Good day and welcome to the Duke Energy First Quarter Earnings Call. Today's conference is being recorded. And at this time, I'll turn the conference over to Mr. Bryan Buckler, Vice President of Investor Relations. Please go ahead, sir.

Bryan Buckler - Vice President of Investor Relations

Thank you, Derrick. Good morning, everyone, and welcome to Duke Energy's first quarter 2020 earnings review and business update. Leading our call today is Lynn Good, Chair, 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 material materially from such forward-looking statements, and those factors are outlined herein and disclosed 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 activity. He will also provide insights into our economic and load growth outlook before closing with key investor considerations.

With that, let me turn the call over to Lynn.

Lynn J. Good - Chair, President and Chief Executive Officer

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 the front line professionals.

This pandemic has no barriers. It has permeated the globe, our country and the states in which we operate, as it's altered our day-to-day lives and how we interact and the way we operate and serve our customers. But despite this dynamic condition, 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, increased disinfecting between shifts, initiated split operations between primary and alternate locations to limit exposure, placed 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/hydro generation outages, all while maintaining focus on safety and delivering on time and on budget. And in mid-April, our transmission and distribution teams quickly responded to more than 900,000 outages across the Midwest and the Carolinas after severe under thunderstorms and tornadoes.

But Duke Energy's response has gone well beyond supporting our internal team. We were one of the first utilities in the country to suspend its services disconnections for non-payment 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. And we are working directly with our commercial and industrial customers to provide assistance 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, which 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 [Phonetic] 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 mid-summer 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 are 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 as 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 that 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 and strengthen 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 plan to address carbon across our footprint, reaching at least a 50% reduction by 2030 and net zero by 2050. Our updated climate and sustainability report 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 emphasized the importance of research and development, focused on load 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 this slide.

Before I close, let me touch on the Atlantic Coast Pipeline. You can reference the 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 US Fish and Wildlife Service as their detailed analysis continues to ensure that a durable permit is issued. We expect the agency to reissue 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 restart construction. Importantly, 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 closely monitoring developments on the Nationwide Permit 12. The recent decision related to the Keystone pipeline by the District Court in Montana has potential implications to ACP. Just yesterday, the judge amended his April 15 ruling, limiting the [Indecipherable] new oil and gas pipeline projects. He also denied a stay, pending appeal. We are 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 those - of the November through March tree felling season, we believe ACP can maintain the existing schedule and cost estimate. 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 investment priorities. They continue to deliver value, capitalize 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 and 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 shine through during the hardest of time as we generate and deliver reliable, increasingly clean energy across our service territories.

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 is unmatched, allowing us to deliver consistent short-term returns and long-term investment opportunity. Furthermore, we operate in constructive regulatory jurisdictions that oversee our operations in arguably the most attractive communities on the East Coast. And our five-year $56 billion plan to invest in cleaner energy, grid improvements and other infrastructure is critical to the customers and communities we serve and will create meaningful shareholder value for many years to come. These are the strong business fundamental 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.

Steven K. Young - Executive Vice President and Chief Financial Officer

Thanks Lynn, and good morning, everyone. I'll start with a brief discussion on our quarterly results, highlighting a few of the key variances to the prior year. For more detailed information on variance drivers and a reconciliation of reported to adjusted results, please refer to the supporting materials that accompany today'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 segments, 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 that favorably impacted the prior-period results.

In our Commercial Renewables 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 resource and pricing this year.

Finally, Other was down $0.12 for the quarter, principally due to planned cost of borrowings and lower investment returns in non-qualified benefit plans, causing an approximate $0.06 year-over-year difference. Returns on these plant [Phonetic] assets partially 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 softer 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 our 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 where they're 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 the order around mid-year. For 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 conductor the hearings. And we expect to revise 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 that help balance the interests of customers and shareholders.

