Lynn Good - Chief Executive Officer
Dan Ford - Barclays Capital
Duke Energy Corporation (DUK) Barclays CEO Energy Conference Call September 12, 2013 9:45 AM ET
Dan Ford - Barclays Capital
Alright, our next presentation is going to be Duke Energy Corporation, Lynn Good, who is now CEO of the company. He is going to present to us. And I look forward to your comments. Lynn?
Lynn Good - Chief Executive Officer
Thank you, Dan and everyone who is joining us today. This is also being webcast. So welcome to those who are joining by phone. As I prepared for the discussion today, I thought back to a year ago in the September conferences and I have to tell you, I have very keen memories of last September. We were two months after the merger with Progress Energy. And as many of you know, it was a challenging time for the company. We were in the midst of the North Carolina investigation. And we as a team were focused on five key priorities. And those priorities included working our way through North Carolina and positioning the company for rate cases that we knew were coming in 2013. It was focusing on merger integration in integrating two very large companies and preparing for the success of that merger.
It was also Edwardsport finishing up the construction and putting that plant in service, it was Crystal River. And it was also nuclear performance. And as I stand here today a year later in new job as Dan indicated, I am extraordinarily proud of what the Duke team has accomplished. And I believe the story that we have today is one of great clarity, one of reduction in risk and issues, and we have created a platform that is unmatched in this industry. And I believe we have a company that is positioned for growth.
And what I would like to talk about today is that strategic focus and what we have achieved over the last year and how we see the future. But before I do, I would like to introduce the team that’s with me today, so Lloyd Yates joins. Lloyd is the Executive Vice President of our Regulated Utilities. And his team has been very focused on achieving regulatory certainty for the company over 2013 which helped lots of other people, but great work by Lloyd and his team over the course of the year. Also Steve Young, Executive Vice President and Chief Financial Officer of the company, Steve was named about a month ago. So he is a veteran now in this role. He has been with Duke for over 30 years and just has a wealth of experience in our industry. He led Rates and Regulation. He has great relationships in North and South Carolina and understands the business extraordinarily well. He is well-respected in the company and a great partner for me and also for the senior management team at Duke. And then Bill Currens newly named Vice President of Investor Relations, you know Bill, many of you do, but he will be succeeding Bob Drennan as Bob retires at the end of this year. So I am delighted to have that team with me.
Let me move to my first slide which is the Safe Harbor, which I won’t read for you, but I am going to begin with just a simple definition of who Duke is and then I will move into this discussion of strategic focus over the next few years. And so who is Duke Energy? The largest regulated utility in the U.S., a utility that has a market cap of around $46 billion serving 7.2 million customers, 28,000 employees, six jurisdictions, 58,000 megawatts of electric generation. And this scale, diversity, and flexibility is in my mind a true asset for the company as we move forward.
If you look at the business mix that we bring, we are about 85% regulated as a result of the merger. And that regulated business is positioned in very constructive jurisdictions, but over time have demonstrated their ability to convert investment into cash flow and earnings for the company as well as balancing the needs of the customers in those jurisdictions. We continue to have about 10% to 15% of our earnings in commercial businesses. This includes Midwest generation, renewables and international. We have diversity in jurisdictions as I talked about. We have diversity also in terms of customer mix. So if you look across the Duke’s footprint for our regulated business, about a third is residential, a third commercial customers, and a third industrial.
And then I would also point to diversity in generation mix. At the bottom of the slide, you can see the progress that we have made in modernizing our fleet moving from about 5% natural gas in 2005 to 25% by 2015 and reducing our coal footprint from 55% to 38 %. So let’s talk about that scale, the diversity and flexibility within a strategic context. And I believe that scale diversity and flexibility provides not only an unmatched platform, but an opportunity to drive the achievement of financial objectives. And our financially objectives are pretty simple, we want to grow the company, we want to grow the dividend and we want to maintain balance sheet strength that will position the company to make the investments to sustain growth into the future. Our strategic focus as you would expect begins with our regulated utility strategy. I would point two things gaining regulatory certainly which we will talk about jurisdiction by jurisdiction today. That’s resolution of regulatory outcomes that’s conversion of investments into cash flow.
