetings on a stakeholder process focused on modernizing regulations, performance-based rate making and other tools. The discussion is early; I would say there was one in-person meeting, and one remote meeting. The objectives there are trying to find ways that carbon reduction can be incentivized and distributed energy resources. That process is moving at perhaps a slightly slower pace, but good discussion and dialogue there as well. We’ll have more feedback as the year progresses and determine whether or not there's any specific push coming out of these processes for legislation in 2021.

Just a quick question on the guidance reaffirmation and the cost savings versus the pressure you see on plan. Is it reasonable to assume that where you're sitting today, if those things play out as you've outlined, recognizing there's a lot of variability, that you would be sort of solidly in the range or kind of holding in at the low end, or just any other color you can give us there?

We built a plan and are executing a plan that matches the COVID-19 expectations, as well as the first quarter weaker weather, which really gives us an opportunity to land solidly within the range. As we've talked about, we have a track record of being able to manage O&M in this fashion and we have a high degree of confidence that we can do that. We also recognize we're only a couple of months into this. The third quarter is still ahead of us. There are wide ranges of assumptions on how the economy is going to play out as states are beginning to reopen. We have the milestones around the Atlantic Coast pipeline that we've talked about with the decision and also the biological opinion. We will continue to update on all of these things as the year progresses. But the actions that we've put into place right now are designed to place us solidly within the range.

You mentioned keeping regulators updated on incremental costs. Are you deferring certain items? Where do you stand on the deferrals and the potential orders from commissions that might allow you to do that?

For the first quarter, Jonathan, minimal impact, since we were just sort of starting into this process and the various policies with customers. We are reporting and tracking all of these costs to our various commissions, and we will begin to see filings around deferrals or accounting orders and other things. I think Ohio and Indiana are already underway. As we get more of that feedback, then we will reflect appropriate accounting entries at the right time. Steve, would you add?

We're preparing filings in the Midwest in Ohio and Indiana. We are tracking costs in all of our jurisdictions. At the appropriate time, we'll make various filings and work with our regulators on appropriate deferrals. Nothing's being deferred at this point, but applications are getting prepared, tracking is moving forward, and we'll continue to look at this and see what makes the most sense.

And how have you kind of treated that in guidance, I guess?

So Jonathan, we're assuming that we will get appropriate treatment of incremental costs. I'm focusing on things like bad debt expense. The timing of when that occurs in terms of cash collections will depend on the jurisdictions. But for incremental costs, we are assuming that we'll get appropriate regulatory treatment.

Can I have a topic? What are your initial thoughts on the recent executive order regarding sourcing equipment from adversary nations? How might this impact your ability to execute your plan on the grid? Any insights would be appreciated, even though it may need further clarification.

We're closely following, Jonathan. I think the spirit of it is to address cyber risk, which is something we strongly support. There was a similar executive order issued formerly a few years ago for the telecom industry and so we will factor it in as we learn more. These plans into our investment plan. But as you know, making investments in T&D intended to address cyber and physical risk, as well as renewables and customer programs, all of that is squarely within our strategic investment plan. We will adjust it as we learn more and applaud focus on cyber risk and around the bulk power system.

I would add that we have a broad supplier base across our footprint. As you said, Jonathan, there's more to learn about what is being specifically targeted here. But we look at our vendor base and try to diversify as much as possible so we can move in different directions if necessary.

So I know you addressed this in part, but I want to come back to it a little bit. How are you thinking about the sustainability of the cost cuts beyond the current period? Obviously, it's a dramatic number, so it's not necessarily expected. But how do you think about the cadence of that against the need for perhaps evolving rate case timeline? Even within that number that you talked about this year as a follow-up question. How are you thinking about that complementing your cost-cutting efforts to mitigate impacts from coal ash, if that makes sense as well?

So I'll take a stab and Steve you can build on it. We had developed a plan to match what we see as COVID risks as well as mild weather. You've got economic downturn as well as weak start to the year, and we've identified from a range of things: operations, corporate center, employee expenses, hiring freeze, contractor contingent workers, overtime, variable compensation, a variety of tools that we will use to go after that. As I commented a moment ago, we're only a couple of months into this and learning about the reopening and what might unfold over the balance of the year. We are also looking at each of those cost categories for potential upsizing, as well as moving into what I would call more transformative changes where we might look at real estate and the early retirement of certain assets and so on. There's a lot of planning going on because the future is uncertain. On that range of costs, some of them will be sustainable. I'm not prepared to give you a percentage or a specific number on that. But I do believe that some of them will be sustainable. The example I gave a moment ago, a hiring freeze is going to put us into 2021 with a smaller workforce. We will monitor as we go how to convert to a sustainable lower-cost structure if we find ourselves in a longer downturn. I think, as you talk about things like coal ash, you’re talking about regulatory risk and the rate case outcomes and how that will factor in. We have a range of assumptions in our financial plan as we think about rate cases and that is always part of our thinking in developing the size of mitigating actions. I won't point to a specific item on that, but I will say anytime you put a financial plan together, you're evaluating a range of outcomes. We feel strongly that recovery of coal ash costs and recovery of returns is important. We believe it's important for the health of a balance sheet, and we think about costs of this nature and we will be prepared to strongly defend that when we're on the band later this summer.

