Duke Energy Q3 2007 Earnings Call Transcript

Nov. 2.07 | About: Duke Energy (DUK)

Duke Energy Corporation (NYSE: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

Operator

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

Sean Trauschke

Good morning, and welcome to Duke Energy's third quarter2007 earnings review. Leading our discussion today are Jim Rogers, Chairman,President, and Chief Executive Officer; and David Hauser, Group Executive andChief Financial Officer. Jim will begin today's presentation by providing ageneral overview of our results. Then David will provide more detailing contextaround our company's results and those of each of our businesses. Jim willclose with the discussion of our outlook for the remainder of 2007 and beyond. Followingthose prepared remarks, we'll open the lines for your questions.

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

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

Jim Rogers

Thank you, Sean. Good morning, everyone, and thank you allfor joining us today. Most importantly, thanks for your interest and investmentin Duke Energy. We had a strong third quarter. As we said in our news releasethis morning, we reported ongoing diluted earnings per share of $0.48 for thethird quarter of 2007 versus $0.29 in the third quarter of last year. Thisreflects an improvement of approximately 21% in combined segment EBIT from ourthree major business segments: U.S. Franchised Electric and Gas, CommercialPower, and Duke Energy International. These strong results were partiallyoffset 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 subrather than an effective 50/50 joint venture.

Our quarterly results also reflect the efforts of ouremployees in the Carolinas and the Midwest whomet our customers' record demand for power in both regions with a superioroperational performance. They worked around the clock to keep our generation,transmission and distribution infrastructure performing at peak efficiency. Iappreciate their dedication and hard work, without them this performance wouldnot have been possible.

Based on these results we expect our annual earnings tofinish well above our 2007 employee incentive target of $1.15 on an ongoingdiluted EPS basis. We are pleased with our third quarter results, we are alsopleased with the progress we continue to make in our businesses, increasingsales, controlling our cost and advancing our legislative and regulatoryinitiatives.

David is going to give you a major detail around the quarter'sresults, after that I'll provide updates on the five-year plan we presented toyou at our September 11th, analyst meeting. Particularly, our legislative andregulatory initiatives to recover the significant investments in ourinfrastructure 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 ongoingdiluted earnings per share for the third quarter 2007 of $0.48 versus $0.29 inthird quarter 2006. The $0.29 excludes the results of the natural gasbusinesses, which were spun off as Spectra Energy in January 2007 and which arenow 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 andgas. The segment reported third quarter 2007 EBIT from continuing operations of$760 million, an increase of $82 million when compared to last years thirdquarter. The year-over-year improvement in segment EBIT was driven by favorableweather conditions, the completion last quarter of merger related ratereductions and increased wholesale volumes. These drivers were partially offsetby higher operation and maintenance cost, lower weather-normalized salesvolumes, and increased Clean Air amortization.

First, let me put the favorable weather in perspective. Inthe Carolinas the number of cooling degreedays was the highest ever recorded in both August and September. In the Midwest,it was hottest August on record in Cincinnatiand 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 $100million. As we discussed in last quarter's call the merger related ratereductions ended in the second quarter of this year, except for small amountthat 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 inwholesale volumes, primarily in Indiana.These positive drivers were partially offset by higher operation andmaintenance cost.

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

After normalizing for the strong summer weather, salesvolumes were down modestly for the quarter, particularly related to textile ourcustomers in the Carolinas. While we added62,000 new customers for all of FE&G, we are affected by general marketconditions such as the softening in the home building industry, as well asrelated industries. Also partially offsetting these increases was regulatoryamortization expense for North Carolina's Clean Air program of approximately $75million for the quarter, compared to approximately $63 million during the samequarter in 2006. The good news is that we have now met our amortizationobligation under the Clean Air legislation.

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

Next, I will review Commercial Power. For the quarter,Commercial Power reported segment EBIT of $121 million from continuingoperations, compared to $57 million of segment EBIT in the third quarter of2006. 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 ofour Midwest gas-fired generation assets. Forthe quarter, those assets contributed positive EBIT to the segment. Theimproved results fro the quarter were driven by record generation volumes andhigher revenues from capacity and tolling agreements. In fact, there was a 50%increase in the generation volumes, quarter-over-quarter. We don't expect thisevery quarter, but we do think that it highlights the tightening capacitymarket in PJM.

Last month, we participated in the PJM capacity auction, forthe 2009-2010 planning year with 2,600 megawatts. The weighted average capacityprice for the 2,600 megawatt sold in the auction is $118 per megawatt day. Thequarter's positive drivers were partially offset by cost, related to higherproduction levels at our synfuel facility. The expense of running the synfuelfacilities 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 impactof synfuel operations on earnings is about $0.04. If crude oil prices remain intheir current mid $90 range, the phase out for the year would be approximately65%, which would result in reversing $0.01 to $0.02 of this benefit in thefourth quarter.