We are also focused on running the business well, operating excellence of course across all of our fleet, but also driving merger savings as a result of the combinations and continuing to focus on continuous improvement. The platform again I believe provides unique opportunities to accomplish that objective. I will also talk about the strategic focus of the international businesses, where we are with the Midwest generation, how we are thinking about international and then finally our focus on growth. For the near term through 2015 and then opportunities that exits beyond 2015. So, let me begin with the regulated strategy. And I am going to move through each of our key jurisdictions as I do so.
The first is Duke Energy in the Carolinas and Duke has stepped back for a moment on where we entered 2013 for the Carolinas. At the end of 2013 we adjust result, the investigation in North Carolina following the merger. And we had in front of us three rate cases. Duke Energy Progress, Duke Energy Carolinas in both North Carolina and South Carolina. The Carolinas are a most significant jurisdiction and as you can see on this slide over 50% of our rate base and actually over 50% of the earnings of the Duke come from the Carolina, so an extraordinarily important jurisdiction as all of you know. We filed those cases. We settled all of those cases in a constructive manner. And as I stand here today two of those cases have been approved. The Duke Progress case and the Duke Energy Carolinas – South Carolina was just approved yesterday.
We remain waiting for approval in North Carolina, but expect that to occur before the end of this month. And so we will have converted $5.5 billion of rate base into rates as a result of these proceedings at a 10.2% ROE, a 53% capital structure, we will stay out of rates at least until 2015 and we will deliver $500 million of annual revenue from these regulatory outcomes. I believe this represents clarity. It represents reduction of risk for the company and puts us in a position where we can drive the success of the Carolinas over the next few years focused on things that are within our control.
Let me move from the Carolinas to Florida and it’s a very similar story. Florida represents about 20% of the company and again stepping back to where we were at beginning of the year, we were still wrestling with the decision about Crystal River. Wherever are we going to go with the Crystal River plant, are we retiring or are we repairing. As you recall shortly after the first of the year, we announced the retirement of the Crystal River station, a very difficult decision for the company as we have weighed the risks and rewards perusing that very difficult repair, we made a decision to retire, we also made a decision to accept a mediator’s proposal on insurance recovery related to that investment. And over the course of the year, we were working through a resolution of ongoing regulatory review of both of the decisions. And in august reached a comprehensive settlement in connection with the decisions around Crystal River. And that comprehensive settlement established recovery of not only Crystal River, the proposed leaving nuclear plant. The Crystal River 1 and 2 coal plants that are scheduled for retirement later this decade. And it also provided a framework for the construction and the acquisition of generating resources over the balance of the decade, 3000 megawatts of generation.
We will stay out of rates in Florida through 2018, but the generation approval that we’ve received in connection with this settlement of the opportunity to build generation would allow us to place that generating into rates without a general rate case. This is the settlement that will go to hearing in October of this year and we would expect an order in the fourth quarter. If I look at this settlement and the journey that we have been on in Florida, I think we have made extraordinary progress in reaching a settlement of important issues providing resolution not only for the company, but for the customers in Florida. And we have established a path forward for growth in this jurisdiction by allowing a provision and providing a provision in the settlement. It gives us an opportunity to add generation to the Florida jurisdiction.
Let me then move to the Midwest. And as I think about the Midwest, I am thinking about the Indiana jurisdiction and Edwardsport and also Ohio T&D and the gas business. And again stepping back to where we were at the beginning of the year, Edwardsport was still under construction. We had not yet completed and placed that plant as a service. We had achieved regulatory certainty of our recovery of Edwardsport, but we are awaiting the very important milestone to be in service of Edwardsport.
And so as I stand here today, we have placed the Edwardsport plant in service in June. And the team is continuing to work very actively on performance testing of that plant, moving through new product introduction testing with GE. The technology is working as it’s been designed and the operating team is gaining experience with the technology. And we will continue to work through the operation of that plant over the next 12 to 15 months as we see it improve and move in to its full generating capacity, so a very important milestone for Indiana. We have completed the plant. The plant is in service. And it is also in rates under the tracking mechanism in Indiana so that we have all of the in-service costs being recovered from customers in Indiana. In Ohio, more traditional rate cases, the T&D case was filed and approved. And the gas case also filed, settled on a number of items within the case, but the rest of the gas case went to hearing and we are waiting Commission approval in the state of Ohio.
