Duke Energy Q3 2007 Earnings Call Transcript

Duke Energy Corporation (DUK)

Q3 2007 Earnings Call

November 2, 2007 10:00 am ET

Executives

Sean Trauschke - VP of Investor and Shareholder Relations

Jim Rogers - Chairman, President, and CEO

David Hauser - Group Executive and CFO

Analysts

Dan Eggers - Credit Suisse

Paul Patterson - Glenrock Associates

Steve Fleishman - Catapult Partners

Jonathan Arnold - Merrill Lynch

Michael Lapides - Goldman Sachs

Ashar Khan - SAC

Nathan Judge - Atlantic Equities

Lasan Johong - RBC Capital Markets

Annie Tsao - Alliance Bernstein

Presentation

Operator

Good day, everyone, and welcome to the Duke Energy Third Quarter Earnings Call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to the Vice President of Investor and Shareholder Relations for Duke Energy, Mr. Sean Trauschke. Please go ahead, sir.

Sean Trauschke

Good morning, and welcome to Duke Energy's third quarter 2007 earnings review. Leading our discussion today are Jim Rogers, Chairman, President, and Chief Executive Officer; and David Hauser, Group Executive and Chief Financial Officer. Jim will begin today's presentation by providing a general overview of our results. Then David will provide more detailing context around our company's results and those of each of our businesses. Jim will close with the discussion of our outlook for the remainder of 2007 and beyond. Following those prepared remarks, we'll open the lines for your questions.

Before we begin, let me take a moment to remind you that some of the things we will discuss today concern future company performance and includes forward-looking statements within the meanings of the Securities Laws. Actual results may materially differ from those discussed in these forward-looking statements and you should refer to the additional information contained in Duke Energy's 2006 Form 10-K filed with the SEC and our other SEC filings concerning factors that could cause those results to be different than contemplated in today's discussions.

In addition, today's discussion includes certain non-GAAP financial measures as defined under SEC Regulation G. A reconciliation of those measures to the most directly comparable GAAP measures is available on our Investor Relations website at www.duke-energy.com. With that, I will turn the call over to Jim.

Jim Rogers

Thank you, Sean. Good morning, everyone, and thank you all for joining us today. Most importantly, thanks for your interest and investment in Duke Energy. We had a strong third quarter. As we said in our news release this morning, we reported ongoing diluted earnings per share of $0.48 for the third quarter of 2007 versus $0.29 in the third quarter of last year. This reflects an improvement of approximately 21% in combined segment EBIT from our three major business segments: U.S. Franchised Electric and Gas, Commercial Power, and Duke Energy International. These strong results were partially offset by a lower contribution from Crescent Resources. As you all may recall, most of last year's third quarter included Crescent as a wholly-owned sub rather than an effective 50/50 joint venture.

Our quarterly results also reflect the efforts of our employees in the Carolinas and the Midwest who met our customers' record demand for power in both regions with a superior operational performance. They worked around the clock to keep our generation, transmission and distribution infrastructure performing at peak efficiency. I appreciate their dedication and hard work, without them this performance would not have been possible.

Based on these results we expect our annual earnings to finish well above our 2007 employee incentive target of $1.15 on an ongoing diluted EPS basis. We are pleased with our third quarter results, we are also pleased with the progress we continue to make in our businesses, increasing sales, controlling our cost and advancing our legislative and regulatory initiatives.

David is going to give you a major detail around the quarter's results, after that I'll provide updates on the five-year plan we presented to you at our September 11th, analyst meeting. Particularly, our legislative and regulatory initiatives to recover the significant investments in our infrastructure we plan to make over the next five years.

With that let me turn it over David.

David Hauser

Thank you, Jim. As Jim noted, Duke Energy reported ongoing diluted earnings per share for the third quarter 2007 of $0.48 versus $0.29 in third quarter 2006. The $0.29 excludes the results of the natural gas businesses, which were spun off as Spectra Energy in January 2007 and which are now included in discontinued operations.

Now, I will begin reviewing our business segment results. I'll start with our largest business segment U.S. Franchised Electronic and gas. The segment reported third quarter 2007 EBIT from continuing operations of $760 million, an increase of $82 million when compared to last years third quarter. The year-over-year improvement in segment EBIT was driven by favorable weather conditions, the completion last quarter of merger related rate reductions and increased wholesale volumes. These drivers were partially offset by higher operation and maintenance cost, lower weather-normalized sales volumes, and increased Clean Air amortization.

First, let me put the favorable weather in perspective. In the Carolinas the number of cooling degree days was the highest ever recorded in both August and September. In the Midwest, it was hottest August on record in Cincinnati and the third hottest on record in Indianapolis. And the month of September ranked within the top 10 in both of those cities.

Overall, the EBIT contribution from weather was about $100 million. As we discussed in last quarter's call the merger related rate reductions ended in the second quarter of this year, except for small amount that we will continue to share with our customers in Kentucky over the next five years. Additionally, long-term contracts effective in early 2007 drove the increase in wholesale volumes, primarily in Indiana. These positive drivers were partially offset by higher operation and maintenance cost.

