Aug 7, 2013
Executives
Bob Drennan - Vice President – Investor Relations Lynn Good - Vice Chairman of the Board, President, Chief Executive Officer Alex Glenn - State President of Florida Lloyd Yates - Executive Vice President of Regulated Utilities
Analysts
Greg Gordon - ISI Group Stephen Byrd - MSSB Shar Pourreza - Citigroup Steve Fleishman - Wolfe Research Julien Dumoulin-Smith - UBS Michael Lapides - Goldman Sachs Hugh Wynne - Sanford Bernstein Kit Konolige - BGC Capital Kamal Patel - Wells Fargo
Operator
Good day and welcome to the Duke Energy second quarterly earnings call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Bob Drennan.
Please go ahead, sir.
Bob Drennan
Thank you, Jim. Good morning, everyone, and welcome to Duke Energy's second quarter 2013 earnings review and business update.
Leading our call this morning is Lynn Good, Duke Energy's President and Chief Executive Officer. Today's discussion will include forward-looking information and the use of non-GAAP financial measures.
Slide two presents the Safe Harbor statement which accompanies our presentation materials. You should also refer to the information in our 2012 10-K and other SEC filings concerning factors that could cause future results to differ from this forward-looking information.
A reconciliation of the non-GAAP financial measures can be found on our website at www.duke-energy.com and in today's materials. Please note that the appendix to today's presentation include supplemental information and additional disclosures to help you analyze the company's performance.
Today, Lynn will provide an in-depth review of the second quarter results and also perspectives on our expectations for the rest of the year. She will also take your questions following her prepared remarks.
This morning, we announced adjusted diluted earnings per share for the second quarter of $0.87, compared to $1.02 for the same quarter a year ago. Principal drivers of the lower quarter-over-quarter adjusted results were less favorable weather at our utilities compared to last year, reduced contributions from our Midwest coal and gas commercial operations and lower contribution from international operations, primarily due to an extended maintenance outage at a National Methanol investment.
These drivers were partly offset on positive revenue contributions from recently approved rate cases in North Carolina and Ohio. Also this morning, we all are reaffirming Duke Energy's previously announced adjusted earnings guidance range for 2013 of $4.20 to $4.45 per share.
Now, I would like to turn the call over the Lynn.
Lynn Good
Thank you, Bob, and good morning. I want to thank all of you for joining our call today.
I am pleased to be joining you as the President and CEO of Duke Energy. As many of you know, Jim Rogers who has left one of his predecessor companies for nearly 25 years will remain Chairman through the end of this year.
I am grateful to Jim for his encouragement and support over the years and I am deeply honored by the confidence the board has placed in me. As well, I want to thank you for your support in the past and for the messages that I have received since this announcement.
Also, yesterday, I announced Steve Young, Duke Energy's new Chief Financial Officer. Steve has recently served as the company's Controller and Chief Accounting Officer and previously served as the CFO of Duke Power.
In his previous roles, Steve has worked closely with the utility commissions in North Carolina and South Carolina as well as the Federal Energy Regulatory Commission. He has deep understanding of our company and industry and will maintain a sharp focus on our financial objectives.
Steve complements our special, deep and talented leadership team and I look forward to introducing Steve to many of you over the coming months. Now, let me turn to our discussion of the quarter's results, expectations for the remainder of 2013 and our near-term strategic priorities.
July 2nd marks the one year anniversary of closing the Duke Progress merger. Thanks to the diligence and hard work of our employees and leadership teams, we have accomplished a great deal over the past 12 months.
Slide 4 outlines our near-term priorities and our progress towards resolving them. Let me provide a brief update on these priorities.
First, we continue to make progress on our regulatory calendar in 2013. I am very pleased with the constructive orders we have received in the Duke Energy Progress in Ohio [Electric].
Additionally, we have reached a balanced settlement with the interveners and the Duke Energy Carolinas and Ohio gas cases and await commission decisions in the third quarter. I will discuss these rate cases in more detail in a moment.
Turning to Edwardsport. In early June, we placed the IGCC plant into service.
This is a major milestone for the company and for our Indiana customers. Over the next several months, our focus remains on plant performance, including ongoing performance testing, completing GE's new product introduction testing protocol and resolving remaining bunch list items from disruption.
As with many of these plans, we expect to encounter issues in the early phase of operation. Our approach is to identify causes and revolve issues as they occur.
To-date, we have not identified any issue that will impact the long-term performance of the plant. Next, Crystal River.
Last week we announced a comprehensive settlement with parties in Florida including the Office of Public Counsel. This settlement provides long-term clarity for Florida customers, the company and other key stakeholders.
As I will discuss in a moment, the settlement addresses the pending Crystal River 3 regulatory proceeding, the proposed Levy nuclear project, the Crystal River 1 & 2 coal units and future generation needs in Florida. Merger integration also remains a key priority.