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

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

The positive driver was partially offset by lower salesvolumes in Argentinadue to drought conditions in that country. DEI is developing two smallhydroelectric power plants in Brazilwith a combined installed capacity of 32.5 megawatts. The total investment isapproximately $100 million over a three-year period. This investmentdemonstrates our commitment to a measured approach toward expansion in thissegment using internally generated cash flows.

Next up is Crescent Resources, ongoing results for thissegment were down $54 million in the third quarter of 2006 to $10 million inthird quarter of 2007. The lower current year results reflect the September2006 change from 100% ownership to an effective 50/50 joint venture. Reducedresidential developed plot sales and legacy land sales also contributed to thesegments lower results.

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

Next, I'll review our other category, while it is notconsidered a business segment. Other primarily included costs associated withcorporate governance and Duke Energy's captive insurance company, BisonInsurance Company Limited. For third quarter of 2007, our other reported anongoing net expense from continuing operations of $49 million, compared to a$132 million in the prior year's quarter. The reduction was primarily due tolower cost related to captive insurance and our focus on driving down corporatecost. Last year, we recorded a charge of $58 million related to our interest inmutual insurance company, which had ceased writing business and was in theprocess of settling all claims.

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

Interest expense from continuing operations was relativelyflat 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 expensefrom continuing operations for the third quarter of 2007 was $223 million,compared to $310 million in the third quarter of 2006. And the effective taxrate for the third quarter of 2007 was approximately 27%, compared toapproximately 39% during the same period in 2006.

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

JimRogers

Thank you, David. Let me start with the snap short of thefive year outlook that my team gave you during our analyst meeting inSeptember. We expect 5% to 7% ongoing diluted EPS growth through 2012, from the2007 base of a $1.15 our employee incentive target. We plan to spendapproximately $23 billion over the next five years. Nearly $19 billion of thiscapital 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' growingdemand. That system growth is also driving our proactive legislative andregulatory strategy, which will be my focus for the next few minutes.

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

The first item on the list is the North Carolina rate review. You will recallthat in June, Duke Energy Carolina has filed with the North Carolina Commissionto 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 aproposed partial settlement, which we filed last month with the commission.

If approved, the partial settlement will reduce overallcustomer rates, without significantly impacting current earning levels. This isdue to a corresponding downward adjustment to the amortization of Clear Airexpenditures. It also permits us to include our remaining Clean Airexpenditures of over $800 million in rate base. In the future, theseexpenditures 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 ofapproximately 8.6%. We've also agreed to share 90% of profits from bulk powermarketing sales with customers, as opposed to the current 50-50 sharingarrangement.

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

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

However, the initial proposed legislation provided littleguidance to the Ohio Commission. In response, many suggestions offered lastweek by Ohio’sElectric Utilities and other stakeholders in the state, the commission’s rolewas more clearly defined. We believe this is a more balanced approach to givethe commission the necessary authority to assure long term price stability andto stimulate investments in energy infrastructure by preserving customerchoice.

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

One more note on the Ohiofront, last week you saw that the Ohio Commission confirmed our 2004 ratestabilization plan, which have been remanded by the Ohio Supreme Court to theCommission for further consideration of two specific issues. Not only does theCommissions' ruling provide for continuation of existing rate structure, but italso approves recovery of rate components reflecting the cost of new pollutioncontrol equipment on Duke Energy Ohiogenerating stations and capacity cost associated with power purchase contractto meet customer demand.

You heard David mention the positive EBIT contribution ofour Midwest gas lead to our third quarter earnings, with the continuingtightening of the Midwest power marketespecially in the western PJM region. Our Midwestgas plants are becoming more valuable. So much so, that we're increasinglyindifferent economically as to whether these asset are dedicated to native loadcustomers under our rate stabilization plant are dedicated to pure market-basedsales.

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

Clearly, the acute shortage of rainfall in the past severalmonths has created an increasingly serious situation for water users in ourregion. The good news for Duke Energy is that a significant portion of ourgeneration in the Carolinas is located on twolake systems. Catawba-Wateree (inaudible) then including network of dams andreservoir that we operate to maintain adequate water supplies throughout theregion.

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

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

Now an update on our efforts to modernize and expand ourgeneration fleet. We continue to move ahead on our plan to build a new unit atour Cliffside Steam Station in North Carolina. The comment period of air permit endedWednesday, 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 clearbefore beginning construction of the plant.

