Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Bob Drennan – Vice President-Investor Relations

Lynn J. Good – President and Chief Executive Officer

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

Analysts

Shar Pourreza – Citigroup Global Markets Inc.

Greg Gordon – International Strategy & Investment Group LLC

Jonathan P. Arnold – Deutsche Bank Securities, Inc.

Daniel Eggers – Credit Suisse

Stephen Byrd – Morgan Stanley

Hugh Wynne – Sanford C. Bernstein & Co., LLC

Julien Dumoulin-Smith – UBS Securities LLC

Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Michael J. Lapides – Goldman Sachs & Co.

Kit Konolige – BGC Partners LP

Ali Agha – SunTrust Robinson Humphrey

Duke Energy Corporation (DUK) Q3 2013 Earnings Conference Call November 6, 2013 10:00 AM ET

Operator

Good day and welcome to the Duke Energy Third 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.

Bob Drennan

Thank you, Mary. Good morning, everyone, and welcome to Duke Energy’s third quarter 2013 earnings review and business update. Leading our call, this morning is Lynn Good, President and CEO; along with Steve Young, Executive Vice President and Chief Financial Officer.

Today’s discussion will include forward-looking information and the use of non-GAAP financial measures. Slide 2 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 non-GAAP financial measures can be found on our website at duke-energy.com and in today’s materials. Please note that the appendix to today’s presentation includes supplemental information and additional disclosures to help you analyze the company’s performance.

Today, Lynn will begin with the highlights of our third quarter and Steve will provide a more detailed financial update. Then Lynn will review our near-term priorities and discuss our future growth opportunities. We will allow plenty of time for your questions.

As many of you know, I am retiring from Duke Energy at the end of this year. So this is my final earnings call. Over 40 years ago, I began my professional career with Duke Power and have experienced a rare opportunity to come full circle in my career ending with Duke Energy. I have over 35 years of combined service to the company and its predecessors, including 25 years devoted to Investor Relations. During that time, I was fortunate to meet a lot of great people in the investment community. I especially appreciate all the wisdom, the guidance and feedback, many of you have shared with me over the years. The goal was always to move the Investor Relations function forward.

I will truly miss the comradery to develop within Investor Relations teams, but I’ll leave knowing that our Duke IR team is in the very strong and capable high ends of Bill Kerns. Thanks for the many bond memories and I look forward to seeing many of you EEI.

Okay. So, Lynn, let’s talk about the quarter.

Lynn J. Good

Good morning, everyone, and thanks, Bob. Before I get into my remarks, I also want to recognize, Bob. I had the pleasure of working with him over the last year and a half. And as a company, we’ve benefited not only from his industry experience and leadership in IR, but also his leadership in the company. So Bob, thank you for a great contribution to the company, and we all wish you and live the very best in the future.

Let me also welcome to the call, Steven Young. As you know, Steve assumed his role as Chief Financial Officer in August. And I know a number of you have had an opportunity to meet with Steve. He brings a deep understanding of our business and is committed to the company and to achieving our financial objectives.

So before turning the call over to Steve, let me begin with a brief highlight of our accomplishments for the quarter. We achieved adjusted diluted earnings per share of $1.46, compared with $1.47 for the same quarter a year ago. Our third quarter results were consistent with our plan for the year. Our results were impacted by unusually mild summer weather, $0.11 below the third quarter of 2012.

At the same time, we benefited from updated customer rates and load growth. As we have previously highlighted, we expected our 2013 earnings to be shaped more toward the back end of the year due to the timing of regulatory outcomes. In late September, we received approval of our two rate cases for Duke Energy Carolinas, including approval for nuclear levelization. As a result, we expect to recognize significant benefits from these regulatory proceedings in the fourth quarter.

As a result of the resolution on a number of important regulatory matters, we have raised the lower end of our earnings guidance range by $0.05 to $4.25. As a result, our expected range for 2013 is now $4.25 to $4.45 per share. This range considers various outcomes in our Ohio cost base capacity request, which is still pending with the Ohio Commission. Based upon the fourth quarter drivers that Steve will discuss shortly, we are confident in our ability to deliver earnings in this range for 2013.

Additionally, during the quarter, we announced the definitive agreement to sell our remaining 50% interest in DukeNet for approximately $210 million in cash. This regional fiber optic network company is a non-core business. We expect the transaction to close in the first quarter of 2014.

Next, let me highlight a few operational and regulatory items for the quarter. From an operational perspective, we had strong performance across our generation fleets. Nuclear fleet improvements remain a high priority. [Indiscernible] and his team has made great strides in the fleets’ performance and let me give you a few highlights. The combined capacity factor for our nuclear plants in the third quarter was 97%.

During the critical summer months of June through August, the fleet capacity factor was 99.7%. We remain on track for 2013 to be the 15th consecutive year with a nuclear fleet capacity factor above 90%. Our Robinson station completed a record continuous run of 531 days before it began its refueling outage in September. The Oconee Station set a record by continuously operating all three units for 315 days before the start of a scheduled outage in October.

Moving to Indiana, we placed the Edwardsport IGCC plant into service in early June. Since that time, we are focused on optimizing plant performance, including ongoing performance testing, progressing through GE's new product introduction testing protocol and resolving the remaining punch list items from construction.

All major technology systems have been validated and are working as designed. In fact, the amount of generation fueled by syngas has increased over the past several months. Since the plant is in service state, we have operated each of the two gasifiers more than 1,500 hours. We are pleased with our overall progress and we'll continue to focus on increasing the plant’s availability and reliability over the next 12 months.

Moving to regulatory matters, 2013 is an important year with a number of significant regulatory proceedings. In September, Duke Energy Carolinas received approval of constructive rate case agreements in both North Carolina and South Carolina. The new rates went into effect in late September and will be key drivers for fourth quarter 2013 and full year 2014 results.