The rise in operation and maintenance cost is actually a reflection of how well we are doing this year. The increase is primarily driven by the impact of increasing the accrual of our anticipated short-term incentive plan payout to reflect above target results. I think you will agree that this is a good thing as the plans incentive is based on Duke Energy's ongoing earnings per share for 2007. If it had not been for the additional incentive plan accrual O&M cost would have been flat.

After normalizing for the strong summer weather, sales volumes were down modestly for the quarter, particularly related to textile our customers in the Carolinas. While we added 62,000 new customers for all of FE&G, we are affected by general market conditions such as the softening in the home building industry, as well as related industries. Also partially offsetting these increases was regulatory amortization expense for North Carolina's Clean Air program of approximately $75 million for the quarter, compared to approximately $63 million during the same quarter in 2006. The good news is that we have now met our amortization obligation under the Clean Air legislation.

As I mentioned earlier, regional growth continued to add to the total customer base in third quarter 2007. Approximately 46,000 new customers were added in the Carolinas since the third quarter of 2006, a 2% increase. Approximately 16,000 new customers were added in the Midwest in that same time period, a 1% increase. For the quarter, the EBIT contribution from bulk power marketing was approximately $12 million, net of the impact of sharing of profits with industrial customers.

Next, I will review Commercial Power. For the quarter, Commercial Power reported segment EBIT of $121 million from continuing operations, compared to $57 million of segment EBIT in the third quarter of 2006. The segment's improved EBIT was driven by higher retail margins, resulting mainly from the timing of the recovery of fuel and purchase power cost, higher overall prices and favorable weather.

We continue to be pleased with the improving performance of our Midwest gas-fired generation assets. For the quarter, those assets contributed positive EBIT to the segment. The improved results fro the quarter were driven by record generation volumes and higher revenues from capacity and tolling agreements. In fact, there was a 50% increase in the generation volumes, quarter-over-quarter. We don't expect this every quarter, but we do think that it highlights the tightening capacity market in PJM.

Last month, we participated in the PJM capacity auction, for the 2009-2010 planning year with 2,600 megawatts. The weighted average capacity price for the 2,600 megawatt sold in the auction is $118 per megawatt day. The quarter's positive drivers were partially offset by cost, related to higher production levels at our synfuel facility. The expense of running the synfuel facilities is included in commercial power. But, of course the tax credit, which more than offsets the expense is in income taxes. The year-to-date impact of synfuel operations on earnings is about $0.04. If crude oil prices remain in their current mid $90 range, the phase out for the year would be approximately 65%, which would result in reversing $0.01 to $0.02 of this benefit in the fourth quarter.

Finally, for the third quarter, commercial power EBIT included $5 million of marked-to-market gains on economic hedges. Consistent with Duke's past practices, we consider any marked-to-market impact as part of ongoing earnings.

Now let us turn to our international business. For the third quarter of 2007, Duke Energy International reported segment EBIT from continuing operations of approximately $92 million, an increase of $24 million when compared to last year's third quarter. DEI improved results for the quarter, were driven mostly by higher pricing in Latin America, particularly in Peru, where power demand in Northern Peru resulted in higher prices when compared to last year.

The positive driver was partially offset by lower sales volumes in Argentina due to drought conditions in that country. DEI is developing two small hydroelectric power plants in Brazil with a combined installed capacity of 32.5 megawatts. The total investment is approximately $100 million over a three-year period. This investment demonstrates our commitment to a measured approach toward expansion in this segment using internally generated cash flows.

Next up is Crescent Resources, ongoing results for this segment were down $54 million in the third quarter of 2006 to $10 million in third quarter of 2007. The lower current year results reflect the September 2006 change from 100% ownership to an effective 50/50 joint venture. Reduced residential developed plot sales and legacy land sales also contributed to the segments lower results.

You should note that third quarter 2006 ongoing results excluded a $246 million pre-tax gain related to the creation of a joint-venture partnership with Morgan Stanley's Real Estate Fund.

Next, I'll review our other category, while it is not considered a business segment. Other primarily included costs associated with corporate governance and Duke Energy's captive insurance company, Bison Insurance Company Limited. For third quarter of 2007, our other reported an ongoing net expense from continuing operations of $49 million, compared to a $132 million in the prior year's quarter. The reduction was primarily due to lower cost related to captive insurance and our focus on driving down corporate cost. Last year, we recorded a charge of $58 million related to our interest in mutual insurance company, which had ceased writing business and was in the process of settling all claims.

Now, I would like to go through a few other important financial items. At the end of the third quarter, we had a net cash balance of approximately $1.1 billion, approximately $1.6 billion of cash, cash equivalents and short-term investment offset by approximately $500 million of short-term commercial piper outstanding. Interest income and other was $73 million for the quarter, compared to $21 million in the third quarter of 2006. The increase was primarily due to interest income related to an anticipated federal tax settlement.

Interest expense from continuing operations was relatively flat over last year. For the third quarter of 2007 it was a $178 million, compared to a $182 million for the third quarter of 2006. Income tax expense from continuing operations for the third quarter of 2007 was $223 million, compared to $310 million in the third quarter of 2006. And the effective tax rate for the third quarter of 2007 was approximately 27%, compared to approximately 39% during the same period in 2006.

The lower effective tax rate in 2007 was primarily due to synfuel production. The third quarter effective tax rate reflects the recognition of approximately $66 million of synfuel credits. We still expect the effective tax rate for 2007 to be approximately 27% including the effect of the synfuel tax credits. With that I'll turn it back over to Jim.