So if I look at the full composition of what we have accomplished in the regulatory calendar over the last year. We have reached resolutions in the Carolinas on modernization investment. We have reached resolution in Florida on the Crystal River asset and the opportunity to build new generation. And in Ohio, we have reached resolution on the T&D case and a gas case and we have the Edwardsport plant in service, settlements in place, awaiting commission approval on just a couple of these pending matters. And so in total, I think it’s a sum of over $600 million of revenue that we have added as a result of this outcome and great clarity on the issues on each of these jurisdictions and also a reduction in risk as we have been able to resolve each of these regulatory proceedings.
And so as I move from the regulatory process to the operations of the business, let me just focus for a moment on merger integration. So running the business and running it well is always a high priority and the platform of the merger has given us an opportunity to focus on delivering merger savings and driving efficiencies out of the business. We have targeted 5% to 7% of overall O&M. We believe we will be within that range in 2014. And then in a rate a full run rate in 2015, but our work doesn’t stop with merger integration. The merger integration plans were developed in 2010 and 2011. So the operating teams and the corporate center teams are continuing to focus on ways that we can drive cost out of the business and drive efficiencies throughout our operation. Another item that we just point to in this area is our commitment to the customers in the Carolinas for fuel and joint dispatch savings. We have guaranteed a savings level of $687 million and have achieved about $120 million of that through the second quarter of 2013. We are on track to meet that commitment, and we will continue to deliver fuel and joint dispatch savings to our customers as we move forward.
So let me transition from the regulated business to the commercial business, and I will begin with Ohio. Obtaining strategic clarity on the Midwest generation is the high priority. As all of you know, we have been talking about this for a number of months. We filed for cost-based capacity in Ohio in August of 2012. And this is related to the pull assets that were formally dedicated to our load in Ohio. And we have been pursuing and moving through the regulatory process over the balance of the year. We now expect an order from Ohio in the fourth quarter and believe that our facts and circumstances in this case place us in a very good position. We are an FRR entity and PJM for these assets and have filed under the terms of the state’s cost-based capacity mechanism. We filed for request of $730 million and will be anxious to see the results of that filing from the Ohio Commission later this year. Clarity on that filing will be important for us to evaluate the strategic context of the Midwest generation as we move forward.
And then international, there has been a lot of discussion in the international business this year around hydrology, around foreign currency. We entered the year in a relatively dry period for Brazil. But I wanted to step back just for a moment and talk generally about the international business. It’s a very highly contracted business, 65% of it is hydrogenation. It’s a very well run business where we focus on operating excellence, focus on cash flow production and as we move forward our strategic focus will be to continue to drive excellence in these operations to find ways to optimize the cash flow that is generated and we will look at growth if it make sense and fits our return and risk profile and that will be growth in the form of generation, which is the nature of the business that we operate in the international market.
So, I would like to before I move to growth just pass for a moment and talk a little bit about 2013 so I talked about sale, I talked about diversity, I talked about flexibility and at the end of the day we need to deliver the results that we set forward and the expectations that we have set forward and how the business can perform. And in 2013, we are on target to deliver our 420 to 445 earnings per share. And I wanted to talk just for a moment about the relative distribution of this earnings because our challenge in 2013 has been that the first half of the year has been relatively weak compared to 2012. But we expect stronger relative position of the back half of the year as to pick it on the slide and that is driven as a result of the timing of the regulatory approval so I just spend time talking about.
So, you can see in the third quarter, we expect contribution from Duke Energy Progress rate cases as well as the Duke Ohio T&D rate case. We expect merger synergies of course and our increased wholesale revenue, but then as you look at the fourth quarter we will be able to add two of the Duke Energy Carolinas north and south cases. We are expecting a ruling on Ohio cost-based capacity. And then you begin to see the impact of nuclear cost outage levelization, which was a method that was approved. In the Duke Progress case, we anticipate approval in Duke Energy Carolinas, where we will be differing cost for 2013 and amortizing those costs over fueling cycles in the future to levelize the impact for both shareholders and customers. So the bottom line is that we are on track to achieve our 420 to 445. We expect a relatively stronger back half and we expect a stronger fourth quarter as a result of a greater influence from the regulatory outcomes.