In late October, the North Carolina Utilities Commission issued an order, which upheld its 2012 approval of the Duke Energy Carolinas rate settlement. The rate increase have been appealed by the Attorney General to the State Supreme Court, which then directed the Commission to review the evidence regarding the appropriate rate of return, although the attorney general has announced his intention to appeal this most recent order from the commission. We believe this affirmation satisfies all of the requirements in this case set up by the Supreme Court.

Last month Duke Energy Florida received regulatory approval of the comprehensive settlement agreement reached in August. The approved settlement moderates rate impacts to customers, provide clarity on cost recovery and creates a framework for meeting future capacity needs. In Ohio, we continue to wait for an order on the cost base capacity filing and resolution of the manufactured gas plant recovery request from our gas distribution case. We anticipate both matters will be resolved by the end of the year. I’m very pleased with all we’ve accomplished so far in 2013, our operational performance is strong and improving, we have received constructive outcomes in our regulatory proceedings resulting in approximately $600 million of total annualized revenue increases.

Let me now turn the call over to Steve who will provide more details on our quarterly financial performance and our short-term and long-term financial objective. After that I will speak about our near term priorities and how we are positioning the company for the future.

Steven K. Young

Thanks Lynn. Since taking over as CFO in early August, I have visited with many of you and described my background. During my 33 years with the company I’ve had the pleasure of getting to know many people at Duke Energy and the fine work that they do. I’ve held various roles in the finance group and worked closely with State and Federal Regulators. I look forward to continuing the company’s relationship with the investment community.

Today I will begin with an overview Duke Energy’s third quarter earnings results for each of its business segments and will also update you on retail customer volume trends and the economic conditions in our regulated jurisdictions. Key earnings drivers to consider for the fourth quarter of 2013 and full year of 2014, the status of our merger integration and cost control efforts and our overall financial objectives.

As Lynn highlighted, today we announce third quarter adjusted diluted earnings per share of a $46 compared to prior year quarterly results of a $47. On Slide 5, you will see a summary of the primary drivers of quarterly adjusted earnings for each of our segments. Note that beginning this quarter we are – our recording progress energies results within each of the respected drivers on this slide. The progress energy contribution will no longer be presented as a single line item.

Let me start with the results U.S. Franchised Electric and Gas our largest segment, which recognized an increase in quarterly earnings of $0.02 per share. You will see that the implementation of updated customer rates added $0.16 hoping to offset the impact of unfavorable weather. Additionally, a 1.7% increase in weather normalized customer volumes and growth in our wholesale business added $0.07. I will provide more details on our customer volume and economic trends in a moment. Weather this quarter was $0.09 below normal, a quarter-over-quarter negative variance of $0.11, cooling degree days in the Carolinas were 18% below normal and the mid-West was 11% below normal. Scarlet this was the mildest third quarter since 2004.

Other negative impacts to USFE&G’s quarterly results included a $0.04 per share reduction of cost of removal amortization in Florida. During the quarter, we recognized $22 million of cost of removal; we planned to utilize the remaining balance of $19 million in the fourth quarter. Lower AFUDC equity due to the completion of several large projects across our service territories also negatively impacted the quarter. However, keep in mind that these completed projects were incorporated into the rate increases described earlier.

Next, international energy recognized an increase of $0.02 per share for the quarter. The segment was positively impacted by higher pricing in Brazil as well as results from the Chilean acquisition in December 2012. Hydro conditions in Brazil continue to stabilize during the third quarter recovering from the delay in the rainy season experienced earlier in the year.

Additionally, our run-of-river hydro facilities in Chile benefited from significant rainfall; unfavorable foreign currency exchange rates driven by a weaker Brazilian real partially offset those results. As an update operations at National Methanol returned to normal this quarter after the extended outage in the second quarter. As such, results of National Methanol were fairly consistent with the prior year quarter.

Next, let’s move to Commercial Power where results were $0.02 lower than the prior year quarter, the non-regulated Midwest generation fleet experienced mixed results due to changes in commodity prices. The Midwest coal fleet recognized higher margins due to lower costs while generation volumes for the Midwest gas fleet were 15% due to a tighter spread and an unplanned outage. Our renewables business recognized the decrease of $0.02 per share compared with the prior year. This was primarily due to a prior year joint venture development fee that did not recur in the current quarter.

Finally, the full quarter impact of the prior year issuance of shares in connection with the merger negatively impacted third quarter earnings by $0.02. our adjusted effective tax rate for the quarter was approximately 32% consistent with the prior year quarter. We remain on track for full year 2013 adjusted effective tax rate of around 34% at the lower end of our previously announced range of 34% to 35%.

Turning to Slide 6, let’s talk about what we are experiencing with customer volume trends. For 2013 we projected retail sales growth at about 1.5% of 1% over the prior year and through the third quarter this is what we have experienced. In the third quarter however, total normalized customer load was 1.7% higher supported by growth in all customer classes. We experienced strong growth in all of our jurisdictions with the exception of Florida, which continues to face unfavorable trends and household income resulting in soft retail and the entertainment spending.

Let me briefly discuss the primary drivers in each of our customer classes for the quarter. Residential demand was 1.1% higher. The average number of customers increased 0.8% from the prior year quarter. Average usage per residential customer is essentially flat for the quarter. Florida’s usage rates remain particularly weak, due to the high number of low usage customers, high vacancy rates and weak household income.

Commercial demand was 1.6% higher on a weather-normalized basis driven by lower unemployment and improved office and retail vacancy rates. Industrial demand was around 3% higher. This is a level we have not experienced since 2010. Key drivers of this increase include strong performance in the automotive, paper and construction-related industries.

One quarter of strong result however, does not cause us to change our long-term views. It is more meaningful to look at longer term trends. Based on the rolling 12 months, we have experienced average annual load growth for all customer classes of around 0.5% consistent with our forecast.

The U.S. economic recovery remains soft relative to historical standards and expectations. U.S. household income has improved, although consumer confidence remains low. Specific to our service territories, we continue to believe the southeast is positioned well for future economic development activity supported by affordable energy and housing as well as sufficient sources of labor. The Midwest has been supported by strengthened manufacturing, while Florida is poised for housing market recovery. While we are pleased with the recent trends, we continue to remain cautiously optimistic on the overall economic recovery. We continue to track overall trends and will provide any updates to our load forecasts in February.