And I might add, Julien, that as we think about our regulatory cadences, the ability to generate O&M efficiencies is a very useful tool here. It gives us headroom to make needed capital investments on behalf of our customers, as Lynn alluded to earlier. This capital optimization around our O&M optimization in sync with the regulatory cadences is a very important part of what we're trying to put together. We've got flexibility in the capital plan, so we can move that capital around to fit under O&M efficiencies to help our shareholders and customers. Those are the types of dynamics we're trying to put together across our footprint.

Can I just follow up very briefly here? How do you think about the shaping here by quarter of the cost cuts and how they manifest themselves, relative I suppose to the reduction in loans? It sounds like you were rapidly able to identify these cost cuts, such that as you think about Q2 and Q3, etc. And then Lynn if you can clarify, you specifically said that you did not yet elect, for instance, voluntary retirement programs as part of this $400 million number?

There is no assumption of a voluntary retirement program in the numbers, Julien.

Most of it will be in the second half of the year. A lot of generation outage work will be in the fall generation season, as our headcount freeze kicks in that kind of builds during the year. We had budgeted increases in workforce. We'll certainly see some in each quarter of the rest of the year but specifically do the generation outage work that will be a bit more in the second half of the year.

A couple of quick ones on CapEx and O&M. As part of the grid hardening plan that you just filed. Is that already reflected in the five-year CapEx plan? I think it is, but just trying to confirm that?

So Michael, we updated in February to include $1.5 billion into Florida's five-year plan, and that is consistent with what we filed in the grid hardening plan. We will see incremental capital beyond the five years, because this is the 10-year plan, and we’ll provide those updates as the years progress.

Our February capital plan was increased by 12%, and the Florida grid mark was a significant part of the increase.

And just to beat a dead horse on the O&M reduction. Is there a ballpark estimate that you could give us for how much is deferral into the planned maintenance and how much is more permanent, 25% of this more permanent, maybe 50% permanent?

Michael, at this point, I don't have a range to share with you. I think that's been a topic of interest. As we go into the second quarter and begin our more earnest planning for 2021, I think we'll be in a better position to talk about that. Our objective will be to make it as sustainable as we can in this environment, but I don't have a specific on deferral versus the sustainable.

We want to look at how the assets operate and think about their performance under the revised operations and so forth, and that will impact it as well.

And related question, Steve you mentioned the idea that you have headroom for lower O&M, more capital improvements. Do you see the opportunity to convert some of these OpEx cuts once the crisis is over into higher rate base and CapEx growth plan?

We certainly always look at putting our financial plan together, keeping in mind impacts on customer rates. To the extent you can reduce O&M costs that does give you that headroom there. We have a robust data set of capital opportunities; we turn capital away each year when we go through our budgeting process. Due to our scope and scale, the breadth of our grid, we have plenty of opportunities to do those kinds of things.

And also since the progress rate case still has a record that's still open, is it possible to incorporate some of these further cost deferrals and recovery mechanisms or anything else you’re thinking about that to incorporate that into that space?

So Michael, we're looking at the appropriate way to handle the Carolinas in light of the fact that these cases have yet to get to hearing. I don't have anything specific to share on that plan right now, but we are reporting the costs to the North Carolina commission and to the state and to South Carolina, and we'll make the appropriate filings and incorporate in the rate case if that makes sense or handle it in whatever way makes sense; it's just too early on that one.

I just want to come to the O&M side with a slightly different angle at that. if I recall, it seems like spending on vegetation management was accelerated in Q4 ‘19. So just trying to think through how much cost savings is kind of banked last year that could be used against this year? And was any of that contingency kind of already utilized in the first quarter?

In 2019, our agility programs worked in the other direction. We had a favorable year and we accelerated some useful expenses into 2019. We have veg management as one area where we had about $0.04 that we pulled into 2019, as I recall, that was baked into our plans and our forecast. The ability to do those kinds of things is very useful to us. That's already baked into the numbers that you're seeing at this point. But that helps us achieve and get into our range with that dexterity between calendar years.

Well, thank you, Derek, and thanks to all who joined today for your interest and investment in Duke Energy. I just want to take this opportunity to thank the employees at Duke Energy; I'm extraordinarily proud of the work that they're undertaking, the new safety protocols to do business as usual but also to serve our customers well. The commitment of the leadership team and our employees to excellence for the customers and maintaining financial health for our company is truly extraordinary. So, thanks to the Duke Energy employees, and thanks to all of you for joining today.