So, let me then transition to the future. This is a slide depicting our 4% to 6% growth rate for 2015 that you are familiar with. And that growth as you kind of step back from what I have talked about today, it is largely driven in the regulated business by the regulatory outcomes that we put in place in 2013. Wholesale will be another key driver of growth in ‘14 and ‘15 where we have find contracts with wholesale customers that have a step in of increased number of megawatts sold to these customers and driving growth of $0.07 to $0.08 in 2014 and $0.07 to $0.08 in 2015. We will continue to invest in rate base. We are expecting modest loan growth. And of course we will be focused on our cost structure.
So as I look at 2014 and 2015 with the clarity that we have driven and also with the reduced regulatory uncertainty that we have a plan to drive growth over the next few years largely within our control, executing our business plan well, operating our assets well and delivering what we believe to be very low growth. And so the question that all of you raised and that we have had a number of questions about us what happens after 2015? And so just wanted to talk about that for a moment, and I think the flexibility and diversity that we have in generation gives us a picture of how we would think about driving growth in the future, because it comes down to where are we going to deploy capital and how can we prepare to drive growth as we move forward.
And so I have given just a little thumbnail on each of the jurisdictions and how we might think about it. So in addition to environmental spending that we are awaiting clarity on around coal ash and water, we also have an opportunity to invest in Indiana and T&D infrastructure and I highlight that because of the constructive regulatory or legislative outcome in Indiana called Senate Bill 560. It gives us an ability to set a T&D modernization plan and place that into rates on a tracker is with some outline that would require commission approval of the plan of course. And as long as it does not increase rates more than 2% you can go through a tracker mechanism in a very routine fashion. Indiana historically has been a very constructive jurisdiction that has embraced the use of trackers to deploy capital and drive growth into business, but also for the benefit of customers in Indiana. So we will be pursuing the development of the plan that makes sense to strengthen the T&D infrastructure in Indiana perhaps include smart grid and distribution automation program and we will be filing that over the next year or so to drive T&D growth in Indiana.
As we move to the Carolinas is the combination of things its generation, its T&D. We also continued to evaluate an investment in the V.C. Summer plant that is being constructed by SCANA. And then of course wholesale investment continues to be an opportunity in the Carolinas. For Florida, I talked about new generation and the opportunity to build generation coming out of the Florida settlement. We also believe we have wholesale opportunities in Florida as well as T&D. Retail sales growth is something that impacts all jurisdictions, we’ve been relatively modest in our assumption kind of a 0.5% to 1%. But we do expect to see some level of retail growth and all of jurisdictions as we move forward.
From a commercial standpoint we continue to look at growth opportunities in international as well as our renewables business and we will have strategic clarity on the Midwest generation fleet, hopefully by the end of this year and we will be able to evaluate the implications to that fleet as we go forward. So as I look at the scale and diversity of the Duke business, I believe we have opportunities to deploy capital in our jurisdictions based upon the needs of our customers in those jurisdiction, based upon the regulatory framework that exist in those jurisdictions and believe that we have an opportunity to drive growth with regulated investment over the period the back part of this decade.
So let me close with our financial objectives. They are simple, deliver expectations in ‘13, grow the business at a 4% to 6% rate, deliver a dividend with consistency in growth and maintain the strength of the balance sheet. And as I look at where we stand today with the clarity that we’ve been able to achieve with the issues that I’ve talked about, with the reduction in risk as a result of achieving regulatory certainty, with the platform that we put together with this merger that is unmatched in our industry and with the opportunities for growth that exist in our business, I believe that we are positioned to deliver these objectives and deliver them well and a period ahead and believe that with this platform as well we have the opportunity to achieve a very strong and premium valuation for our business as we move forward.
And I’m proud of Duke, what Duke has been able to accomplish. I am proud to be a part of Duke Energy. This team that has come together and driven these outcomes over the last year have demonstrated passion for our business, they’ve demonstrated passion for our customers, operational excellence, the jurisdictions that we operate in and I believe that team is capable of delivering into the future. So, I would like to pause at this point and answer any questions that you have and Dan I am sure you’re preparing to maybe kick that off.
Dan Ford - Barclays Capital
Yeah. Well, thanks very much. And for questions there are a couple of mics that will be going around the room.