As we stated on the second quarter call, we expected 2013 earnings to be more back-end loaded than usual. This is due to the timing of regulatory approvals, including the approval of our request to levelize nuclear outage costs. We began to see the benefits of these regulatory outcomes in the third quarter, but these results were masked by unfavorable weather. Based upon our results to-date and the finalization of significant regulatory activity, we are confident in our ability to deliver 2013 adjusted earnings within the range of $4.25 to $4.45 per share. In the fourth quarter, we are well positioned to deliver adjusted diluted earnings per share of between $0.90 and $1.10. This is significantly higher than the $0.70 we recognized in the fourth quarter of 2012.

Let me discuss a few of the primary drivers expected to impact our fourth quarter results as outlined on Slide 7. First of all, Duke Energy Carolinas will recognize a full quarter of the customer rate increases approved in late September. These increases along with those implemented early in 2013 will be significant drivers of our fourth quarter results compared to last year. Additionally, our Carolinas rate settlements included the approval of nuclear outage cost levelization. As a result, the cost related to our four power refueling outages will be deferred and amortized over the refueling cycle rather than expensed when the outage occurs. This will benefit our fourth quarter results.

We expect to see retail customer load growth as well as increased contributions from our regulated wholesale business. Further we expect continued merger synergies and other cost control efforts to contribute to the fourth quarter results. I will provide further information on merger cost savings in a moment. We also project normal weather for the quarter. As you may recall, our fourth quarter 2012 results included below normal weather of around $0.04.

In all these drivers, most of which are known, give us confidence in our ability to achieve our updated 2013 adjusted diluted earnings per share guidance range. This range considers various outcomes in our Ohio cost base capacity request, which is still pending with the Ohio Commission. As Lynn mentioned in her opening remarks, we anticipate a decision on this matter before the end of the year.

Now let's turn our attention to merger integration efforts. We have two broad categories of merger savings opportunities. First, fuel and joint dispatch savings, which immediately benefit our Carolinas’ customers; and second, the more traditional O&M synergies resulting from the elimination of duplicative functions, processes and systems. We continue to make progress on our commitment to deliver fuel and joint dispatch savings to our customers in the Carolinas. To-date, we are ahead of our target and have generated $145 million of cumulative fuel on joint dispatch savings since the inception of the merger. We have contractually locked in or generated approximately 50% of the guaranteed fuel and joint dispatch savings. As a result, we are on track to deliver the guaranteed savings of $687 million. Our merger integration savings and continuous improvement initiatives are also on track. A significant amount of our savings to-date have been related to corporate centric cost. We expect those cost to decrease by approximately 20% on a pro forma combined basis from 2011 to 2014.

Let me provide some highlights from this effort. First, we have completed the organizational staffing process and we'll release the lapse of approximately employees to our voluntary severance program by early 2014. Second, efforts to consolidate IT systems and operational processes are on track with essentially all financial and human resources systems expected in place in January 2014.

Finally, our supply chain function is also achieving savings through the consolidation and renegotiation of procurement contracts. In addition to savings from the corporate functions, our efforts to consolidate operational departments such as nuclear, fossil generation, transmission and distribution are well underway and are on track to be completed in 2014 and 2015 providing further benefits.

As a result of our efforts to-date between 2011 and 2014, we project our total non-fuel O&M costs will remain flat. The cost saving efforts I have described will help to reduce the impact of modest inflationary pressures as well as cost increases resulting from nuclear and our new generation investments. We expect to exceed the high-end of our original estimate of 5% to 7% in non-fuel O&M savings, creating total cost savings of approximately $550 million or 9% of our pro forma consolidated O&M expense of $6 billion by 2014.

We previously targeted a longer-term annual O&M growth rate of 1% to 2%, net of merger savings and other cost control efforts. Based upon our success to-date as well as continued aggressive focus on cost, we believe we could exceed these expectations. In addition to the cost control efforts which I just described let me turn to Slide 9 and provide you with our preliminary thoughts on our other 2014 earnings drivers. We will provide our 2014 earnings guidance in February.

On the right hand side of this slide, you will see the key year-over-year segment earnings drivers for 2014. At USFE&G earnings will get a full year benefit from this year's approved rate settlements. We also expect an uplift from a return to normal weather along with modest retail load growth of one-half of 1%.We expect continued growth in our regulated wholesale business due primarily to new long-term contracted sales. Headwinds will include the elimination of cost of renewable amortization in Florida and lower nuclear outage costs levelization benefits in the Carolinas.

In commercial power, we anticipate improved results from higher PJM capacity revenues. Additionally, the outcome of the Ohio cost base capacity request may also impact next year's segment results. Finally, the weakness experienced in the first half of 2013 at international was not expected to recur in 2014. The unfavorable rainfall conditions experienced earlier this year in Brazil have stabilized and operations have returned to normal. At the same time, our international earnings will continue to be sensitive to changes in foreign exchange and commodity prices at National Methanol.

Slide 10 reaffirms our financial objectives. Duke Energy is well positioned due to the constructive rate case outcomes we achieved during the year and the success of our efforts to resolve uncertainty during the past 16 months. We continue to target 4% to 6% adjusted earnings per share growth through 2015. This is based on the midpoint of our original 2013 earnings per share guidance range. We will update our earnings growth objectives through 2016 during our year-end call in February.

Our balance sheet and credit metrics remain strong. Moody's recently recognized our efforts to reduce business risks by upgrading the ratings of our utilities in the Carolinas and Indiana as well as the ratings of the Duke Energy holding company. Our current business plans do not include any new equity issuances through the end of 2015. We are focused on optimizing the use of cash previously generated by our international businesses.