Jim Rogers

Thank you, David. Let me start with the snap short of the five year outlook that my team gave you during our analyst meeting in September. We expect 5% to 7% ongoing diluted EPS growth through 2012, from the 2007 base of a $1.15 our employee incentive target. We plan to spend approximately $23 billion over the next five years. Nearly $19 billion of this capital is supporting our franchise electric and gas business segment.

Almost a quarter of this capital will go towards new coal, IGCC, gas and renewable generation resources to meet our customers' growing demand. That system growth is also driving our proactive legislative and regulatory strategy, which will be my focus for the next few minutes.

This slide reflects our current regulatory agenda. It shows you, at a glance, the progress we are making on these initiatives. As you can see, comprehensive energy legislation has been signed into law in both North and South Carolina. Now let me spend a few moments talking in more detail, about some of these other items.

The first item on the list is the North Carolina rate review. You will recall that in June, Duke Energy Carolina has filed with the North Carolina Commission to increase its electric rates by 3.6%, effective Jan 1, 2008. As we often do, we work with a public staff and industrial customer groups to achieve a proposed partial settlement, which we filed last month with the commission.

If approved, the partial settlement will reduce overall customer rates, without significantly impacting current earning levels. This is due to a corresponding downward adjustment to the amortization of Clear Air expenditures. It also permits us to include our remaining Clean Air expenditures of over $800 million in rate base. In the future, these expenditures will be made in '08 through '10.

The proposed agreement gives us an 11% return on equity, with a 53% equity component, which translates to an overall rate of return of approximately 8.6%. We've also agreed to share 90% of profits from bulk power marketing sales with customers, as opposed to the current 50-50 sharing arrangement.

Hearings were held last month on this and other issues. We are complying with a data request from those hearings, and we would expect the commission order on the proposed settlement in the unresolved issues later this year.

Next is Ohio. Our view is that legislation clarifying the post-2008 market framework in Ohio is both appropriate and necessary. We continue to focus our efforts on the recently passed Senate Bill 221, which we believe provides a workable framework for the development of new technologies, for building of new generation, environmental improvement, as well as energy efficiency.

However, the initial proposed legislation provided little guidance to the Ohio Commission. In response, many suggestions offered last week by Ohio’s Electric Utilities and other stakeholders in the state, the commission’s role was more clearly defined. We believe this is a more balanced approach to give the commission the necessary authority to assure long term price stability and to stimulate investments in energy infrastructure by preserving customer choice.

The bill was recently unanimously passed by the senate, and now moves to the House for consideration. We are working aggressively to see the amended bill enacted as quickly as possible. There is more work that needs to be done with respect to this bill and we believe that will happen in the House process. We expect enactment by the end of the first quarter next year.

One more note on the Ohio front, last week you saw that the Ohio Commission confirmed our 2004 rate stabilization plan, which have been remanded by the Ohio Supreme Court to the Commission for further consideration of two specific issues. Not only does the Commissions' ruling provide for continuation of existing rate structure, but it also approves recovery of rate components reflecting the cost of new pollution control equipment on Duke Energy Ohio generating stations and capacity cost associated with power purchase contract to meet customer demand.

You heard David mention the positive EBIT contribution of our Midwest gas lead to our third quarter earnings, with the continuing tightening of the Midwest power market especially in the western PJM region. Our Midwest gas plants are becoming more valuable. So much so, that we're increasingly indifferent economically as to whether these asset are dedicated to native load customers under our rate stabilization plant are dedicated to pure market-based sales.

Before I update you on our plans to our meet our customers' increasing demand for electricity, let me first update you on the exceptional draught we are experiencing in the southeastern part of United States in the Carolina's. In fact today in USA Today, there was a story that talked about the acuteness of this draught.

Clearly, the acute shortage of rainfall in the past several months has created an increasingly serious situation for water users in our region. The good news for Duke Energy is that a significant portion of our generation in the Carolinas is located on two lake systems. Catawba-Wateree (inaudible) then including network of dams and reservoir that we operate to maintain adequate water supplies throughout the region.

Working with our customers and other water users, particularly in the Catawba-Wateree river basin, we have seen water conservation efforts mitigate somewhat the impact of the draught on useable water storage levels. The significance and the importance of these assets to our region can be best seen and I say this to the eyes of someone who has just learned about this system over the last year and half, of comparing it to what's going on in Georgia with Lake Lanier and other regions. So this system is a very valuable asset.

Assuming rainfall even approaches more normal levels than we have seen in the past several months, we should be able to manage till the summer of 2008 without any disruption to our electric customers. Water conservation remains a key. Our over riding priority is reliability. So the next several weeks are critical in our contingency planning to conserve water in the river and the lakes for essential uses. Meanwhile we thank everyone in the region for continuing to conserve water until normal rainfall returns.

Now an update on our efforts to modernize and expand our generation fleet. We continue to move ahead on our plan to build a new unit at our Cliffside Steam Station in North Carolina. The comment period of air permit ended Wednesday, so we expect the permit to be issued by the end of this year. Issuance of the air permit is the last regulatory hurdle we need to clear before beginning construction of the plant.