Lynn, first of all congratulations and I think so you’ve done a great job in trying to get all the kinks out of the way in terms of rate case decisions. But one kink which is remaining is the Ohio capacity results what the commission does. Can we assume that whatever the decision comes out at the end of the year that you are able to maintain this 4% to 6% growth rate over that timeframe that you have right now?
So the question that Ashar raised is no matter what happens in Ohio, we will be able to obtain this growth rate or attain the growth rate that I’ve outlined. And that’s been a question that we’ve had over the last year Ashar. And we believe we can achieve and we will achieve a 4% to 6% growth rate without Ohio or with Ohio. And so as we have looked at planning our business and establishing business plans to put us in a position to move forward, we have looked at a variety of scenarios, and Ohio has been one of them. And so we look at all of the leverage we have in the business to position ourselves to go forward, but what I will say on Ohio is I believe that our case in Ohio is very strong and that our fundamentals that we are asking for here based upon the state’s cost-based capacity mechanism that our case is a very strong case. And we will be anxious to report the results of that Commission ruling later this year.
Dan Ford - Barclays Capital
And Lynn, can you talk a little bit about the capacity opportunities both in Florida maybe the timing of one will give clarity about the 3,000 megawatts and ownership of that? And then also what gating factors there are to watch for the V.C. Summer decision?
Sure. Let me talk about Florida just for a moment. The construct of this settlement gives us an opportunity to put generation into rates without a general rate case. And it comes in two tranches. The first tranche is about 1100 megawatts of primarily peaking generation. It can be an acquisition, it could be a purchase power agreement, it could be a self-build of the CT. And we will be completing the planning for that over the course of this year and to early next, Dan, and be in a position to announce how we are thinking about that tranches of generation. The second tranche of generation in about 1800 megawatts will be a combined cycle plant and in the State of Florida what we need to do is run an RFP. We will present a self build option in connection with that RFP. If we are successful in achieving winning the bid under the RFP, we will then file for a certificate of need and be in a position to begin constructing that plan if we are successful in 2014-2015. And so as we move through all of those elements of that process, we will be keeping everyone up-to-date on the RFP and the self-build option on our progress through the regulatory approval in Florida.
And then V.C. Summer, we have continued to – we have remained in discussions with Santee Cooper on that plant. And those discussions continue. We are looking at about 10% investment in V.C. Summer. And at this point do not have a timeline on when we might be able to resolve those negotiations, but of course, we will continue to update as progress is made.
Dan Ford - Barclays Capital
Lynn, the flat that’s up there currently suggests long-term earnings growth and then you go out through 2015 which is not really long-term nowadays. So I wonder what are you thinking about in terms of I recognize there are lot of balls beyond 2015, lot of things you just mentioned some of them, but where do you see your sales, because most companies have been giving every year give a five-year trajectory of some kind or another, where do you see, you are still in the 4% to 6%, are you going to be able to move that up at all?
We have been kind of a three-year growth trajectory. So our 4% to 6% for ‘15 was something that we announced in connection with our earnings guidance for ‘13. We will be updating guidance in 2014 to give you a longer term perspective, but one of the things I was trying to accomplish was the review of the jurisdictions in the investment opportunities is to indicate that we believe we have opportunities to invest around our system with an expectation that will continue to grow the company. And so we are targeting a 4% to 6% growth rate and we will give more specifics on the period after 2015 when we released guidance in February.
Dan Ford - Barclays Capital
Any other questions for Lynn?
Lynn, you mentioned in your remarks that some of the standards regarding the environmental might be out by the end of the year which could determine some environmental CapEx. Can you elaborate what range of that CapEx could be? Is it like $0.5 billion or what should we be thinking of in terms of magnitude roughly?
We have disclosed $5 billion to $6 billion over the decade Ashar on environmental. So in the three-year period of ‘13 to ‘15 we have about $1.5 billion. It’s primarily air in that period. And then you will move into water and you will move into ash later in the decade. So that gives you kind of a range of what we are thinking about.
Dan Ford - Barclays Capital
Great. Alright, if there are no other questions, then let me thank Lynn for presentation. We do have a breakout session for Q&A in Liberty 5 where we will take her now. Thank you very much.
Lynn Good - Chief Executive Officer
Well, Dan, thank you so much.
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