As of September 30, we had $1.8 billion of cash offshore, of which, $1.2 billion was held outside our operating companies and is generally available for reinvestment in the international business or return to the United States. In December of this year, we expect to bring back approximately $700 million of cash using a one-time tax efficient financing structure. In the near term, this cash will be used to refund holding company level debt that matures in the first quarter of 2014.

These funds will provide us balance sheet flexibility as we evaluate longer term growth investment opportunities. The dividend remains central to our investor value proposition. Over the past several years, we have been growing the dividend annually at about 2%, which is a rate slower than our overall earnings growth. We continue to target a payout ratio of 65% to 70% based upon adjusted diluted earnings per share. Ultimately, the dividend is at the discretion of the Board. We believe we have flexibility to grow the dividend at a pace more consistent with earnings growth once we are within this targeted payout ratio.

In closing, we have a platform unmatched in the industry due to our scale and highly regulated business mix. We remain committed to our financial objectives and we use our strengths to deliver significant benefits to our customers and investors.

Now, I will turn the call back over to Lynn.

Lynn J. Good

Thank you, Steve. Let me close with the discussion of our strategy priorities. As a company, we've accomplished a great deal since we closed the merger with Progress in July of last year. We created the largest utility in the industry with a diverse set of customers, jurisdictions and generation sources. We resolved the near term priorities we established after the merger as outlined on Slide 11.

Our regulatory proceedings are essentially complete with five rate cases approved and updated customer rates implemented. Clarity on the cost based capacity filing in Ohio will help inform our long-term strategic plans for the Midwest generation fleet. As Steve detailed, we have made significant progress in achieving the savings we anticipated from the merger, both fuel and joint dispatch, as well as non-fuel O&M savings. We also remain focused on ensuring consistently exceptional performance from our valuable nuclear fleet in the Carolinas.

By resolving these issues, we have positioned Duke Energy as a low risk, highly regulated utility, operating in constructive regulatory environments. We have the financial strength and flexibility to consistently deliver on our commitments and grow the business.

Let me spend a few minutes discussing our future growth opportunities as outlined on Slide 12. In Florida, the comprehensive settlement approved by the Florida Commission in October allows us to evaluate new generation investments to replace lost capacity due to plant retirements such as Crystal River 3 and a potential retirement of the Crystal River 1 and 2 coal units. In early October, we issued an RFP for approximately 1,640 megawatts of combined cycle generation capacity needs. We expect to finalize the RFP in late summer next year. As the company's self-build option is selected as the most cost effective alternative, we will file for a need certificate with the Commission. Construction could begin in early 2015 with an in-service date of 2018.

In the Carolinas, last month, we filed an application for a need certificate with the Public Service Commission of South Carolina seeking approval to construct and operate a 750 megawatt combined cycle plant at the existing Lee Steam station site in South Carolina. NCEMC will be a minority owner of 100 megawatts of the project if constructed. If approved, this plant could come online in the 2017 timeframe. Additionally, we have the potential to invest in the V.C. Summer nuclear plant being built in South Carolina. We continue to evaluate an ownership interest in this facility of up to 10%. We also expect growth from new wholesale contracts in the Carolinas.

In Indiana, Senate Bill 560 provides the opportunity to move forward with transmission and distribution modernization in the state. We are evaluating, filing a seven-year infrastructure plan with the Commission outlining proposed investments. We also anticipate making several billion dollars of environmental compliance investments principally in the Carolinas and Indiana. The ultimate level of such investments will depend on the finalization of rules, which are currently pending with EPA. Further, we will evaluate targeted growth opportunities in our renewables and international businesses that complement our 4% to 6% growth objectives while meeting our risk adjusted return expectations.

For Duke Energy as a whole, our scale and diversity position us to deploy capital based on the needs of our customers in each jurisdiction. In total, these investments will help drive growth in the back half of the decade, while maintaining our low risk value proposition and highly regulated business mix. In closing, as I step back and view our company 16 months after the merger, I see a company that has successfully addressed post-merger uncertainties, achieved significant regulatory clarity and lower business risk. We will excel in our mission to provide affordable and reliable energy to our customers, while at the same time, continuing our efforts to drive efficiencies and cost effectively deploying capital investments. We are well positioned to achieve our short-term and long-term financial objectives and continue to deliver value for our customers, communities and investors. In February, we will provide updated financial plans for 2014 and the future.

With that, let's open the phone lines for your questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) And we’ll take our first question from Shar Pourreza with Citigroup.

Shar Pourreza – Citigroup Global Markets Inc.

Good morning, everyone.

Lynn J. Good

Good morning, Shar.

Steven K. Young

Good morning.

Shar Pourreza – Citigroup Global Markets Inc.

Bob, first congrats on the retirement. You’ve been a good friend and a great resource for us for several years, so congratulations.

Bob Drennan

Thank you.

Shar Pourreza – Citigroup Global Markets Inc.

Let me ask you a question. With the approximate $700 million coming back to the U.S., any guidance on where you think you'll redeploy it? And I guess, with the rest of the cash from Latin America, curious if you see any further value creating opportunities in the U.S., like maybe solar that could potentially offset the tax leakage?

Lynn J. Good

In the short-term, we will bring the $700 million back and use it to delay additional financing at the holding company, which effectively creates balance sheet flexibility for us to identify growth opportunities and invest in longer-term growth opportunities. Solar can certainly be a part of that as we look at renewables in our jurisdictions, and I also, as I went through Slide 12, gave you some perspective of other capital investment opportunities that exist in our jurisdictions.

Shar Pourreza – Citigroup Global Markets Inc.

Okay. Terrific. And then just one question on the Ohio capacity case, given what's left with the procedural schedule on PUCO at least for November; are we thinking more we'll get an order in the cost-based approach sometime in December or we – is there still the potential for a November order?

Lynn J. Good

At this point, I don't have any specifics on it, Shar. We believe, expect or anticipate it by the end of the year. With the holiday schedule, I think, we'll just have to evaluate it as the dockets and schedules are produced, whether it's November or December.