In Indiana, we expect the Commission to issue an order by year end, approving the need and associated rate making treatment for our proposed $630 megawatt IGCC plant at Edwardsport. We expect an air permit for the project to be issued in the first quarter of 2008, with construction beginning shortly thereafter.

We plan to file our integrated resource plan with the North and South Carolina commissions in December. We believe our RRP will show a growing need for the Lee nuclear station and the positive impact it will have on the communities we serve in the Carolinas.

Because our resource plan is showing a need for the Lee plant, we have continued to prepare to seek all necessary regulatory approvals for the plant. We are on track to file yet this year, our application with the Nuclear Regulatory Commission for a combined construction and operating license for Lee. We are also planning to file a certificate of public convenience necessity in South Carolina in 2008. These actions are necessary steps, as we continue to pursue the option of building the new plant.

As we have said before, we won't make any significant commitments on equipment, labor or materials until we secure all necessary and appropriate regulatory approvals. Also this year, we will file a CPC in applications to build two 600 to 800 megawatt combined cycle natural gas power plants in North Carolina. One, at our Buck’s Steam Station by 2002 and the other at our Dan River Steam Station by 2011.

Renewable power is also a growing component of our supply portfolio. Last month in Indiana, we issued an RFP for up to 200 megawatts of renewable energy by 2011. This is in addition to the renewal energy RFP Duke Energy Carolinas issued in April. We received several and economically viable options from that RFP and we will decide soon which to pursue.

We are also making good progress on increasing the role energy efficiency will have in meeting our customers’ future energy needs. Last month, we filed our Save-a-Watt plans in South Carolina and Indiana. Indiana’s is a state where we already have extensive demand-side management programs and our energy efficiency filing expands those 10 fold.

You will recall that we have filed our Save-a Watt-plan last spring in North Carolina and we expanded our current energy efficiency offerings in both Kentucky and Ohio.

At the federal level our focus continues to be on climate change legislation that is moving through the senate. In our view a viable bill must have four key components. First, it should control greenhouse gas emissions though an economy wide market-based cap and trade program that utilizes a safety valve price mechanism. Second, it should support the development, demonstration and deployment of new technologies that will enable the nation to reduce greenhouse gas emission over the long-term.

Third, it should remove barriers to the deployment of zero emission nuclear energy, and fourth, a fair allocation of allowances should be made to consumers who rely on coal during this transition period to when we can deploy new technologies to capture and store carbon.

While the recently introduced Lieberman-Warner Bill has cap-and-trade, we don't think it adequately protects the economies and the customers of the 25 states that produce more than 50% of their electricity from coal. This is primarily due to the Bill's provision for higher allowances. We will continue to work with the two senators and their counterparts on the Environment and Public Works Committee to develop effective and economically sustainable climate change legislation and with fairly allocated emission credits.

Now, I would also like to give you a quick update on our commercial businesses. You heard David talk about the strong quarterly performance in the Commercial Power and International Energy segments to our third quarter earnings. This is further evidenced of how the value of these assets has improved even since our analyst conference in September.

As we told you in September, we expect our Commercial Power, Duke Energy International, and Crescent segments to grow ongoing EBIT at a combined 8% to 10% on a compounded annual growth rate basis through 2012 and that's all for 2008 base.

In our international business, in Latin America, the economic trends continue to dramatically improve, as a result we are investing, as David mentioned, in high-quality generation projects, including the two Brazilian hydro plants. In September, we told you that Duke Energy International will invest up to $1 billion of growth capital through 2012.

Finally, as you know earlier this year we purchased 1,000 megawatts of wind assets under development in the West and Southwest United States. We committed 430 million to the first three projects, our 240 megawatts in this portfolio and we expect to break ground on the first project in Texas this year.

I believe, we've given the overall good sense of the many steps we've made in the third quarter and for the year. When you add them all up you can see that we continue make progress toward our goals, including maintaining a strong financial position?

We are very focused on our operations, on controlling our costs and earning fair returns for our investors. Our current dividend yield is approximately 4.6% and we expect even stronger earnings growth in the future. We believe this is a great value proposition for investors.

With that let's open the line so that David and I can take yours questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). And we'll take our first question from Dan Eggers with Credit Suisse.

Dan Eggers - Credit Suisse

Good morning.

Jim Rogers

Good morning, Dan.

Dan Eggers - Credit Suisse

First question, just on Ohio, you thought that there was some more work to be done with [Ohio's] legislation. Can you just give us a run down on what you think still needs to be added to get Ohio where it needs to be?

Jim Rogers

Well I going to be to, Dan, circumspect with respect this, because we are in that negotiating discussion, working through the solutions phase, now that it's out of the senate into the House. And we are working with the various stakeholders in the state to get greater clarity with respect. I think one of the areas that needs to be defined in a clear way is with respect to the Commission's ability to allow us to go to market in the whole process of the renegotiation, and how that will work going forward.

So, there is work that needs to get done there. It is unclear whether utility, for instance, can recover capacity cost not associated with planning reserves and there is a need to get clarity with respect to that provision. And I probably can give you six or seven other areas, but I think it would be more prudent from my standpoint and for our ultimate success to leave that to those on the ground in Ohio to walk through the details of this going forward.

But on balance, the senate did a good job of taking the governor's proposal and shaping it in a way that's allowing us to move forward and the next step is the House. They set a clear procedural schedule. They seem committed to dealing with it. And I think we are all confident that with a little good luck and some further refinement, we can get legislation that makes sense.