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

We plan to file our integrated resource plan with the Northand South Carolinacommissions in December. We believe our RRP will show a growing need for theLee nuclear station and the positive impact it will have on the communities weserve in the Carolinas.

Because our resource plan is showing a need for the Leeplant, we have continued to prepare to seek all necessary regulatory approvalsfor the plant. We are on track to file yet this year, our application with theNuclear Regulatory Commission for a combined construction and operating licensefor Lee. We are also planning to file a certificate of public conveniencenecessity in South Carolinain 2008. These actions are necessary steps, as we continue to pursue the optionof building the new plant.

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

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

We are also making good progress on increasing the roleenergy efficiency will have in meeting our customers’ future energy needs. Lastmonth, we filed our Save-a-Watt plans in South Carolinaand Indiana. Indiana’s is a statewhere we already have extensive demand-side management programs and our energy efficiencyfiling expands those 10 fold.

You will recall that we have filed our Save-a Watt-plan lastspring in North Carolina and we expanded ourcurrent energy efficiency offerings in both Kentuckyand Ohio.

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

Third, it should remove barriers to the deployment of zeroemission nuclear energy, and fourth, a fair allocation of allowances should bemade to consumers who rely on coal during this transition period to when we candeploy new technologies to capture and store carbon.

While the recently introduced Lieberman-Warner Bill hascap-and-trade, we don't think it adequately protects the economies and thecustomers of the 25 states that produce more than 50% of their electricity fromcoal. This is primarily due to the Bill's provision for higher allowances. Wewill continue to work with the two senators and their counterparts on theEnvironment and Public Works Committee to develop effective and economicallysustainable climate change legislation and with fairly allocated emissioncredits.

Now, I would also like to give you a quick update on ourcommercial businesses. You heard David talk about the strong quarterlyperformance in the Commercial Power and International Energy segments to ourthird quarter earnings. This is further evidenced of how the value of these assetshas 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 acombined 8% to 10% on a compounded annual growth rate basis through 2012 andthat's all for 2008 base.

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

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

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

We are very focused on our operations, on controlling ourcosts and earning fair returns for our investors. Our current dividend yield isapproximately 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 takeyours questions.

Question-and-AnswerSession

Operator

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

Dan Eggers - CreditSuisse

Good morning.

Jim Rogers

Good morning, Dan.

Dan Eggers - CreditSuisse

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 arun 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 solutionsphase, now that it's out of the senate into the House. And we are working withthe various stakeholders in the state to get greater clarity with respect. Ithink one of the areas that needs to be defined in a clear way is with respectto the Commission's ability to allow us to go to market in the whole process ofthe renegotiation, and how that will work going forward.

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

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

Dan Eggers - CreditSuisse

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

Jim Rogers

I think there is a full court press by environmentalistthroughout the country to block the building of any new coal plant. And theyare ceasing on anything they confine that would throw up a roadblock to thebuilding of new coal plants in this country. And I think that's across thecountry. And there is no place that that's an exception. But, as we lookbetween now and 2030 in the United States where we will experience a 40% growthin demand, we need to add additional generation. We have worked hard to put alot of effort into investments in energy efficiency, as well as investments inrenewables. And renewables are quite frankly a little higher priced than coalgeneration. But we are working very hard to make sure we are maximizing thosein support of our need to build both coal and nuclear, so more to come on allthat. And by the way our plan in Indiana, whenthat 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 todevelop a carbon capture and sequestration project there that will ultimately, ifwe can get the details worked out, offer hope with respect to using coal in thefuture and capturing the carbon that is a consequence of the burning of thecoal.

Dan Eggers - CreditSuisse

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

Jim Rogers

I think given the timeline adding additional generation nowto deal with the issue over the next year or two is just not doable. But, weare doing some thing that will make a difference. And let me give you just oneexample of that. We're adding new piping and valves to backup system. It's oneof our multiple backup systems at our McGuire Nuclear Station, which will allowthe plant to operate at lower lake level. We expect this work to be completedby early 2008. Cost of this work is part of normal operating cost and in thisthe power plants in the basin generate about 9000 megawatts of electricity toserve 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 backuppower, going forward. But our current expectation, and remember for us job oneis reliability. Our current expectation is if we get close to normal rainfallwe're going to have no problem meeting the demands on our system through nextsummer.

Dan Eggers - CreditSuisse

Got it. Thank you.