Shar Pourreza – Citigroup Global Markets Inc.

Okay. Thanks very much. Congrats.

Lynn J. Good

Thank you.

Operator

And we’ll take our next question from Greg Gordon with ISI Group.

Lynn J. Good

Good morning, Greg.

Greg Gordon – International Strategy & Investment Group LLC

You'll be missed. My question is on the commentary you just made with regard to your O&M growth or aspirations/your ability to control O&M growth. As we look into 2014, I guess, you've indicated you feel like it's possible that you'll outperform 1% to 2% O&M growth baseline that you've targeted. Can you – you pointed to some things that are driving that, is pension and the increase in expected discount rates a big factor in that, and are there other things on the list that you necessarily didn't call out earlier?

Lynn J. Good

Greg, I think it's a combination of a number of things. What we try to emphasize with the merger synergies is we have effectively exceeded the 5% to 7% targeted savings and expect to deliver about $550 million of savings in 2014. That puts us in a position to maintain O&M flat from 2011 to 2014. So it's a combination of merger integration. Certainly, we believe that pension benefits will trend down as we are looking at discount rates and other factors, but we'll need to finalize the specifics on the pension when we set the discount rate at the end of the year.

Steven K. Young

And I would say that the pension expense is not the bigger driver of the $550 million by any means. It is primarily O&M savings within our corporate and functional areas.

Greg Gordon – International Strategy & Investment Group LLC

Okay. Thank you, guys.

Lynn J. Good

Thanks, Greg.

Operator

And we’ll take our next question from Jonathan Arnold with Deutsche Bank.

Jonathan P. Arnold – Deutsche Bank Securities, Inc.

Yes. Good morning.

Lynn J. Good

Good morning.

Jonathan P. Arnold – Deutsche Bank Securities, Inc.

I’d like to – Bob, personally, good wishes as well. Thank you. On the – just on the last question around, you were saying flat into 2014 for O&M, but everything else in the prior guidance slides was talking about into 2015. Do you feel that you're just not quite ready to commit flat into 2015 or should we be thinking about back to that 1% to 2% growth trajectory on the extra year?

Lynn J. Good

Jonathan, we haven't given specific guidance into 2015. What we did indicate in our remarks here today is based on where we're positioned and the aggressive cost control measures we have in place. We could exceed the 1% to 2% meaning a lesser growth in CAGR and O&M, but we haven’t given any specific guidance on that. We’ll continue to finalize our plans and you should know we’re aggressively working on cost to continue to drive cost out of the business and all of those factors are considered in our growth expectation of 4% to 6% through 2015.

Jonathan Arnold – Deutsche Bank

Okay, thank you. And I just also notice that you don’t – you sort of take down your I guess long-term sales number to 1.5% to 1% now versus it was 1% before. So could you just provide in context of what you said about 2013 and one quarter not being a trend are you looking at 2013 really as an anomaly at this point or is that something else that’s kind of drive that additional caution further out?

Lynn J. Good

Jonathan, I think we’re right on track with where we expected to be. Our guidance for the full year of 2013 was 0.5% and that’s where we see the growth. The third quarter was a bit stronger than what we anticipated coming in at 1.7 but there are some imprecision in those volume numbers particular in a soft weather quarter. Long-term we’ve been planning for 0.5% to 1% and we are actually challenging our team to think about an environment of that kind of load growth even trending to flat overtime potentially as we think about sizing our spending, O&M spending.

Jonathan Arnold – Deutsche Bank

Great. Got it. Because I’m right on one other topic. Should we view the 700 million repatriation as what you consider to be the sort of the current excess or is this an initial cost of something that could be more substantial and then may be just could you clarify the structure you are using and what the tax implications are?

Lynn J. Good

Jonathan, this is a one time opportunity to take advantage of a tax structure to bring home cash without a substantial tax liability, it’s effectively strips basis out of the structure of the international structure. And so that 700 will come home, you could consider that to be a one-time opportunity for us to take advantage of that tax structure. On an ongoing basis we continue to evaluate the use of international cash. We have not made a final decision to repatriate trade on an ongoing basis but that represents an opportunity for us in the future.

Jonathan Arnold – Deutsche Bank

Okay. Great. Thank you, Lynn.

Lynn J. Good

Thank you.

Operator

And we will our next question from Dan Eggers with Credit Suisse.

Daniel Eggers – Credit Suisse

Hey good morning. First of all Bob congratulations we’ll see you next week so we can do it more personally and formally. But I guess just to the quarter or to the outlook. Can you talk a little bit more what you guys see is the big CapEx buckets maybe a little more detail beyond kind of the near-term plan if you think about infrastructure spending in Indiana if you think about the next wave of environmental CapEx what kind of rate base and growth you still see out there?

Bob Drennan

Looking at our CapEx over the next several years we see that we’re in the roughly $6 billion range slightly down from the combined levels we’ve seen in the past. We have had a lot of major projects complete recently, but going forward we’ve got a lot of maintenance CapEx in those numbers and there is nuclear infrastructure. Additionally when you get out into 2015, 2016 or 2017 you’ll start to see the next cycle of build in the CapEx with potentially Florida self-build combined cycle and self-build in the Carolinas as well. but that's kind of the broad picture of our CapEx.

Dan Eggers – Credit Suisse

I think its you went southern on the earnings call, last week they talked about the idea that towards the end of the decade there should be reacceleration in environmental CapEx for their coal fleet. Where do you guys see that affecting your generation coal ash and water coming?

Steven K. Young

We are projecting over the next 10 year period $5 billion to $6 billion of environmental spend. In the near-term, over the next, through 2015 we will spending over $1 billion primarily on air and primarily in Indiana and in the Carolinas. As you move beyond that towards the back-end of the 10 year period you will start to pick up some of the water and ash expenditures. It's difficult to predict exactly what level of CapEx will be given that the rules are not finalized at this particular point in time.

Lynn J. Good

It's that range of $5 billion to $6 billion Dan is what we are estimating based on a range of scenarios that could impact could result from those rules. So that's a good rule of thumb for you to think about.