Dan Eggers - Credit Suisse

Fair enough. On the coal plant progress for development, you guys are making good progress as far as permits are concerned. Are you running into any resistance even with the progress around building these plants given opposition elsewhere in the country both on conventional pulverizers as well as on the IGCC front?

Jim Rogers

I think there is a full court press by environmentalist throughout the country to block the building of any new coal plant. And they are ceasing on anything they confine that would throw up a roadblock to the building of new coal plants in this country. And I think that's across the country. And there is no place that that's an exception. But, as we look between now and 2030 in the United States where we will experience a 40% growth in demand, we need to add additional generation. We have worked hard to put a lot of effort into investments in energy efficiency, as well as investments in renewables. And renewables are quite frankly a little higher priced than coal generation. But we are working very hard to make sure we are maximizing those in support of our need to build both coal and nuclear, so more to come on all that. And by the way our plan in Indiana, when that is completed, will be the most efficient coal plant in the United States. And we have plans working with both EPRI as well as the Department of Energy to develop a carbon capture and sequestration project there that will ultimately, if we can get the details worked out, offer hope with respect to using coal in the future and capturing the carbon that is a consequence of the burning of the coal.

Dan Eggers - Credit Suisse

Okay. And I guess, one last one, Jim, you talked about success in water conservation with the current drought conditions. Well, obviously, some pretty sizeable water consuming generation being proposed in the region by you folks as part of your resource plan. Any thoughts on reconsideration on what might get built just to manage some of those water resource considerations.

Jim Rogers

I think given the timeline adding additional generation now to deal with the issue over the next year or two is just not doable. But, we are doing some thing that will make a difference. And let me give you just one example of that. We're adding new piping and valves to backup system. It's one of our multiple backup systems at our McGuire Nuclear Station, which will allow the plant to operate at lower lake level. We expect this work to be completed by early 2008. Cost of this work is part of normal operating cost and in this the power plants in the basin generate about 9000 megawatts of electricity to serve customers' needs. So, that's just one example of things that we're doing. We're looking around the region to make sure there is some adequate backup power, going forward. But our current expectation, and remember for us job one is reliability. Our current expectation is if we get close to normal rainfall we're going to have no problem meeting the demands on our system through next summer.

Dan Eggers - Credit Suisse

Got it. Thank you.

Operator

Moving on, we will take our next question from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

Good morning, guys.

Jim Rogers

Paul, welcome.

Paul Patterson - Glenrock Associates

Just to sort of follow-up on Dan's question on Ohio. I know you need to be circumspect and there are lot of different issues that you're dealing with, but it sounds like if I understood your comments correctly, I guess the single biggest issue is the discretion that [FUGO] has in terms of determining whether or not you are going to market, is that fair to say?

Jim Rogers

I think that's one of the key issues. I think the other key issues is how do you establish the value of the deregulated generation. And I think on that specific, what I called the deregulated generation that has been dedicated under an RSP and that has kind of been a concern. The senator address that in a way -- in a clear way, but there is more work that needs to get done in other provisions. And like all legislation you really have to look at all the pieces and make sure they are internally consistent. And as we work through we want to make sure they all tie together and don't leave any kind of gap that would create appeals in the future. But, we are comfortable let's say if it address the issue of that valuation going forward. But there are some other issues that are critical to be addressed, but more work to do on that. But, on balance we are moving in the right direction and I think that's the important point.

Paul Patterson - Glenrock Associates

Okay. You guys are still pretty confident about getting it done in early 2008?

Jim Rogers

Well you can never predict.

Paul Patterson - Glenrock Associates

Right. Sure.

Jim Rogers

Legislative processes, I'll tell you that. But, I think what's important to me is that senate unanimously voted out the Bill. That didn't happen very often. And that says that they believe there is sense of urgency here to act and move forward. The House immediately set a schedule that to me indicates that they will be finished in January. We use the date, the first quarter, because we know how these things slip in the process, in terms of our own expectation. But, I think there is a recognition within the state that we need to address this immediately, because the rate stabilization plans end at the end of the '08. And they also recognize the closer we get to the Presidential Election, the harder it would be to work through something that makes sense. So, to me, the fact that the House is set such a tight schedule, says we get it done in the first quarter and it gives us enough time to have a seamless transition to '09, and that is really critical to maintaining reliability to our customers in Ohio.

Paul Patterson - Glenrock Associates

Okay. Thanks a lot.

Jim Rogers

Thank you.

Operator

We will hear next from Steve Fleishman with Catapult.

Steve Fleishman - Catapult Partners

Yeah. Hi, Jim.

Jim Rogers

Steve welcome.

Steve Fleishman - Catapult Partners

Hi. On your commentary on the DENA assets, would you say that you are may even be on track to meet the breakeven by '09 for those, or even ahead to that?

David Hauser

Well, this is David. We had said that they would -- initially we had said that was $60 million this year that we updated that to $30 million and I think we are in good shape to meet or improve on that and we haven't changed our '09 guidance of being at breakeven in '09 at this point.

Steve Fleishman - Catapult Partners

Okay. And then, how much was the O&M increase at the utility that you talked about related to primarily the incentive comp.

David Hauser

For just the utility, that was the $36 million.

Steve Fleishman - Catapult Partners

Okay.

David Hauser

For the total company that was 51 million.

Steve Fleishman - Catapult Partners

Okay. And then finally, is there any more specific timeline on when the Indiana commission will rule?

Jim Rogers

I was in Indiana just this week and based on briefings there, the thought is it will probably be more like late November, early December.

Steve Fleishman - Catapult Partners

Okay, thank you.

Jim Rogers

Thank you, Steve.

Operator

We'll take our next question from Jonathan Arnold with Merrill Lynch.

Jonathan Arnold - Merrill Lynch

Good morning.

Jim Rogers

Good morning Jonathan and welcome.

Jonathan Arnold - Merrill Lynch

Thank you. Couple of quick questions, you mentioned I think a $100 million of weather in the utility. I want to just be sure that that's versus normal?

David Hauser

That is a $100 million versus normal in the utility.

Jonathan Arnold - Merrill Lynch

And so, where are you David year-to-date on weather, in the utility?

David Hauser

Year-to-date, I'll tell you what, let us dig that number out and we'll tell you that in a minute.

Jonathan Arnold - Merrill Lynch

Okay. And then a slightly related one on, to what extent is it possible to put a figure on how much weather versus normal may have benefited commercial power, and to what extent that is causing you to track and to what extent in the market?

David Hauser

Yeah, our estimate is that's about 10 million of benefit in commercial power.

Jonathan Arnold - Merrill Lynch

In the third quarter?

David Hauser

In the third quarter versus normal.

Jonathan Arnold - Merrill Lynch

Okay.

David Hauser

And of course keep in mind that all of this weather would be offset by the increase in the incentive accrual that occurred because of the higher earnings that we are experiencing.

Jonathan Arnold - Merrill Lynch

Right.

Jim Rogers

Jonathan, I would add to David's answer by saying that, and that’s why we almost at the point of economic indifference, we see the supply-demand balance tightening fast at PJM West. And as capacity markets develop there, we really see the potential for improvement there coming fast and so, I think its not just weather, and it is in the short-term, but I think there is a underlying fundamental that work here that will translate into greater value from those assets.

Jonathan Arnold - Merrill Lynch

Great. Thank you.

David Hauser

Let me circle back to your first question, we pulled that up. The weather for the year-to-date versus last year or versus the prior year is about $190 million.

Jonathan Arnold - Merrill Lynch

190?

David Hauser

Yes, versus the prior year.

Jonathan Arnold - Merrill Lynch

Okay. And then the incentive comp accruals you gave a 36 and 51. Do they have, are they higher year-to-date number or was that just an accrual you made in the third quarter that relates to the year.

David Hauser

That is basically third quarter accrual, because that is when we reached a conclusion that we would be above target on the incentive.

Jonathan Arnold - Merrill Lynch

Okay. So, the whole of the above targets element is captured in that 51 million?

David Hauser

Yes, in other words that’s nine months worth of the above target, but it was all booked in the third quarter.

Jonathan Arnold - Merrill Lynch

Okay. And I could just another quick thing. You mentioned that you would have to reverse out a penny or two of synfuels year-to-date in the fourth quarter if oil prices stay where they are. Why would you not have had accrue that now, if that’s where the oil force are?

David Hauser

We closed the books at September 30, and the phase out at September 30th was 50%. And as all prices have moved around since then, we did not go reopen the books and remark-to-market.

Jonathan Arnold - Merrill Lynch

Perfect, thank you very much guys.

Jim Rogers

Jonathan thank you so much.

Operator

Next from Goldman Sachs will hear from Michael Lapides.

Michael Lapides - Goldman Sachs

Hey guys Michael Lapides here. Quick question in Indiana regarding Edwardsport, can you provide some commentary on some of the political push back and discussions that are occurring regarding approval or potential approval of the plant and the role of various political figures in terms of discussing it with the Commission?

Jim Rogers

We have experienced strong support in Indiana across the board. What I mean by that, is that, at the local level, at the state level as well as in the federal level, as you may know we have more than $400 million of tax credit in incentives that came out from DOE, from the state legislature and from the local communities. So they not only supported vocally, but they have supported the building of this plan in a financial way.

There was recently a hearing down in Bloomington, and the overwhelming group that were there were in support, they actually buzz down from Edwardsport people, got together, went down there and made it clear that it was critical to the success of their community that this plan gets build. Because on a local level, this is a plan that will provide great tax base to fund their schools, it will also provide jobs, and from an environmental standpoint, it will allow us to put in place the most efficient coal plant in the United States, and we are building it on our Brownfield site, and a 50 year plant will now operate as a consequence of replacing it with this new plant.

And we have gotten support from environmental groups in the state, because we are committed to doing a carbon capture and sequestration project figure, and if you remember the MIT study, the MIT study made it very clear that if we were going to get, be able to use coal in the future, we need to have some major carbon capture projects developed over the next five to ten years.

This will be the first commercial coal gasification plant built in United States, the geology in Indiana is almost perfect for carbon capture, I mean for sequestration. So we are working to develop that, so we've got state and local support, we have federal support, we have the major environmental groups support. We still have some groups that oppose it, because they oppose all coal plants. But on balance, we think across the state, there is strong support for the building of this plant at every level.