Operator

Moving on, we will take our next question from PaulPatterson 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 tobe 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 singlebiggest issue is the discretion that [FUGO] has in terms of determining whetheror 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 keyissues is how do you establish the value of the deregulated generation. And Ithink on that specific, what I called the deregulated generation that has beendedicated under an RSP and that has kind of been a concern. The senator addressthat in a way -- in a clear way, but there is more work that needs to get donein other provisions. And like all legislation you really have to look at allthe pieces and make sure they are internally consistent. And as we work throughwe want to make sure they all tie together and don't leave any kind of gap thatwould create appeals in the future. But, we are comfortable let's say if itaddress the issue of that valuation going forward. But there are some otherissues that are critical to be addressed, but more work to do on that. But, onbalance we are moving in the right direction and I think that's the importantpoint.

Paul Patterson -Glenrock Associates

Okay. You guys are still pretty confident about getting itdone 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 thinkwhat's important to me is that senate unanimously voted out the Bill. Thatdidn't happen very often. And that says that they believe there is sense ofurgency here to act and move forward. The House immediately set a schedule thatto me indicates that they will be finished in January. We use the date, thefirst quarter, because we know how these things slip in the process, in termsof our own expectation. But, I think there is a recognition within the statethat we need to address this immediately, because the rate stabilization plansend at the end of the '08. And they also recognize the closer we get to thePresidential Election, the harder it would be to work through something thatmakes 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 aseamless transition to '09, and that is really critical to maintainingreliability 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 saythat you are may even be on track to meet the breakeven by '09 for those, oreven 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 wehaven'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 theutility that you talked about related to primarily the incentive comp.

David Hauser

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

Steve Fleishman - CatapultPartners

Okay.

David Hauser

For the total company that was 51 million.

Steve Fleishman -Catapult Partners

Okay. And then finally, is there any more specific timelineon when the Indianacommission will rule?

Jim Rogers

I was in Indianajust this week and based on briefings there, the thought is it will probably bemore 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 withMerrill 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 thinka $100 million of weather in the utility. I want to just be sure that that'sversus 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 theutility?

David Hauser

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

Jonathan Arnold -Merrill Lynch

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

David Hauser

Yeah, our estimate is that's about 10 million of benefit incommercial 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 beoffset by the increase in the incentive accrual that occurred because of thehigher earnings that we are experiencing.

Jonathan Arnold -Merrill Lynch

Right.

Jim Rogers

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

Jonathan Arnold -Merrill Lynch

Great. Thank you.

David Hauser

Let me circle back to your first question, we pulled thatup. The weather for the year-to-date versus last year or versus the prior yearis 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 and51. Do they have, are they higher year-to-date number or was that just an accrualyou made in the third quarter that relates to the year.

David Hauser

That is basically third quarter accrual, because that iswhen 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 capturedin that 51 million?

David Hauser

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

Jonathan Arnold -Merrill Lynch

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

David Hauser

We closed the books at September 30, and the phase out atSeptember 30th was 50%. And as all prices have moved around since then, we didnot 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 Indianaregarding Edwardsport, can you provide some commentary on some of the politicalpush back and discussions that are occurring regarding approval or potentialapproval of the plant and the role of various political figures in terms ofdiscussing it with the Commission?

Jim Rogers

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

There was recently a hearing down in Bloomington, and theoverwhelming group that were there were in support, they actually buzz downfrom Edwardsport people, got together, went down there and made it clear thatit 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 fundtheir 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 UnitedStates, and we are building it on our Brownfield site, and a 50 year plant willnow operate as a consequence of replacing it with this new plant.

And we have gotten support from environmental groups in thestate, because we are committed to doing a carbon capture and sequestrationproject figure, and if you remember the MIT study, the MIT study made it veryclear that if we were going to get, be able to use coal in the future, we needto have some major carbon capture projects developed over the next five to tenyears.

This will be the first commercial coal gasification plantbuilt in United States, thegeology in Indianais almost perfect for carbon capture, I mean for sequestration. So we areworking to develop that, so we've got state and local support, we have federalsupport, we have the major environmental groups support. We still have somegroups that oppose it, because they oppose all coal plants. But on balance, wethink across the state, there is strong support for the building of this plantat every level.

Michael Lapides -Goldman Sachs

Got it. Thank you. Much appreciate it. Where do you thinkthis heads in terms of cash returns during construction and whether the projectROE 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 howto answer this. And I guess the way I would say is, is that, we’ve asked for anincentive ROE with respect to this and that will be a judgment that will bemade 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 waytheir proposed order is written, is that when they approve the need for theplant, they approve the mechanism that allows us to recover the cash during theconstruction.

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

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 EnergyCompany. And according to your tables, you are at 103 or 104. So if you canmatch last years' results we should be at like 135 range, and then what you arealso saying if I heard that majority of the gain from the weather has beencancelled by the compensation hit. So I guess there is growth in earnings fromthat level onwards in '08. Are any of my assumptions wrong?