Dan Eggers – Credit Suisse

Okay. And I guess just on there has been some good success with the wholesale contracts where do you guys seen as far as maybe picking up some more of that kind of business and is that going to have any barrier on how you guys lay out the 2015, 2016 new build decisions for incremental generation capacity.

Lynn J. Good

I think wholesale opportunities can exist from time to time Dan, they are opportunistic generally and we'll provide more specifics if we see clarity around those as we move forward.

Dan Eggers – Credit Suisse

Got it. Thank you guys.

Lynn J. Good

Thanks so much.

Operator

And we’ll take our next question from Stephen Byrd with Morgan Stanley

Stephen Byrd – Morgan Stanley

Good morning.

Lynn J. Good

Good morning.

Steven K. Young

Good morning

Stephen Byrd – Morgan Stanley

I just wanted to follow-up on the cash that's outside the U.S. As you look at read a point out actually outside of the U.S., can you just speak to the degree of opportunity you see there or do you see fairly limited opportunities there in the overall objective remains to try to continue to look for ways to bring as much of that cash back to U.S. as you can.

Lynn J. Good

Steve I think it's a balance, we have continue to look for generation development opportunities and have made a number of investments over the last three to four years consistent with generation in countries that we are consisted with our risk profile. So you may recall in 2012 made investments in Chile. So we do continue to look for opportunities to grow the business consistent with a 4% to 6% growth rate, but that business also produces a lot of cash and finding ways to optimally use the cash is a key objective.

Stephen Byrd – Morgan Stanley

Okay. So, it does sounds like perhaps on an overall basis, the cash flow is exceeding the opportunities sort of systematically as you look out.

Steven K. Young

Opportunities are a bit lumpy so it's hard to track it, to annual cash flows that grows.

Stephen Byrd – Morgan Stanley

Okay, understood, understood. Shifting gears over as you assess new nuclear options I know that's something you have been looking at any further updates as you think about new nuclear?

Lynn J. Good

Steve, we continue to look at the VC Summer plant which is under construction in South Carolina. We believe in regional nuclear, we certainly have a very supportive regulatory environment in South Carolina, but we have not made a final decision to move forward we continue to evaluate the opportunity and we'll provide update as our decision making progresses.

Stephen Byrd – Morgan Stanley

Okay, understood. So there is no specific timeline we should be thinking about for that?

Lynn J. Good

Not at this point.

Stephen Byrd – Morgan Stanley

Okay, thank you very much.

Lynn J. Good

Thank you.

Operator

And we’ll take our next question from Hugh Wynne with Sanford Bernstein.

Hugh Wynne – Sanford C. Bernstein & Co., LLC

Good morning, thank you.

Lynn J. Good

Good morning.

Steven K. Young

Good morning.

Hugh Wynne – Sanford C. Bernstein & Co., LLC

You mentioned that you were going to bring back something on the order of 700 million in cash from your overseas operation to pay a maturing – debt maturity at the holding company, what are your plans for holding company debt over sort of a three year horizon, will that be reduced further in those years or do you think that we are basically in a steady state?

Lynn J. Good

Hugh we are not trying to deliver the company our credit ratings and financial profile are very strong and well positioned within our ratings category. We just have this opportunity to provide some flexibility to the balance sheet by taking advantage of this tax structure and then overtime as growth investments materialize we’ll reinvest in the holding company becomes an opportunity to fund those investments. At this point, we do not see a need for equity through 2015.

Steven K. Young

And the use of this $700 million to take care of these holdco maturities we’ll give some uplift here in terms of displacing interest.

Hugh Wynne – Sanford C. Bernstein & Co., LLC

One quick follow-on question. You had mentioned that you’re expecting longer term sales growth of 0.5% to 1% per year. Can you break that down roughly into what your longer term expectations are for customer growth and usage per customer?

Lynn J. Good

You know Hugh I don’t have underlying specifics on that. What I would say is in 2013 our customer count has grown almost 1% a bit stronger in the Southeast, but actually pretty strong in the Midwest as well. So, I think with housing markets improving with continued traction with the U.S. economy we believe that the Southeast and Florida in particular are well positioned for customer growth. But I don’t have any further break down for you on that guidance.

Hugh Wynne – Sanford C. Bernstein & Co., LLC

Is there a potential for meaningful volume sales growth on the wholesale side. You mentioned that as a potential driver of growth in the Carolina and Florida?

Lynn J. Good

I think it’s something that it’s opportunistic Hugh. So, we were able to sign up and extend the contracts back in 2010, 2012, we will continue to evaluate those opportunities but don’t have anything specific to share with you at this point.

Hugh Wynne – Sanford C. Bernstein & Co., LLC

Great, all right. Thank you very much.

Lynn J. Good

Thank you.

Operator

And we’ll take our next question from Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith – UBS Securities LLC

Hi, good morning.

Lynn J. Good

Good morning.

Julien Dumoulin-Smith – UBS Securities LLC

So first perhaps following up a little bit on the last question. With regards to the summer site, is it more around the need and projected demand that holds you back from pulling the trigger or is it more around structuring a transaction and concerns around I suppose site specific issue. If you could just give us a sense and maybe going back to it with regards to Carolinas, do you have any sense initially as to what their reaction would be and the structure would be under which you would acquire any nuclear generation?

Lynn J. Good

So Julien, if you look at our integrated resource plans for both Duke Energy Carolinas and Duke Energy Progress, we do show a need that could be filled by nuclear in the back part of the decade. And I’m not going to comment specifically on negotiations it’s an important asset for the region. We’re continuing to evaluate it, but have not reached a point of terms that we’re ready to move forward at this point.

As you know, the asset is strongly supported by South Carolina, if we were to acquire up to 10% somewhere around 70% of that investment would be dedicated to North Carolina. so it’ll be important to receive appropriate regulatory recovery in North Carolina as well.