Significant work continues to integrate financial, work management and human resource systems. We are on track to achieve our targeted non-fuel O&M savings of between 5% to 7% in 2014.
We also continue to deliver customer savings through fuel savings, joint-dispatch commitment. Over the last 12 months, we have exceeded our original forecast by achieving cumulative savings of approximately $120 million.
We expect to continue this progress into 2014 and beyond. Finally, let me update you on our nuclear fleet performance improvement effort.
Both the Oconee and Catawba sites in the Carolinas is operating at record capacity factors for the first six months of the year. Additionally, our focus on the single unit Robinson nuclear station has resulted in improved performance in several key performance indicators, including capacity factors and the INPO Index, an independent view of our overall performance.
Over the remainder of 2013, we have four planned nuclear refueling outages and are performing the necessary preparation work to ensure their successful application. As we discussed with you in February, we will continue to focus on achieving top world class performance across the entire nuclear fleet.
We are pleased with the improvements we are seeing and our focus remains on maintaining a standard of excellence throughout the nuclear fleet. Slide five reaffirms our principal financial objectives, achieving growth in earnings per share and the dividends, while also maintaining the strength of the balance sheet.
These objectives have remained consistent overtime and will continue as a centerpiece of our investment value proposition. We are reaffirming our previously announced earnings guidance range for 2013 of $4.20 to $4.45 per share.
Our results for the year will largely depend on the following. Resolution of our pending rate cases and outcome of Ohio and cost based capacity request, our cost control efforts including merger integration and our third quarter results, historically our most significant quarter of the year.
We continue to target a long-term growth rate of 4% to 6% and adjusted diluted earnings per share through 2015. We remain focused on growing the dividend on an annual basis and continue to target a dividend payout ratio of 55% to 70% based on adjusted diluted earnings per share.
Consistent with this objective, in June, our board announced an approximate 2% increase in the quarterly dividend payable in September. Additionally, we remain focused on the strength of the balance sheet supported by our liquidity and credit metrics.
In fact, the credit rating agencies recently acknowledged the significant progress we have made in resolving our near-term priorities. Moody's placed Duke on review for possible upgrade and Standard & Poor's revised its credit outlook on the company from negative to stable.
Our financial plans do not call for any new equity issuances through the end of 2015. Next, I will provide a more detail look at our financial performance for the quarter.
As we discussed during our first quarter earnings call, we expected relatively weaker results in the first half of 2013 compared to 2012 as a result of the issuance of incremental shares in connection with the merger, lower PJM capacity prices, progress from company interest expenses and unfavorable foreign exchange rates and results in Brazil. Consistent with these expectations and impacted further by milder weather on the second quarter and an extended outage at National Methanol, our second quarter adjusted results were $0.15 lower than the prior year quarter.
The quarterly drivers are outlined on slide six. Our GAAP reported earnings per share for the quarter were $0.48 as compared to the prior year's quarter results of $0.99.
These reported results for the quarter includes special items such as the Crystal River 3 impairment, the cost to achieve merger savings and others. The special items are outlined in the reconciliation table in today's press release material.
Let me begin now the business segment overview of our second quarter adjusted earnings results. Our regulated U.S.
Franchised Electric & Gas segment recognized quarterly adjusted segment earnings for the quarter that was $0.36 per share higher than the prior year quarter. This increase was primarily due to the addition of the formal progress energy utility operations These results were partially offset by milder weather.
In the second quarter of 2012, we experienced above normal weather and we are seeing below normal weather during this year's quarter. In fact, a significant amount of rainfall during the quarter contributed to below normal cooling degree days in Carolinas.
In North Carolinas, we experienced the second highest level of rainfall from April to June than we had during the last 100 years. This mild summer weather has continued into July.
High temperatures in Charlotte reached above 90 degrees only today during the month of July. Let's now turn to International, which had segment earnings $0.03 per share lower than the prior year quarter.
International's results were impacted by lower volumes at our National Methanol investment, primarily due to an extended planned maintenance outage. Although, reservoir in Brazil continue to remain slightly below historical levels, results during the quarter were consistent with our expectation.
We continue to monitor development in Brazil. Turning to our non-regulated commercial power segment, adjusted segment income was $0.05 per share lower than the prior year's quarter, in line with our expectations.
These results are attributed to lower PJM capacity revenues and lower generation volumes for our Midwest generation fleet and the prior year recovery of the Lehman Brothers receivable that have been previously written off. In other, we incurred additional interest expense associated with the Progress Energy Holding Company debt and higher debt levels at Duke Energy Holding company.
Turning to slide 7, let me spend a few minutes discussing our progress toward achieving our 2013 earnings guidance range. As I previously highlighted, we remain on track to achieve between $4.20 and $4.45 per share of adjusted earnings for the full year.
As demonstrated on this slide, we expect the second half of the year to be relatively stronger than the first half primarily as a result of three items. First, constructive rate case outcomes, including nuclear outage levelization, which I will discuss further in a moment, second, additional merger synergy.
Third, increased contributions from our regulated wholesale operations. The impact of the Duke Energy Carolinas rate case, the Ohio cost base capacity case and the deferral of nuclear outage cost will be most significant in the fourth quarter.
The recent rate case order for Duke Energy Progress and pending settlements for Duke Energy Carolinas in both North and South Carolina, provide for accounting recognition of nuclear outage expenses over the refueling cycle for example, 18 or 24 months rather than when the outage occurred. This deferral of nuclear outage cost, known as nuclear outage levelization, is expected to add between $0.07 and $0.09 per share to our results for the remainder of the year, up to approximately $0.04 for Duke Energy Progress and $0.05 for Duke Energy Carolinas.
Approvals of the Duke Energy Carolinas cases are still pending. The appendix materials in today's presentation contained an overview of how nuclear outage levelization works.
For the year, we expect Franchised Electric and Gas to exceed its target while international is expected to fall slightly short for this annual target. Commercial Power's results will largely depend on the outcome of the cost base capacity filing pending in Ohio, which we expect in the fourth quarter.
We will provide additional update to our annual guidance range after we complete the third quarter which is historically our most significant one. Slide eight contains our quarterly volume trends by customer class in total based on calculations that include weather impact.
For the second quarter, our overall weather normal volumes were around 0.4% higher than the prior year period driven primarily by growth in the commercial and industrial sectors. On the year-to-date basis, weather normal volumes were also around 24% higher excluding the impact of the 2012 leap year.
In the industrial class quarterly weather normalized volumes were 1.2% higher. We continue to experience strength in automotive in the Carolinas and Midwest.
Lower activity in the primary and fabricated metal sectors in the Midwest reflects a softening of global demand. On the positive side, the continued housing market recovery has also supported related industrial activity through our service territories.
Weather-normalized volumes for our commercial customers were approximately 0.5% higher than the prior year quarter, continuing the recent trend of modest growth. Finally, residential volumes were 0.4% lower for the quarter.
We continue to experience growth in the average number of residential customers as they have increased by 49,000 or 0.8% since the prior year quarter. However, usage per customer continues to trend slightly lower due to the challenging economy and increased energy efficiency penetration.
In particular, we continue to see weakness in Florida due to the number of low usage customers and higher vacancy rates. Consistent with our outflows during the first quarter earnings call, we remain cautious on the overall economic recovery.
We expect fairly stable economic outlook and activity in the back half of the year as household income growth is projected to remain flat. As a result, weather-normalized growth for the full year 2013 is expected to be slightly below our previous assumption of around 0.5% growth.
Next I would like to briefly address the revised settlement agreement we have reached with intermitting parties in Florida as outlined on slide nine. This revised settlement agreement addresses issues related with Crystal River 3 that are pending before the Florida Commission including our acceptance of the mediator's proposal, related to the NEIL insurance coverage.
It also addresses the termination of the engineering, procurement and construction agreement, or EPC, and related cost recovery of the Levy nuclear project, recovery of cost related to the potential retirement of the Crystal River 1 & 2 coal units and a regulatory framework for the addition of new generation. As you know, resolving issues related to Crystal River 3 has been a priority since the closing of the merger.
This agreement is an important step and provides the balance between moderating rate impact to our customers, providing clarity on cost recovery and providing a framework for any future capacity needs. Let me highlight some of the key conditions of the agreement.
First, Crystal River. The settlement clarifies cost recovery of cash adjustment to the Crystal River 3 site.
Excluding the extended power upgrade investment and the future dry ash storage facility which are separately recoverable. We have agreed a cash recoverability of remaining cost related to the site at $1.466 billion.
Cost under the cap are recoverable in base rates over a 20-year period beginning no later than 2017. Note that our current cost estimates are within the cost cap.
We have also agreed to accelerate the cash recovery of around $135 million from retail customers between 2014 and 2015. And in order to mitigate the impact of Crystal River 3 investments to retail customers, we have reduced the carrying investment to be recovered by $295 million Next let me discuss the Levy nuclear project.
In 2008, we announced plans to construct two new Westinghouse AP1000 nuclear units in Levy County. Florida.
Our EPC for Levy was based on the ability to obtain the combined construction and operating license or COL from the NRC by January 1, 2014. As a result of delays by the NRC in issuing COL for new nuclear plants, as well as increased uncertainty in cost recovery caused by recent legislative changes in Florida, we are terminating Levy EPC contract.
Despite this decision, we continue to regard the Levy site as a valuable option for future nuclear generation and will continue to pursue the COL. We now expect to receive the COL in late 2014 or early 2015.
We will continue to recover the Levy investments including the contract termination cost through the nuclear cost recovery clause. We can seek recovery of additional cost to obtain the COL in future proceedings upon the (inaudible) date of any new nuclear units.
Next I will discuss Crystal River 1 & 2. Approximately 875 megawatts of unscrubbed coal generation in Florida.
These units have been evaluated for retirement due to compliance with the MATS and other environment regulations. In the event, we are required to retire these units early, this settlement permits us to continue recovery at normal annual deprecation expense through the end of 2020 and recover any remaining net book value in 2021.
To continue to meet the future energy needs of our customers in Florida, the agreement also gets us the ability to construct, acquire or operate up to 1,150 megawatts of capacity prior to the end of 2017, and place the investment in rates without a general rate case. We have an outstanding solicitation to address short-term capacity needs.
We will evaluate these proposals along with the construction of peaking units, operate, and potential capacity acquisitions. Our capital plan will be updated to address these requirements as decisions are made.
We also project the need for additional generating capacity in Florida during 2018. We expect to issue an RFP for this capacity this year, which will include a self build option.
If the self-build option is the most cost effective alternative and it's the commission grants us the determination of need for this generation. We will be able to establish a generation in base rate adjustment for up to 1,800 megawatts of new combined cycle gas-fired generation.
Prudent costs associated with these new generation investments will be recovered in customer rates without a general rate case upon in-service date, based upon the 10.5% ROE. Finally, we will agree to stay out of the general rate case proceeding until the end of 2018, an additional two-year period to our current four-year base rate increase.
However, Duke Energy Florida's return on equity falls below 9.5% during this period, we will be allowed to seek base rate relief. Overall this settlement has minimal adjusted earnings and cash flow impact.
In the second quarter, we have recognized the $295 million free cash write off at the Crystal River 3 investment balance as well as the $55 million pretax write off related to the wholesale allocation of [investment]. These write offs are special items and therefore have been excluded from our adjusted diluted earnings per share of the quarter.
This settlement is a balanced agreement, providing longer-term clarity to both, our Florida customers and the company. The agreement is still subject to the review of approval by the Florida Commission, which we expect by the end of the year.
Before I move to our pending regulatory calendar, I want to highlight we are continuing negotiations with certain of our joint owners of the Crystal River 3 site, to resolve any remaining issues they have related to the initial outage and our decision to require the unit. As you will recall, these joint owners hold an approximate 8% interest in the deferred unit.
We will provide updates as these negotiations progress. Next, let me move onto our regulatory calendar on slide 10.
2013 is an important year with a number of regulatory proceedings position the company for the future. We operated constructive regulatory jurisdictions and have five approved or pending settlements with annual revenue increases of around $600 million.
First, we have resolved the Duke Energy's Progress case in North Carolina with revised rate that became effective in June. We also have constructive and balanced settlement agreements pending commission approval for Duke Energy Carolina in both, North and South Carolina.
These rate increases will likely go into effect next month. All of these cases are based upon 10.2% ROE and a 53% equity component of the capital structure.
They each contain rate mitigation mechanism, which minimize the initial impact of increased rates to our customers. Additionally, we have a final order from the Ohio Commission on our Electric T&D case and awaited decision on our gas T&D request.
Finally, we anticipate an order from the Ohio Commission on our cost base capacity request in the fourth quarter of this year. Clearly, on this filing will help us form our long-term strategic plans for the Midwest generation fleet.
Other than a potential filing by Duke Energy Progress in South Carolina later this year, we do not forecast any further additional rate cases in the next two years. This will result in less regulatory risk to the company as well as more rate certainty for our customers.
These conservative regulatory outcome position the company for the future, establishing and rate recovery of over $9 billion of modernization investments. As we look ahead, we will continue to harvest merger synergies, drive additional cost out of our business through continuous improvement efforts, grow our wholesale business and deploy capital in our jurisdictions, including new generation in Florida and the Carolinas.
Our commercial businesses will also compliment our growth. With our focus on resolution on near-term priorities, a constructive regulatory outcome, we have positioned Duke for low-risk, primarily regulated growth through 2015.
We will provide details around our 2014 financial guidance and strategic priorities early next year. Before closing, let me provide some perspective on my transition and current focus.
I had the opportunity over the last months to meet with employees and key stakeholders and I am very encouraged by the conversation. Our work matters to the customers and communities that we serve and our employees are passionate and proud of what they do.
We have built a lot of momentum over the last year, resolving our near-term priorities and integrating two great companies. My focus is in three areas.
Continuing to deliver on our commitment, strengthening our relationship with all of our stakeholders and positioning the company for long-term success. Let me briefly discuss each one.
You can expect us to continue delivering on our commitments. We will build on our track record of delivering safe reliable service to our customers, operating our assets with affluence and meeting our financial objectives.
Achieving our merger synergies and ongoing cost discipline will be an important part of this mission. Effective capital deployment for the benefit of our customers and constructive regulatory outcomes will also play a key role.
We will also focus on strengthening stakeholder relationships. We play an important role in the success of our customers and communities and a strong constructive relationship with our customers, regulators and community leaders is based on trust, respect and transparency.
Their success is vital to our success. Finally, the Duke Energy leadership team will focus on positioning the company for long-term success.
The electric industry is changing. Lot of growth, new technologies, new regulations and ongoing cost pressures are just some of the forces that require new thinking and action.
As we position the company in the industry for the future, we must innovate every part of the business to address these challenges for the long-term benefit of our customers and our stakeholders. This includes the innovation and technology deployment, continuous improvements and regulatory mechanism.
We must also engage in leading public policy discussions that will impact our customers and our business. The scale and portfolio of businesses we have position us well to successfully navigate the weather ahead.
In closing, I want to thank Jim and the board for building a strong company with talented leaders, dedicated employees and a performance based culture. We have met many important milestones over the course of the year and are focused on finishing the year strong, achieving our objectives and setting the stage for success in 2014 and beyond.
Throughout the remainder of the year, I will update you on our progress and at this point I would like to open the phone lines for your questions.
Operator
(Operator Instructions) We will take our first question from Greg Gordon from ISI Group.
Greg Gordon - ISI Group
Thanks, good morning.
Lynn Good
Good morning, Greg.
Greg Gordon - ISI Group
And congratulations.
Lynn Good
Thank you.
Greg Gordon - ISI Group
I just want to go over the general guidance you have given for the balance of the year. Maybe review it.
You said, you are still on track to meet your overall guidance expectation with the regulated utilities being better than forecast, international being slightly below and generation being uncertain, depending on the outcome of Ohio. Is that a fair recap?
Lynn Good
No. I think the success of commercial, Greg, will depend on whether Ohio comes out but we also have the third quarter in front us for commercial and just seasonally, you can expect more earnings from the base operations in the third quarter.
Greg Gordon - ISI Group
Okay, but a big piece of the change in the utility, I am looking in the appendix which you referenced during your comments, page 22, is potential second half impact of the change in accounting for nuclear outage levelization. But it looks like one of the outage has already happened.
So I presume that if that decision goes in your favor that that impact the retroactive?
Lynn Good
So, Greg, if I could refer you to slide 7, I think you have got a comprehensive list of drivers to the second quarter. Let me just talk for a moment about nuclear outage levelization.
For the Duke Energy Carolinas plant that accounting method will be adopted prospectively, so you will see the benefits in the fourth quarter of the outages in the Duke Carolinas fleet. The Duke Progress adoption of levelization was retroactive to January, so you see a couple of cents in Progress' results in the fourth quarter on levelization and you will see another $0.04 in the back half of the year for the Progress piece of levelization.
Greg Gordon - ISI Group
Perfect. That's exactly what I needed.
Then prospectively if you think about our forecasting that means that there will be much less volatility in underlying O&M such that it actually will be sort of less of all things equal, less of a benefit in years where you have fewer outages?
Lynn Good
Less of a detriment in the years that we have one.
Greg Gordon - ISI Group
Correct. Great.
Lynn Good
So I think that stabilization is helpful. So yes, that's right.
You got it.
Greg Gordon - ISI Group
But it won't change the cash flow, obviously the ongoing cash expense profile of the company in years where you have outages you will be booking those cash expenses?
Lynn Good
That's right. The next rate case.
We think that beyond 2015, rates will be set in the future based on levelized outage, so you will see cash impact at that point.
Greg Gordon - ISI Group
Got you. Thank you very much.
Operator
We will take our next question from Stephen Byrd from MSSB.
Stephen Byrd - MSSB
Good morning and congratulations. I just wanted to talk broadly, Lynn, you mentioned the third of the strategic priorities positioning the company for long-term success and the International business we have seen volatility in the performance of the business over time and as you think about the long-term vision for the company, how might we think about that volatility in the long-term?
Ways to address that? To reduce that to be more in line with the U.S.
core utility business?
Lynn Good
Steve, I think that's a good question. There is natural volatility in international around foreign exchange rates and to some extent the National Methanol entity is impacted by oil prices or other commodity influences.
That volatility as you know has been in our favor in recent years as the U.S. dollar has weakened, now the U.S.
dollar is strengthening. It's going the other direction.
We continue to look at ways to position the International business and address that volatility. I don't have any specific plan that I can share with you at this point, but positioning international to complement the growth of the company is the priority.
Stephen Byrd - MSSB
Understood. And, just on the overall O&M position of the company.
You are obviously making great progress in looking at your cost structure. Should we be thinking about sort of continual review of that or, as you look out at the cost structure of the company, do you see further opportunities that are as yet untapped or areas that you would want to focus more on down the road, or is it more likely to be relatively stable from here?
Lynn Good
Steve, I think, so staying on cost structure has become a way of life and we will continue to be such. You think about the merger integration plans that we developed, a lot of that work was in 2010 and early 2011.
The business is continuing to change and we continue to look for ways to deploy continuous improvement, looks for ways to optimize labor and contract labor to continue to drive cost savings. I think you are hearing that throughout the industry as we grapple with a [loan] growth environment and we are very keenly focused on improving our cost structure.
Operator
We will take our next question from Shar Pourreza from Citigroup.
Shar Pourreza - Citigroup
Good morning, everyone.
Lynn Good
Good morning, Shar.
Shar Pourreza - Citigroup
Just on Ohio, assuming you don't get the Ohio capacity to cost base approach that you are seeking, how soon could we see more defined plan on strategic options with the Ohio, the Midwest assets?
Lynn Good
Shar, we are expecting an order probably late September or October. It could slip into November.
We don't have a specific procedural schedule. We will take our time to analyze that order, understand what it says about the plants, understand what it says about the position the Commission is taking and then we will analyze and make a decision as it makes sense to do so.
So I would say, I can't say it would be by the end of the year, necessarily, but I would think by the end of the first quarter of next year, we would have finalized our thinking.
Shar Pourreza - Citigroup
Okay, got it. Very helpful.
Then if you, looking at the second half this year, how much would the capacity case impact your 2H outlook, especially if you don't get an order until potentially late or mid fourth quarter?
Lynn Good
I think that will depend on what the order says. So you may recall, when we filed the request, we actually asked for retroactive treatment back to August of 2012.
So I think we are going to have to see how the Commission has referenced that and at what point the recovery is going at. So what I would point to is our plans for commercial is roughly $90 million of net income.
We have delivered roughly $3 million through the second half. So that gives you a range of what the second half could include from a balanced target.
Shar Pourreza - Citigroup
Alright, got it. Then just lastly, shifting to Florida, as far as the potential new addition of gas assets in 2017 and 2018, when could we start seeing builds occur, assuming you decide and you win the RFP process for 2017 power?
Lynn Good
Let me ask Alex Glenn, who is the president of Florida, to jump in and give us an update on that.
Alex Gunn
Sure, Shar. On the 2018 combined cycle, our timing on that would be to go out for RFP this year and file an E case next year.
So that we would get, if we select the self build option approval from the commission, and then that would be an in-service date before the summer peak of 2018. That's on the larger combined cycle on the 2014 to 2017 time frame timeframe.
We are really looking at capacity needs in the '16 to '18 timeframe. So we could be looking at new capacity, whether it's purchase, build or acquiring existing facilities in that '14, '15, '16 timeframe.
Operator
Moving on, we will take our next question from Steven Fleishman with Wolfe Research.
Steve Fleishman - Wolfe Research
Could you give us a sense of gone to ROEs that the utilities, either I guess trailing or in your forecast, for this year?
Lynn Good
That's a good question. See, we have so many pending regulatories pertaining to rate case asset, that's an interesting time.
Why don't we take that offline because I think what we want to do is to reflect the benefit of the rate cases over the partial year and probably give you a sense of what '13 could look like. We do file surveillance reports in North and South Carolina but both of those calculations have some unique characteristics to them that I don't think is really indicative of what we are earning.
So I will ask Bill and Bob to follow-up with you on that.
Steve Fleishman - Wolfe Research
Okay, great, and just to clarify your comment on rate cases, so after this round of cases is complete, you don't have any intention to file, did you say next year or for the next few years?
Lynn Good
Next few years. The one case we are evaluating is Duke Energy Progress in South Carolina and that would be the only one.
Steve Fleishman - Wolfe Research
Okay, and I think I have one more. Just where are you on any potential interest in the summer plant?
Lynn Good
We are continuing to look at that, Steve. We have been in negotiations for sometime with Santee Cooper.
As we have said before, we believe that regional nuclear, we think that we still believe diversification. We think that's going to be important to the company, long-term but we have not yet reached an agreement and don't have any further update at this point.
Operator
Moving on, we will take our next question from Julien Dumoulin-Smith from UBS.
Julien Dumoulin-Smith - UBS
Hi, good morning. Perhaps just a follow-up on Steve's question, what are the various considerations for timing on a South Carolina case as it goes?
Lynn Good
Lloyd Yates is with me. I will ask Lloyd to step in on timing.
Lloyd Yates
In terms of timing, we are looking at filing. If we file that case, we are looking at filing a case sometime late fourth quarter of this year.
Julien Dumoulin-Smith - UBS
Any considerations as far as whether or not you would? Anything need to happen or not happen, shall we say?
Lynn Good
Julien, we analyze rate cases based on the returns that we are earnings based on what we see in terms of cost structure O&M, and also maintenance position and so Duke Energy Progress has the same capital as the North Carolina jurisdiction. So, it's Sutton and me and [complex] and so we are looking very closely at it.
Just we have not made a final decision and therefore haven't notified the case and all the things that would go with that.
Lloyd Yates
In terms of numbers, if you think about Duke Energy Progress South Carolina is about 20% being higher utility, Duke Energy North Carolina was 80%, Duke Energy South Carolina would be about 20% of utility, so think about it that way in terms of ours.
Julien Dumoulin-Smith - UBS
Great. Excellent.
Then turning back to Ohio, if you will quickly? Some of your peers have talked about driving cost out of that business specifically given the transition to restructured markets.
Any comments there? I mean, any kind of revaluation as you think about that business' future?
Lynn Good
Julien, we have been focused on cost in the Midwest fleet really dating back to 2010 and that teams have been very aggressive in driving cost out. I think as you know where capacity prices are in this year in particular, you are not going to solve the economics by driving costs out in 2013, but we do have a very keen focus on running as efficiently as we can.
Julien Dumoulin-Smith - UBS
Very fair, and then perhaps lastly as it relates to Florida, if you could just walk through quickly, the interim capacity needs prior to 2018. Is it more likely to think of that as sort of a temporary need more than a permanent self-builds opportunity?
I mean, how do you think about that just given this being more of a transitionary opportunity?
Lynn Good
I will ask Alex to step in, Julien.
Alex Glenn
Yes, Julien. We look at it more of a permanent need.
I mean, we are retiring roughly 1,700, 1,800 megawatts of capacity in the 2016 to 2018 timeframe. We have got real needs to fill capacity in 2016, 2017, 2018.
That doesn't go away over the long-term, so we are looking at the 2016, 2017, 2018 as needs for additional generation whether it would be purchase power or peaking units or possibly upgrading some plants and then maybe possible acquisitions out there, plants that are existing in the market, so that's both, the short and the longer term need.
Julien Dumoulin-Smith - UBS
Great. So, in total, you are really looking at 3 gigs in aggregate of permanent needs, if you will, roughly?
Alex Glenn
Up to. I would say up to that.
Operator
Moving now to your next question from Michael Lapides from Goldman Sachs.
Michael Lapides - Goldman Sachs
Guys, just first of all, Lynn and Steve, congratulations. Congratulations to both of you, especially Steve with your announcement this week.
I want to focus a little bit on cash flow. I would love if you could just talk about things like significant items like pension contribution needs over the next year or so.
How the potential change in cash that's outside of the U.S., how the change in that tax law could potentially impact Duke, whether you could bring back more cash from Latin America. as well as bonus depreciation?
Lynn Good
Sure. I will take pension first, Michael.
We are forecasting a $350 million contribution in 2013 which is comparable with what we did in 2012, and that will be a combination of the Duke Energy Progress plants as well as the plant. On the international front, we have got about $1.5 billion overseas.
We have talked a little bit in the past about two things, one being a structured transaction that we could pursue to bring some cash home. That's still under evaluation.
Then the second option would be flat out just repatriation. We could do it with or without a tax holiday, but you have got basically $1.5 billion offshore.
Bonus depreciation, the bonus depreciation in 2013 is about $1.2 billion. We are in an NOL position.
So the cash associated with that bonus is really going to be realized out in the 2015, 2016 timeframe.
Michael Lapides - Goldman Sachs
Meaning, you are not expecting to be a significant cash tax payor in '13 or '14 as well?
Lynn Good
That's correct.
Michael Lapides - Goldman Sachs
Got it. One other question.
When you closed the Progress Energy merger, there was a significant amount, almost $4 billion, of holding company debt at the Progress Energy level, at interest rates that are little bit above current first mortgage bond or senior secured debt. What are your plans for the Progress Energy holding company level debt and does that present a refinancing opportunity for you that can be a positive tailwind for earnings?
Lynn Good
We have done a little bit of that, Michael. I believe we took the quick instrument out earlier this year and continue to work at the economics of refinancing to see if that makes sense but I would not say that's a huge driver.
Operator
Moving on, we will take our next question from Hugh Wynne from Sanford Bernstein.
Hugh Wynne - Sanford Bernstein
Good morning, my questions have to do with a couple of the items that are excluded from adjusted earnings. The nuclear development charge of $87 million.
I take it that's related to the cancellation of the EPC contract at Levy?
Lynn Good
That's primarily Levy and also Harris. You may recall that we suspended most operating (inaudible) on the Harris plant and took a charge of wholesale allocation to the cost as well, Hugh.
Hugh Wynne - Sanford Bernstein
Okay, but the Florida nuke costs, those are recoverable under the nuclear clause in that state. Is that right?
Lynn Good
Let me pause just for a moment. So that's the wholesale allocation of Levy and under the wholesale terms of that contract, Hugh, we do not have an ability to recover them and as a result impair a bit of the cost.
You may recall that these were identified back into 2012 settlement in Florida as being amortizable in the same way as COR but in connection with the 2013 settlement that provision of the 2012 settlement was set aside and we made a decision to take the impairment at that point.
Hugh Wynne - Sanford C. Bernstein & Co.
Okay, and then, the litigation reserve of $50 million. I believe that's something actually with Crescent.
I don't know if you could perhaps give us some background there?
Lynn Good
It is, Hugh. We have a made a settlement offer to certain creditors that are involved in the Crescent bankruptcy litigation, really dating back to the Crescent transaction in 2007.
The terms of the offer are confidential. The litigation is ongoing.
At this point, I can't comment any further on that litigation. We of course, continue to believe that the claims are without merit but we are working through this litigation.
Hugh Wynne - Sanford Bernstein
Great, and then finally if I could, could you just brief us on the post commissioning outages at Edwardsport and what, if anything, they pertain for the plant's capacity factor over the next year or year and half?
Lynn Good
We have made good progress on Edwardsport, Hugh. The focus over the post and service period over the first few months is really consistent with early operations of a new power plant.
We have been focused on system testing. We have been focused on tuning.
So all of the major technology systems, the power block, the gasifier have been tested. The plant is running on both gasifiers as we speak.
As we have identified issues, we have dispatched the team to do a root cause analysis and have resolved them. At this point, we do not see anything that has developed over a long-term nature.
You can expect us to continue to address issues as they arise over the next several months as we really get plant to the point of full capacity and potential.
Operator
Moving on, we will take our next question from Kit Konolige from BGC Capital.
Kit Konolige - BGC Capital
Thanks. I will add my congratulations to Lynn and Steve.
A couple of questions, Lynn, I believe you spoke about sales growth being slightly disappointing compared with your expectations?
Lynn Good
You know what I would say is we are 0.4% against an aspiration of 0.5%. We have seen good growth in industrial in certain segments, but weakness in others like I pointed to primary metals, probably the most weakness that concerns us a little bit about the back half is really in Florida, where we have continued to see static low usage customers and not really the rebound that we had hoped as we were forecasting the 0.5% and that's probably the area I would point to that gives us lack of complete confidence on a 0.5% growth rate.
So, we will continue to update this in the third quarter and fourth quarter, but we just remain cautious about the outlook.
Kit Konolige - BGC Capital
Is there anything that you see developing on the sales growth that would have implications for your 4% to 6% EPS growth over the next couple of years?
Lynn Good
No. I think we have been very conservative with our growth assumptions, so, we are looking at kind of a 1% type range and we are adding customers at roughly that percentage right now, so I don't see a significant risk to the growth rate given the way we forecasted this volume.
Kit Konolige - BGC Capital
And one other area, if I could you mentioned in positioning for long-term success one of your goals is to advocate for new regulatory mechanisms. Anything in particular you have in mind there?
Lynn Good
I guess I would point back to something that we successfully partnered with other utilities in Indiana. The Senate Bill 560 that gives us an opportunity to modernize the grid.
For example, under a multiyear plan to bring those costs into rates in a way that is more smoother for customers and more consistent with the deployment of capital. That would be anything if we could achieve things like that in our jurisdictions.
Operator
Moving on, we will take our next question from Kamal Patel from Wells Fargo.
Kamal Patel - Wells Fargo
Good morning. I had two quick questions roughly.
With regard to Indiana, and the Edwardsport startup issues, is there any cost sharing requirement with repairs or will you be passing those costs to them? How does that work?
Lynn Good
We are operating under cap in Indiana and the costs that we have incurred are under the cap, so we do not have positive risk in Indiana at this point.
Kamal Patel - Wells Fargo
Okay. Then is probably better answered offline, but the Florida settlement, I just wanted to get an idea of the various remaining balances that there might be for recovery related to Crystal River 3 and Levy, or is everything basically getting flushed out as part of the settlement?
Lynn Good
After recognition of $295 million impairment, the remaining investment in Crystal River should be recoverable under the various provisions, so it would be about roughly $1.2 billion at the end of June on the Crystal River plant. Approximately $300 million on the upgrade environment.
Then the Levy investment is probably around $250 million.
Alex Glenn
This is Alex. Right now it's around $200 million.
That has not been collected.
Lynn Good
That again would fall under cost recovery
Alex Glenn
Provisions of the settlement in the statute.
Kamal Patel - Wells Fargo
Okay. All right.
That's it for me. Thank you.
Operator
We will take our final question from Michael Lapides from Goldman Sachs.
Michael Lapides - Goldman Sachs
Hey, guys. (Inaudible).
Lynn Good
Okay. Thanks, Michael.
Okay. Well, thank you all for participating, for your questions.
We are looking forward to visiting with many of you in the fall conference season. And, as always, the IR team is available if there are follow-up questions, so thank you so much.
Operator
Thank you. That will conclude today's conference.
We thank you for participation.