David Hauser

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

Ashar Khan - SAC

Okay.

David Hauser

So, that would be one significant difference. Then if I lookat the weather discussion, we had about a $100 million in franchise andelectric and about $10 million in the commercial, so about $110 million totaloffset by about $51 million increase in the incentives. So, you still had $50million 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 forthe 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 thetable because there ongoing earning table said that for 2006 to year-to-dateearnings were $0.76 as I guess there's a discrepancy somewhere in the mathsomewhere?

David Hauser

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

Ashar Khan - SAC

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

David Hauser

We aren’t getting that specific, but we're very clear thatwe'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 withAtlantic Equities.

Jim Rogers

Nathan welcome.

Nathan Judge -Atlantic Equities

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

Jim Rogers

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

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

David Hauser

Let me just add one thing that you maybe are focusing ownNathan. 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. Soyour presumption that it would be fully covered in rates in 2013 is a goodpresumption, but all of what Jim said is absolutely true too. So it's just 2012that is the anomaly in the way we modeled it.

Nathan Judge -Atlantic Equities

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

David Hauser

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

Nathan Judge -Atlantic Equities

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

David Hauser

I would have said, your logic is good, but we haven’t run2013.

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 - RBCCapital Markets

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

Jim Rogers

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

Lasan Johong - RBCCapital Markets

So has your scientist discovered a catalyst that would bindCO2 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 thatquestion. What I have been told is that, again there is some sequestration donetoday in the United States,and it's primarily in the southwest where you're re-injecting CO2 in thereservoirs to get additional oil and natural gas out.

Here the situation is that you would be re-injecting it intothese limestone formations. And we would start out by only doing a portion ofthe CO2, and you should remember it's easier to capture carbon coming fromsyngas and coming from the emissions of the coal plant, and the technology iswell developed to capture the carbon. The difficult and the thing that we willbe 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 technicalquestions that need to be answered, and that's why we believe in this countryand this is part of the debate on Capita Hill.

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

Lasan Johong - RBCCapital Markets

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

Jim Rogers

With respect to the plant itself, we need the energy and itis the least cost option for us to build this coal gas plant. So, we will betaking 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, becauseof the efficiency of the plant. The experimentation part will be capture of thecarbon and storage, which will done contemporaneous with the operation of theplant. Now, there is some technical issues around that, because as we'vetalked, reliability is number one in running that plant, as much as we can runthat plant at the highest load factor is our goal line. But, we are prepared totry to do both because its so critical not just to our company who is the thirdlargest consumer of coal in the country, but its so critical to our entirecountry that we develop this technology going forward.

Lasan Johong - RBCCapital Markets

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

Jim Rogers

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

Lasan Johong - RBCCapital Markets

Okay, thank you.

Jim Rogers

Thank you very much.

Operator

We'll go ahead and take our final question from Annie Tsao withAlliance 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 weshould assume effective tax credit for '07 to be 27%. What should we anticipatefor '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 '08anymore.

Annie Tsao - Alliance Bernstein

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

Jim Rogers

We have built a number of contingency plans, because ourgoal line is to work our way through this problem in a way that is seamless toour customers. So, I mentioned a few moments ago the work that we're doingaround the McGuire Nuclear Station. The other things we're doing, is lining uppotential supplies and looking at alternative supply sources during somecritical periods going forward. So, our team, and I am very proud of our teamin 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 peoplethrow the switch.

Annie Tsao - Alliance Bernstein

Okay. Andyou mentioned also Lieberman and Warner legislation. You don't think theyprotect 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 theBingaman bill did. And that is a flaw in the bill in terms of protectingconsumers against the volatility in the rise in the price of CO2 during theseearly periods when technology is yet to be developed. The second thing is thatthey have not allocated the allowances in a way -- that in my judgment arefair, particularly to those state that are so dependent on coal. About 50% ofelectricity in this country comes from coal and actually it's concentrated in25 states. And in these 25 states, under the Lieberman bill, you could seeprices increase as much as 30% and 40% unless they adjust these allowances.

So the industrial heartland of our country in the Southeasthit in face with what I would effectively call a carbon tax, or new charges ontheir generation. So this, like many issues as in the energy area, and theenvironmental area, are not issues of Republicans versus Democrats. They arereally 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 legislationis structured it basically punishes those who have dependent on coal. And thatto me at the end of the day is equity issue, a fairness issue, and quitefrankly, that is going to have to get resolved before you really get completesupport 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. Weappreciate your interest and investment in our company, and we are working hardto deliver for you. Thank you all very much.

Operator

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

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