Julien Dumoulin-Smith – UBS Securities LLC

Excellent. And then going back to Ohio quickly I mean if you could just give us an update on your thoughts around timing for potential revaluation of that business, specifically the generation side of that business. And secondly, what are the switching trends you’ve seen particularly a very late if you will?

Lynn J. Good

We are at this point waiting for the Ohio Commission order, Julien and are anticipating it by the end of the year. we don’t have any specifics on the exact timeframe between now and then. We are agnostic as to switching, because we are fully decoupled. The generation is fully merchant, all of the load it serves under auction for Duke Energy Ohio. So the switching is not relevant to us any longer.

Julien Dumoulin-Smith – UBS Securities LLC

Fair enough. And then lastly just with regards to Indiana, if you would, I know you provided some good detail on Edwardsport. But just from a regulatory perspective all those okay on that front, the regulators are kind of seeing this as appropriate just the gradual ramp up.

Lynn J. Good

We’re certainly keeping the regulator informed, Julien for the progress at Edwardsport. You may recall that the recovery of Edwardsport cost is in accordance with a tracker, under the terms of a tracker that we file twice a year, giving us an opportunity to fully update the Commission on our results or cost structure et cetera. So we are continuing to maintain those updates and providing the commission with the status of the project.

Julien Dumoulin-Smith – UBS Securities LLC

Got you. Excellent. Well, thank you very much.

Lynn J. Good

Thank you.

Operator

And we’ll take our next question from Brian Chin with Merrill Lynch.

Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Hi, good morning.

Lynn J. Good

Good morning, Brian.

Lynn J. Good

Good morning.

Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc.

On the improved O&M containment efforts, is there a way you can break down between whether most of those incremental savings are coming from the USFE&G segment or Commercial Power?

Lynn J. Good

The majority of these savings, given the size of the segment were newer to the FE&G segment. Right now, we’re recognizing a lot of benefits in the corporate areas and those corporate areas get allocated to all segments including the international and commercial, but the lion’s share of that would newer to the FE&G segment. As you go forward, efforts such as nuclear generation, fossil generation, T&D those are more focused on the regulated businesses, because that’s primarily what progress was. So that’s what we’re integrating and finding benefits to. So the majority of merger integration will newer to the FE&G segment, logically there, but a lot of these corporate benefits will pass through to other segments as well.

Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Understood, understood. And then going over to Slide 9, just to be clear, I know that you’re going to give more color on this in February, but for those data points that are the blue boxes Ohio cost-based capacity, energy margins in Midwest generation is the point that year-over-year, we should be thinking about 2013 to 2014, those are going to be relatively flat. And that’s why there is no down, to be fair on that?

Lynn J. Good

Brain, what I would say on Ohio cost-based capacity, because we don’t have an order yet it’s difficult for us to project implications to 2014. Energy margins will be dictated by commodity prices similarly the FX and the NMC. So those will be able to give you some specific guidance as these trends develop between now and February.

Lynn J. Good

So it’s more uncertainty at this point.

Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Got it. Got it. And then lastly, you had said that your load growth long-term assumptions were generally still on the 0.5% to 1% range. Would you say that that’s probably appropriate for thinking about 2014?

Lynn J. Good

I think that’s a reasonable range, Brain, 0.5% to 1%, yes, to 2015, right.

Brian J. Chin – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Great, thank you very much.

Lynn J. Good

Thank you.

Operator

And we’ll take our next question from Michael Lapides with Goldman Sachs.

Michael J. Lapides – Goldman Sachs & Co.

Few things. First of all, thank you for taking my call. Second, Bob, I hope you don’t mind, I’m going to show up on your doorstep in the mountains of Western North Carolina, I look forward to going fashion one day. I want to ask, I want to make sure we understand two things. So the $6 billion number you referenced in the footnote on O&M, that’s kind of the starting point and then you’re basically assume you’ll be in or around that same level in 2014, but I think it talks about excluding recoverable items. Can you just kind of quantify how much those recoverable items are or is that kind of a GAAP expected O&M number?

Lynn J. Good

I can give you a flavor for them, Michael. The net of recoverables you might be looking at $5.5 billion and you’ve got some recoverables on Edwardsport, you’ve got some recoverables with Energy Efficiency, SmartGrid, we’ve got some rides like that, but the $5.5 billion is a number net of recoverable.

Michael J. Lapides – Goldman Sachs & Co.

And the GAAP number – I’m sorry and I want to make sure I follow this. So that $5.5 billion is the expected 2014 number and then that’s after accounting for the recoverables or is that 2011 base to start from?

Steven K. Young

Well that’s both actually we’re starting from that base and even with inflation and emergent work in particularly in nuclear Fukushima and cyber security we think we’ll able to offset all of the data in 2014 be at a level of $5.5 billion.

Michael J. Lapides – Goldman Sachs & Co.

Okay. And then the recoverables are about $500 million, so that’s how you get to the $6 billion number?

Steven K. Young

Roughly, that’s correct.

Michael J. Lapides – Goldman Sachs & Co.

Okay. On the nuclear – on the nuclear levelization, can you just kind of walk us through how that flows to the income statement, meaning is that an offset to O&M, is that an offset to D&A, does it have an unusual impact in the third and fourth quarter of this year and first and second quarter of next year, but then kind of normalizes after that?

Steven K. Young

Yes. The way the accounting will work, it will be an offset in O&M costs. It will be in that line item. It will, with its initiation result in lower O&M in the fourth quarter of 2013 and that’s a big driver that we are pointing to the fourth quarter. We will see some benefits in 2014, as you continue to defer cost, but there will be less benefits in 2014 than they were in 2013. And then after 2014, the amortization of the deferrals will have caught up if you will to the actual expenses and there won’t be much difference there.

Michael J. Lapides – Goldman Sachs & Co.

Okay. When did this go into effect and is there a way to just kind of quantify what we’re talking about the dollar millions impact on O&M?