Michael Lapides - Goldman Sachs

Got it. Thank you. Much appreciate it. Where do you think this heads in terms of cash returns during construction and whether the project ROE will differ from the current normalized ROE at utility, at DSI?

Jim Rogers

That's really a good question, and I am trying to think how to answer this. And I guess the way I would say is, is that, we’ve asked for an incentive ROE with respect to this and that will be a judgment that will be made by the Commission with respect to that.

In Indiana, we have quip so we are allowed to get cash as we go as we build, and the way their proposed order is written, is that when they approve the need for the plant, they approve the mechanism that allows us to recover the cash during the construction.

So that approval will give us both the ability to build and the ability to recover as we go. We are totally confident of that because that's exactly the way the law works, once the certificate is granted. It will be the commission as judgment with respect to what the ROE is, it will either be the current ROE or the incentive ROE, but that will be a judgment that they will make.

Michael Lapides - Goldman Sachs

Okay, thank you. Much appreciate it guys.

Jim Rogers

Thank you.

Operator

We're going to take our next question from Ashar Khan with SAC.

Ashar Khan - SAC

Good morning.

Jim Rogers

Good morning Ashar.

Ashar Khan - SAC

David, I just want to understand if I have my math right, you earned $0.31 in the last quarter of fourth quarter for the Duke Energy Company. And according to your tables, you are at 103 or 104. So if you can match last years' results we should be at like 135 range, and then what you are also saying if I heard that majority of the gain from the weather has been cancelled by the compensation hit. So I guess there is growth in earnings from that level onwards in '08. Are any of my assumptions wrong?

David Hauser

Yes. But, so let me just go through them a little bit. If you look at last year, we made about $0.23 in the fourth quarter when you strip out Spectra and all that.

Ashar Khan - SAC

Okay.

David Hauser

So, that would be one significant difference. Then if I look at the weather discussion, we had about a $100 million in franchise and electric and about $10 million in the commercial, so about $110 million total offset by about $51 million increase in the incentives. So, you still had $50 million to $60 million net benefit there.

Ashar Khan - SAC

Okay.

David Hauser

Now did that answer both.

Ashar Khan - SAC

Okay. No I was just, I'd thought you aren’t like $1.07 for the whole company last year now.

David Hauser

I think that’s right, I think that is right.

Ashar Khan - SAC

Okay. Because then I guess there might be something on the table because there ongoing earning table said that for 2006 to year-to-date earnings were $0.76 as I guess there's a discrepancy somewhere in the math somewhere?

David Hauser

We’ll take a look at that and we'll figure it out, and the IR folks can talk about it, but I don’t know the answer of that at the top of my head.

Ashar Khan - SAC

Okay. So, if you match your earnings then you're saying you will like around 127, 128 level range.

David Hauser

We aren’t getting that specific, but we're very clear that we'll be well above our incentive target.

Ashar Khan - SAC

Okay. Thank you.

David Hauser

Thank you very much.

Operator

We're going to take our next question from Nathan Judge with Atlantic Equities.

Jim Rogers

Nathan welcome.

Nathan Judge - Atlantic Equities

Good morning. Just wanted to ask a question about the assumption as far as earnings with regard to those plants plus sides in the IGCC plant. When you look out I believe those plants are going to be completed sometime tentatively in the 2012 period. Under the Analyst Day I think you said that you are going to be going into rate case. Will those plans then begin fully earning in 2013, is that the expectation?

Jim Rogers

I think it works a little different in that. First with the IGCC, because we have quip we'll get both cash and earnings during the building of that facility, and that will start once we start construction. In North Carolina we have the potential for -- and we do that without having a general rate case, it just automatically happens during that period of time, because we don't -- as I remember do not have scheduled a general rate case in Indiana until the end of the five year period. But we still get the cash and the earnings along the way.

In North Carolina I think we have a rate case scheduled around 2010, and at that point the way the law works, we will go and then make adjustments with respect to quip at that time and going forward, but during the end we will be accumulating AFTC which will affect earnings during that period of time, but would not translate in to cash.

David Hauser

Let me just add one thing that you maybe are focusing own Nathan. If you look at the year 2012, when the coal plant comes in service, there is a lag between when it comes in service and when rates are granted. So your presumption that it would be fully covered in rates in 2013 is a good presumption, but all of what Jim said is absolutely true too. So it's just 2012 that is the anomaly in the way we modeled it.

Nathan Judge - Atlantic Equities

So its kind of thinking to that, it means that there could potentially be some uplift in pretty meaningful uplift as these tend to come on in 2013.

David Hauser

While we haven’t though run our models up to, now you are asking us to do a signal forecast.

Nathan Judge - Atlantic Equities

Just with regard to the impact and this goes back to the analyst day, but rates go up 5% with quip, assuming that they Edwardsport plant to be approved in Indiana.

David Hauser

I would have said, your logic is good, but we haven’t run 2013.

Nathan Judge - Atlantic Equities

Okay. Thank you very much.

Jim Rogers

Thank you.

Operator

We will take our next question from Lasan Johong with RBC

Lasan Johong - RBC Capital Markets

Good morning, yes. My question is on Edwardsport. What makes the geology in Indiana so receptive to carbon sequestration, are we talking about lime stones, are we talking about old gas and oil wells, or what are we talking about?

Jim Rogers

I think primarily the Edwardsport plant is really built in the coal producing region of the state. And it's primarily a limestone formation there. And that’s why it is so conducive to capture -- storing CO2.

Lasan Johong - RBC Capital Markets

So has your scientist discovered a catalyst that would bind CO2 to limestone in old fashioned, it doesn’t take 200 years for a ton to bind.

Jim Rogers

Well, you've just moved beyond my expertise with that question. What I have been told is that, again there is some sequestration done today in the United States, and it's primarily in the southwest where you're re-injecting CO2 in the reservoirs to get additional oil and natural gas out.

Here the situation is that you would be re-injecting it into these limestone formations. And we would start out by only doing a portion of the CO2, and you should remember it's easier to capture carbon coming from syngas and coming from the emissions of the coal plant, and the technology is well developed to capture the carbon. The difficult and the thing that we will be testing, this is why it will be a test project is exactly how storage works, can we manage any seepage from it. And there is a lot of very technical questions that need to be answered, and that's why we believe in this country and this is part of the debate on Capita Hill.

It's going to take a decade to a decade and half to really develop carbon capture and storage technology and to take it a commercial level in this country. This plant in this location offers an opportunity for us to develop that technology.

Lasan Johong - RBC Capital Markets

So basically the idea at this point is not necessarily to provide energy, but it's more of a technology research venture?

Jim Rogers

With respect to the plant itself, we need the energy and it is the least cost option for us to build this coal gas plant. So, we will be taking all the output of the plant and because it's our most efficient plant, it will be one of the first that's actually dispatched in our system, because of the efficiency of the plant. The experimentation part will be capture of the carbon and storage, which will done contemporaneous with the operation of the plant. Now, there is some technical issues around that, because as we've talked, reliability is number one in running that plant, as much as we can run that plant at the highest load factor is our goal line. But, we are prepared to try to do both because its so critical not just to our company who is the third largest consumer of coal in the country, but its so critical to our entire country that we develop this technology going forward.

Lasan Johong - RBC Capital Markets

Have you compared emission output on this plant to say a CCGT, a conventional CCGT?

Jim Rogers

I think I haven't and I really couldn't make that comparison for you.

Lasan Johong - RBC Capital Markets

Okay, thank you.

Jim Rogers

Thank you very much.

Operator

We'll go ahead and take our final question from Annie Tsao with Alliance Bernstein.

Annie Tsao - Alliance Bernstein

Good morning.

Jim Rogers

Good morning, Annie.

David Hauser

Good morning.

Annie Tsao - Alliance Bernstein

Few questions for both of you. First David, you said we should assume effective tax credit for '07 to be 27%. What should we anticipate for '08? And what kind of synfuel tax credit should we assume?

David Hauser

You should assume 33% for '08 and there is no synfuel in '08 anymore.

Annie Tsao - Alliance Bernstein

Thanks. Good. That's what I am trying to clarify. And also Jim, is there any backup planning for the drought situation in case of you don't get the water level to normal?

Jim Rogers

We have built a number of contingency plans, because our goal line is to work our way through this problem in a way that is seamless to our customers. So, I mentioned a few moments ago the work that we're doing around the McGuire Nuclear Station. The other things we're doing, is lining up potential supplies and looking at alternative supply sources during some critical periods going forward. So, our team, and I am very proud of our team in terms of the work they've done to develop a wide range of contingencies. So, at the end of the day we're able to continue to supply power 24/7 when people throw the switch.

Annie Tsao - Alliance Bernstein

Okay. And you mentioned also Lieberman and Warner legislation. You don't think they protect consumer, can you elaborate that a little bit in more detail?

Jim Rogers

Yes.

Annie Tsao - Alliance Bernstein

How you think that operates?

Jim Rogers

This bill is, one, does not have safety valve which the Bingaman bill did. And that is a flaw in the bill in terms of protecting consumers against the volatility in the rise in the price of CO2 during these early periods when technology is yet to be developed. The second thing is that they have not allocated the allowances in a way -- that in my judgment are fair, particularly to those state that are so dependent on coal. About 50% of electricity in this country comes from coal and actually it's concentrated in 25 states. And in these 25 states, under the Lieberman bill, you could see prices increase as much as 30% and 40% unless they adjust these allowances.

So the industrial heartland of our country in the Southeast hit in face with what I would effectively call a carbon tax, or new charges on their generation. So this, like many issues as in the energy area, and the environmental area, are not issues of Republicans versus Democrats. They are really issues between regions of the country and what fuel we are depended on. And so, to the extent that we are dependent on coal, the way this legislation is structured it basically punishes those who have dependent on coal. And that to me at the end of the day is equity issue, a fairness issue, and quite frankly, that is going to have to get resolved before you really get complete support from Congress to pass any legislation on carbon in this country.

Annie Tsao - Alliance Bernstein

Thanks.

Operator

And Ms. Tsao was there anything further.

Annie Tsao - Alliance Bernstein

No. Thank you.

Jim Rogers

Well, thank you all very much for being here today. We appreciate your interest and investment in our company, and we are working hard to deliver for you. Thank you all very much.

Operator

And that does conclude our conference. Again, thank you all for your participation. We do hope you enjoy the rest of your day.

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