With regard to COVID-19 and the expected impacts across our jurisdictions, we are tracking the financial effects on our utilities, including elevated bad debt expense and waived 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 who operate our businesses. Similar to what others are doing across the country, we will work with our regulators to identify the best solutions 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-planned 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 plan remains 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 and anchored by our growing residential customer clients. The Southeast remains a very attractive part of the country that continues to experience strong growth of new residential customers at a rate of approximately 1.7% year-over-year. With the recent stay-at-home 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 operationally, including schools and universities, bars and restaurants, and other retail establishments. Certain sectors within the commercial - within commercial remain resilient such as data centers and hospitals that continue to provide front line services in the fight against the pandemic. The temporary closures and curtailments of certain industrial customers are beginning to give away the plans to restart production as states in our service territories are relaxing stay-at-home policies and workers are preparing to come back to work gradually.

Turning to Slide 13, as we compare billed sales in April to the prior year, we were 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 were 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 are beginning measured reopenings, we are 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 time frame. 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 impacts of COVID-19. Our annual non-rider O&M budget is nearly $5 billion, providing us a formidable lever 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 years in some - strong earnings in some years to strengthen periods when unexpected 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 aspirational, but is underscored with discreet actions of which we have 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 scope of our 2020 plant outages. In addition, we are aggressively managing all expenses, including our contract labor, overtime, non-essential projects and a broad range of discretionary spending. We are also suspending external hire, while sharing existing resources in a virtual manner in order to optimize labor costs. Let me be clear, we are highly confident in our ability to deliver on this goal of $350 million to $450 million of 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 in to motion, we are affirming our 2020 target to deliver within our original earnings per share guidance range.

Finally, we understand the value of the dividend to our investors, approximately 40% of whom are retail investors and 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 yield, coupled with our long-term earnings growth from investments in our regulated utilities, provide a compelling risk-adjusted return for shareholders. As a company, we are well positioned and confident our vibrant and growing communities will resume strong economic growth as we emerge from this pandemic.

With that, we'll open the line for your questions.

Question & Answers

Operator

[Operator Instructions] And we'll take our first question from Shar Pourreza with Guggenheim Partners. Please go ahead.

Shar Pourreza - Guggenheim Partners - Analyst

Hey, good morning, guys.

Lynn J. Good - Chair, President and Chief Executive Officer

Hi, Shar.

Steven K. Young - Executive Vice President and Chief Financial Officer

Good morning.

Shar Pourreza - Guggenheim Partners - Analyst

So it's a mitigation plan that was announced. How much of the $0.35 to $0.45 is sort of cemented? And if COVID is more protracted than your current 4% to 5% [Phonetic] low degradation, do you have incremental levers? And I do have a quick follow-up.

Lynn J. Good - Chair, President and Chief Executive Officer

I'll start and, Steve, you can add. We have definitive plans for the $0.35 to $0.45, Shar, as well as upside potential. And I think at some point, depending on how this economic downturn plays out, we would continue to go more aggressively, not only with the cost categories we've identified, but really within a broader context of transformation. And this is where we'll be more aggressive around corporate center, around outsourcing, real estate, digital tools, our early plant retirements, just a variety of things. And that work is already underway. So this is something that I'm particularly proud of. We've demonstrated the ability to understand our cost and 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.

Shar Pourreza - Guggenheim Partners - Analyst

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

Lynn J. Good - Chair, President and Chief Executive Officer

No, Shar, I would say, there will be elements of the cost reductions that are sustainable and there will be elements that move with timing. So, an example would be, when you put a hiring freeze in place, we will enter 2021 with a lower headcount than we would have originally projected. And then, we will begin bringing skills in at the appropriate time and pace, 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 settle 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, and I believe there will be permanent savings from the way we are using resources. And we're trying to get our hands around quantification of that as we look at remote work policies and as we look at our real estate footprint. And you can expect to hear more about that as we think about 2021 and beyond.

Steve, would you add to that?

Steven K. Young - Executive Vice President and Chief Financial Officer

No, I think, Lynn, you hit it very well. I'm very confident that we're learning a lot through this pandemic about how to work remotely, how to use technology tools that we didn't really realize what we had. That will serve us well as we go forward. You couple that with the digital capabilities that our business transformation center is utilizing and data analytics, I think we will be able to - we have found a new avenue, a new path of another body of efficiencies through what we're learning through this COVID-19 pandemic.

Shar Pourreza - Guggenheim Partners - Analyst

Terrific, guys. Congrats on the plan that was announced today and good execution. Thanks.

Lynn J. Good - Chair, President and Chief Executive Officer

Shar, thank you.

Operator

Thank you. Our next question comes from Stephen Byrd with Morgan Stanley. Please go ahead.

Stephen Byrd - Morgan Stanley - Analyst

Hi, good morning.

Lynn J. Good - Chair, President and Chief Executive Officer

Good morning.

Steven K. Young - Executive Vice President and Chief Financial Officer

Good morning.

Stephen Byrd - Morgan Stanley - Analyst

Hope you all and your families are doing well through this [Speech Overlap].

Lynn J. Good - Chair, President and Chief Executive Officer

Thank you, Stephen. And the [Indecipherable] for yours, as well.

Stephen Byrd - Morgan Stanley - Analyst

Thank you. I wanted to touch just first on ACP. And I think we expect and I think many expect that you will be victorious at the Supreme Court. From there, I guess, I'm thinking about the Montana litigation and potential impacts 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?

Lynn J. Good - Chair, President and Chief Executive Officer

Stephen, it's an important consideration. And as I said in the remarks, assuming that we can get this resolved before [Phonetic] the tree felling season, we'll be in position to move forward, maintaining cost and schedule. Given the fact that that ruling happened yesterday, you're catching us at a very early time in our evaluation. We would expect the Army Corps and DOJ to appeal, and we'll be monitoring this closely as I know others will be in the industry and other infrastructure companies. And we'll of course learn more from the Army Corps and DOJ as we go forward. So it's something to keep on the radar screen. And we will continue to monitor and update as we learn more.

Stephen Byrd - Morgan Stanley - Analyst

Understood. It is clearly relevant as you're thinking about the overall plan for the project. Understood.

Lynn J. Good - Chair, President and Chief Executive Officer

Yeah. It's [Indecipherable].

Stephen Byrd - Morgan Stanley - Analyst

Understood. And then, maybe just a quick one on the credit statistics, Steve, that you laid out - laid out kind of your - a pretty clear path. I'm maybe sort of over-thinking 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 dialog with the 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?

Steven K. Young - Executive Vice President and Chief Financial Officer

Yeah. So, 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. And everybody is looking at the impacts of this pandemic. So, we will continue our dialog. We're seeing some erosion in the 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'll continue the dialog. We will 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 the corporate portion of payroll taxes. That's about $100 million cash flow benefit. Our pension plans are in good shape in terms of funding and so forth. And we're not a cash tax payer until 2027 in a significant way. So, we've got some solid strengths in our balance sheet that help us. And then the continued regulatory activity of getting recovery of cost is essential there. So, we'll continue that dialog with the rating agencies. And we'll keep them abreast of what's moving forward.

Stephen Byrd - Morgan Stanley - Analyst

That makes total sense. And just lastly, if I could, just on the O&M cost control, impressive results in terms of being able to cut costs. And 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 and the trajectory, is there a potential that some of these learnings that are - that could last and be beneficial? Could that other meaningful have a 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?

Lynn J. Good - Chair, President and Chief Executive Officer

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

Stephen Byrd - Morgan Stanley - Analyst

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

Lynn J. Good - Chair, President and Chief Executive Officer

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. And we think, particularly in a time we've got economic uncertainty, to move 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.

Steven K. Young - Executive Vice President and Chief Financial Officer

And 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, IT people to different functions. The virtual capabilities, as we learn more about them, are going to help us utilize our workforce more efficiently. And I think that's going to provide longer-term savings capabilities.

Stephen Byrd - Morgan Stanley - Analyst

Very good. Thank you very much.

Lynn J. Good - Chair, President and Chief Executive Officer

Thank you, Stephen.

Steven K. Young - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Steve Fleishman with Wolfe Research LLC. Please go ahead.

Steve Fleishman - Wolfe Research - Analyst

Hi, good morning.

Lynn J. Good - Chair, President and Chief Executive Officer

Hi, Steve. Good morning.

Steve Fleishman - Wolfe Research - Analyst

So just the - 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?

Lynn J. Good - Chair, President and Chief Executive Officer

Steve, we made a filing maybe a week ago, a few days ago, suggesting or recommending a consolidation of the two cases in the Carolinas, supported by public staff putting the hearing in July of this year. And so, we think the Commission will give a close consideration. That will put us close to the timing we had originally planned. So we feel like we've got some flexibility within our financial plan for 2020 on that timing. I also think it's fair to say that there are tools with these cases, whether it's deferrals, accounting orders, give-back of deferred income taxes, interim rates, a variety of tools that could be used to support the health of the utility. And we'll be evaluating all of those considerations as we go. And those tools - many of those tools are available to the Commission as you now.

Steve Fleishman - Wolfe Research - Analyst

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

Lynn J. Good - Chair, President and Chief Executive Officer

Steve, we've entered into a settlement on a handful of items in the DEC case. We'll do have similar discussions on DEP. And 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 are of course working through the economic downturn, but the health of the utilities are also extraordinarily important. And I'm not sure that there is another time when the essential nature of our service has been underscored more than this. And so, we'll continue to have discussions. It's hard to forecast whether or not we'll get to any further settlement at this point. But we'll keep you posted.

Steve Fleishman - Wolfe Research - Analyst

Okay. And then lastly, I think you mentioned that there has been the initial meeting in 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?

Lynn J. Good - Chair, President and Chief Executive Officer

Sure. There have been two stakeholder work streams, Steve, in 2020; one focused on climate policy. So this is a group of stakeholders focused on retirement of coal, CO2 markets, clean energy standard, and 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, public draft for 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 70% carbon reduction by 2030. And it's actually greenhouse gases, not carbon. And so, there are some alignment around base years and other things going on to figure out exactly how to do the counting. We're comfortable with this objective. As you know from our climate strategy, we're at least 50% by 2030. So that stream of work is very engaged.

There have also been two meetings on a stakeholder process focused on modernized regulation, performance-based rate making and other tools. The discussion there is early, I would say. I think there was one meeting in person, one remote meeting. The objective there are trying to find ways that carbon reduction can be incented, distributed energy resources. And so, that is moving at perhaps a slightly slower pace, but good discussion and dialog there as well. So I think on both of these, we'll have more feedback as the year progresses and determine whether or not there is any specific push coming out of either of these processes for legislation in 2021.

Steve Fleishman - Wolfe Research - Analyst

Okay, great. Thank you.

Lynn J. Good - Chair, President and Chief Executive Officer

Thank you.

Operator

Thank you. We will next go to Jonathan Arnold with Vertical Research. Please go ahead.

Jonathan Arnold - Vertical Research Partners - Analyst

Hi, good morning, everyone.

Lynn J. Good - Chair, President and Chief Executive Officer

Good morning, Jonathan.

Steven K. Young - Executive Vice President and Chief Financial Officer

Good morning.

Jonathan Arnold - Vertical Research Partners - Analyst

Just a quick question sort of on the guidance reaffirmation and the cost savings versus the pressure you see on sales, 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, but that you would be sort of solidly in the range? Or are we holding in the - at the low end? Or if there's any other color you can give us there?

Lynn J. Good - Chair, President and Chief Executive Officer

Jonathan, I appreciate that. We've built a plan and are executing a plan that matches the COVID-19 expectation as well as the first quarter weaker weather, which really gives us an opportunity to land solidly within the range. And as we 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. But we also recognize we're only a couple of months into this. The third quarter is still ahead of us. There are a wide range of assumptions on how this economy is going to play out. Our states are just beginning to reopen. We have the milestones around the Atlantic Coast Pipeline that we've talked about with the SCOTUS decision and also the biological opinion. So we'll 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.

Jonathan Arnold - Vertical Research Partners - Analyst

Perfect. Thank you for clarifying, Lynn. And just one other thing. You talked about keeping regulators informed on incremental costs. Could you just sort of speak, are you actually deferring certain items? And just where are you on sort of deferral and potentially orders out of Commissions allowing you to do that?

Lynn J. Good - Chair, President and Chief Executive Officer

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

Steve, how would you add to that?

Steven K. Young - Executive Vice President and Chief Financial Officer

Yeah, that's correct. We're preparing filings in the Midwest in Ohio and Indiana. We are tracking costs in all of our jurisdictions. And at the appropriate time, we'll make various filings and work with our regulators on appropriate deferrals. Nothing is 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 most sense.

Jonathan Arnold - Vertical Research Partners - Analyst

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

Lynn J. Good - Chair, President and Chief Executive Officer

So, Jonathan, we're assuming that we will get appropriate treatment of the incremental costs. And 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 will get appropriate regulatory treatment.

Jonathan Arnold - Vertical Research Partners - Analyst

Perfect. Okay, thanks. And could I discuss one other topic, the recent executive order about not sourcing equipment from adversary nations? Do you have any initial thoughts at the high level on how this might impact your ability to execute the plan on grid, for example? Just any color? I realize that it yet has to be defined. But it seems to be neutral at the moment.

Lynn J. Good - Chair, President and Chief Executive Officer

Sure. We were closely following it, Jonathan. I think the spirit of it is to address cyber risks, 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 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 clearly within our strategic investment plan. So, we will adjust it as we learn more and applaud focus on cyber risk and around the bulk [Phonetic] power system.

Steven K. Young - Executive Vice President and Chief Financial Officer

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

Jonathan Arnold - Vertical Research Partners - Analyst

Perfect. Great, thank you very much for your time.

Lynn J. Good - Chair, President and Chief Executive Officer

Thank you, Jonathan.

Steven K. Young - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. We'll next go to Julien Dumoulin-Smith with Bank of America. Please go ahead.

Julien Dumoulin-Smith - Bank of America Merrill Lynch - Analyst

Hey, good morning, Steve [Phonetic]. Hope you all are well.

Lynn J. Good - Chair, President and Chief Executive Officer

Hi, Julien.

Steven K. Young - Executive Vice President and Chief Financial Officer

Good morning.

Julien Dumoulin-Smith - Bank of America Merrill Lynch - Analyst

Hey, good morning. So, I know you addressed this in part, but I want to come max [Phonetic] 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 not necessarily expect it. But how do you think about the cadence of that against the need for perhaps evolving rate case timeline? And 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 the impacts from coal ash, if that makes sense as well?

Lynn J. Good - Chair, President and Chief Executive Officer

Yeah. So, I'll take a stab. And, Steve, you can we can build on it. We have developed a plan, Julien, to match what we see as COVID risk as well as mild weather, so you've got an economic downturn as well weak start to the year. And we've identified from a range of things, operations, corporate center, employee expenses, hiring freeze, contract with contingent workers, overtime, variable compensation, a variety of tools that we will use to go after that. As I commented a moment ago, the fact that we're only a couple of months into this and learning about the reopening and learning about what might unfold over the balance of the year. We are also looking at each of those cost categories for potential upsizing of them as well as moving into what I would call more transformative changes where we might look at real estate and early retirement of certain assets and so on. So there is a lot of planning going on because the future is uncertain.

If I look at 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, hiring freeze is going to put us into 2021 with a smaller workforce. And 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. And so, I don'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 return is important. We believe it's important for any - health of the balance sheet when you think about a cost of this nature. And we will be prepared to strongly defend that when we're on the stand later this summer.

Steven K. Young - Executive Vice President and Chief Financial Officer

And I might add, Julien, that as we think about our regulatory cadences, the ability to generate these 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, and minimize any rate impacts to customers. So, this capital optimization around our O&M optimization in sync with the regulatory cadence is a very important part of what we're trying to put together. And we've got flexibility in the capital plan. So, we can move that capital around to fit under O&M efficiencies or to help our shareholders and our customers. So those are the types of dynamics we've kind of put together across our footprint.

Julien Dumoulin-Smith - Bank of America Merrill Lynch - Analyst

Excellent. Can I just follow up very briefly here, how are you thinking about the shaping here by quarter of the cost cuts and how they manifest themselves relative, I suppose, to the reduction load? It sounds like you were rapidly able to identify these cost cuts [Indecipherable] as you think about 2Q and 3Q, etc. And then, Lynn, if I can clarify, you specifically said that you did not yet elect, for instance, a voluntary private program as part of this $400 million number?

Lynn J. Good - Chair, President and Chief Executive Officer

I'll take that one. There is no assumption of a voluntary retirement program in the numbers, Julien.

Steven K. Young - Executive Vice President and Chief Financial Officer

And then on the shaping, Julien, I'd look for most of it to be in the second half of the year. A lot of our 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 due to the generation outage work, that will be a bit more in the second half of the year.

Julien Dumoulin-Smith - Bank of America Merrill Lynch - Analyst

Excellent. Thank you for the patience, guys. Best of luck.

Lynn J. Good - Chair, President and Chief Executive Officer

Thank you, Julien.

Steven K. Young - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. We'll next go to Michael Weinstein with Credit Suisse. Please go ahead.

Michael Weinstein - Credit Suisse - Analyst

Hi guys. [Speed Overlap] A couple of quick ones here on capex and O&M. So the Florida grid hardening plan that you just filed, is that already reflected in the five-year capex plan? I think it is. So I just wanted to confirm that.

Lynn J. Good - Chair, President and Chief Executive Officer

So, Michael, we updated in February about $1.5 billion in just Florida - Florida five-year plan, and that is consistent with what we filed in the grid hardening plan. You will see incremental capital beyond the five years because this has put forward a 10-year plan. And we'll provide those updates as the years progress.

Steven K. Young - Executive Vice President and Chief Financial Officer

That's right. Our February capital plan was increased 12% and the Florida grid mod was a significant part of the increase.

Michael Weinstein - Credit Suisse - Analyst

Right. And just to beat a dead horse on the O&M reductions, is there a ballpark estimate that you could give us for how much is deferral into the plant maintenance and how much is more permanent? 25% of it's more permanent, 50% permanent? Can I have a ballpark…

Lynn J. Good - Chair, President and Chief Executive Officer

Yeah, Michael, at this point, I don't have a range to share with you. I think that's been a topic of interest. And 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. But our objective will be to make as much sustainable as we can in this environment, but I don't have a specific on deferral versus sustainable at this point.

Steven K. Young - Executive Vice President and Chief Financial Officer

Yeah. I think we want to look at how the assets operate and think about their performance under the revised operations and so forth and where we're headed, and that will impact it as well.

Michael Weinstein - Credit Suisse - Analyst

A related question. Steve, you mentioned the idea that you have headroom from lower O&M for more capital improvement. Do you see the opportunity to convert some of these opex cuts, when the crisis is over, into a higher rate base and capex growth plan?

Steven K. Young - Executive Vice President and Chief Financial Officer

Yeah, we certainly always look at putting our financial plan together keeping in mind impacts on customer rates. And so, 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 return capital away each year when we go through our budgeting process. So, given our scope and scale, the breadth of our grid, we have plenty of opportunities to do those kind of things, Mike.

Michael Weinstein - Credit Suisse - Analyst

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

Lynn J. Good - Chair, President and Chief Executive Officer

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

Michael Weinstein - Credit Suisse - Analyst

Good you. Okay, that's all I have. Stay safe, guys. Now they say it, guys. Thank you very much.

Lynn J. Good - Chair, President and Chief Executive Officer

Thank you.

Steven K. Young - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. We'll next go to Jeremy Tonet with J.P. Morgan. Please go ahead.

Jeremy Tonet - J.P. Morgan - Analyst

Hi, good morning.

Lynn J. Good - Chair, President and Chief Executive Officer

Hi Jeremy.

Steven K. Young - Executive Vice President and Chief Financial Officer

Good morning.

Jeremy Tonet - J.P. Morgan - Analyst

I just wanted to come to the O&M side with a slightly different I guess. If I recall, it seems like that spending on items such as vegetation management has accelerated in 4Q '19. So just trying to think through how much cost savings you 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?

Steven K. Young - Executive Vice President and Chief Financial Officer

You're right. In 2019, our agility programs worked in the other direction. We have a favorable year, and we accelerated some useful expenses into 2019. We have - veg management is 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 and so forth. And the ability to do those kind 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, that dexterity between calendar years.

Jeremy Tonet - J.P. Morgan - Analyst

Got it. That's helpful. That's it from me. Thanks.

Lynn J. Good - Chair, President and Chief Executive Officer

Thank you, Jeremy.

Operator

Thank you. And ladies and gentlemen, that does conclude our time for questions and answers. I'd like to turn the conference back over to Ms. Lynn Good for any additional or closing remarks.

Lynn J. Good - Chair, President and Chief Executive Officer

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

Operator

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DUKE ENERGY CORP

Q1 2020

Earnings Transcript

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