Steven K. Young

We began this in the third quarter actually in terms of levelizing nuclear outage cost I believe for the most part and we’ve got four refueling outages, an outage will run roughly $20 million, $30 million per outage. We can give you more details on the specifics in terms of the cost incurred.

Michael J. Lapides – Goldman Sachs & Co.

Okay.

Lynn J. Good

Michael, for the full year nuclear levelization is about $0.10 to $0.12 and the majority of that will sit in the fourth quarter, because of the refueling Steve just spoke about.

Michael J. Lapides – Goldman Sachs & Co.

Meaning the full year impact in 2013 is $0.10 to $0.12, but if I would annualize, if I would use it on an annualized basis, it’s doubled that, because it only started in September?

Lynn J. Good

No.

Steven K. Young

No, it’s – the full year impact about the $0.10 to $0.12, most of that will be in the fourth quarter and then when you look perspectively in 2014, you’ll have new outages being deferred, but you’ll have amortizations of previous outages catching up to it if you will. So the impact in 2014 will be a net reduction of O&M, but not as significant as what we saw in 2013.

Michael J. Lapides – Goldman Sachs & Co.

Got it. Okay, guys. Thank you much appreciated and I’ll see you at EEI.

Lynn J. Good

Yes. Thanks, Michael.

Operator

And we’ll take our next question from Kit Konolige with BGC.

Kit Konolige – BGC Partners LP

Good morning.

Lynn J. Good

Good morning, Kit.

Steven K. Young

Good morning.

Kit Konolige – BGC Partners LP

I don't know what your retirement says about my career, but we’ve been doing this together for a long time.

Steven K. Young

I’m quite...

Kit Konolige – BGC Partners LP

So just a couple of details to follow-up. A lot of my questions have been answered, but can you review, I guess this would be for Steve; can you review why the decision in the Ohio capacity case would have an impact on O&M in the fourth quarter, I’m just on earnings in the fourth quarter?

Steven K. Young

Well the decision on Ohio, it could have an impact if we get a decision in the calendar year, and it depends on what the decision is. We may have to book some effectively cost deferrals or revenues based on whatever the order says. So it could impact the 2013 earnings. It depends on what the order says and what calendar year do we get it in. So we’ve taken that into account and we’ve updated our guidance in the range we still think regardless of outcomes in Ohio we can be within our range.

Kit Konolige – BGC Partners LP

So you're anticipating that, that whatever the decision is it potentially could affect the adjusted earnings not just GAAP earnings?

Steven K. Young

It could, we have to look at what the order said in the so forth. But it could affect adjusted earnings. That’s correct.

Kit Konolige – BGC Partners LP

And then once – so once that’s received, I think in the past Lynn, you’ve said that order in the fourth quarter.

Lynn J. Good

Kit, I’m not going to comment strategic decision at this point until we see the order and understand the implications to the business. And so if we receive the order by the end of the year, we’ll have opportunity to evaluate that and understand next steps and we’ll share that with you when it’s appropriate.

Kit Konolige – BGC Partners LP

And how about on international is do you consider that a non-core business like DukeNet obviously it’s different in size, but does that – is that under review for possible different relationship with Duke Energy or do you consider that part of the business on a permanent basis?

Lynn J. Good

If you look at the international business as an important part of Duke contributes about 10% up to 15% of our earnings. It’s been a strong contributor to the company, certainly strong cash flow. Our strategic focus over the last 16 months has really been on the regulated business working through these regulatory proceedings, focus on merger integration, we’ll focus on Midwest generation over the next year or so, as we evaluate the impact of the cost-based capacity filing. And we’ll continue to look for opportunities to optimize the value of the international business, but we don’t have any specific strategic review that I would share with you at this point.

Kit Konolige – BGC Partners LP

Okay, thank you very much. See you all at EEI.

Lynn J. Good

Thank you.

Steven K. Young

Thank you.

Operator

And we’ll take our last question from Ali Agha with SunTrust

Ali Agha – SunTrust Robinson Humphrey

Thank you. Good morning.

Lynn J. Good

Good morning.

Steven K. Young

Good morning.

Ali Agha – SunTrust Robinson Humphrey

Good morning, Lynn or Steve, just wondered to clarify a couple of quick things, one is, you’ve kept a pretty wide range for your 2013 guidance all of that will come up in the fourth quarter, is it fair to say that wide range is primarily driven by the Ohio capacity tooling that would be the same factor, is that a way to think about it?

Lynn J. Good

I think that’s the best way to think about it, Ali.

Ali Agha – SunTrust Robinson Humphrey

Okay, okay. And then second, you shared with us based on your CapEx program, you’re looking at rate base growth, 2012 through 2015 on a 4% CAGR. When you look at these opportunities that you highlighted on that slide about beyond 2015, is 4% roughly still the CAGR we should think about beyond 2015 given the opportunities you are seeing out there?

Lynn J. Good

We haven’t given guidance beyond 2015, although there’ll certainly be a focus as we come to the street in February. Some of the items we have talked though could impact capital through 2015. For example, if we pursue the South field option in Florida et cetera. so we will also be refining CapEx through 2015 when we provide guidance early next year.

Ali Agha – SunTrust Robinson Humphrey

I see. And last question just to be clear on your plans on Ohio. Regardless of whatever decision comes out from the commission, do you still see the merchant business as core to Duke, given as you mentioned a few times the low risk profile portfolio that you currently own, does it really fit in with your overall business outlook?

Lynn J. Good

Ali, that’s certainly a strategic question that we will need to answer as we move forward. Our focus at this point is on securing the order from the Ohio commission. We’re also focused on cost effective operation of those assets, we are engaged in the discussions with PJM on the structuring of the market. So far, the – our focus over this near-term is on those specific items.

Ali Agha – SunTrust Robinson Humphrey

Fair enough. thank you.

Lynn J. Good

All right. Thank you. Well, I’d like to thank all of you for questions and for your interest in Duke Energy. We look forward to talking with many of you next week at EEI Financial Conference in Orlando. Thank you.

Operator

And that does conclude today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Duke Energy's CEO Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts