TRANSCRIPT
DUK - Q3 2014 Duke Energy Corp Earnings Call
EVENT DATE/TIME: NOVEMBER 05, 2014 / 10:00AM EST
1
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
CORPORATE PARTICIPAN TS
Bill Currens Duke Energy Corporation - VP, IR
Lynn Good Duke Energy Corporation - President & CEO
Steve Young Duke Energy Corporation - EVP & CFO
CONFERENCE CALL PART ICIPANTS
Julien Dumoulin-Smith UBS - Analyst
Greg Gordon Evercore ISI - Analyst
Stephen Byrd Morgan Stanley - Analyst
Jonathan Arnold Deutsche Bank - Analyst
Michael Lapides Goldman Sachs - Analyst
Hugh Wynne Sanford C. Bernstein & Company, Inc. - Analyst
Ali Agha SunTrust Robinson Humphrey - Analyst
Andy Levi Avon Capital Advisors - Analyst
PRESENTATION
Operator
Good day and welcome to the Duke Energy third quarterly earnings call. Today's conference is being
recorded.
At this time, I would like to turn the conference over to Bill Currens. Please go ahead, sir.
Bill Currens - Duke Energy Corporation - VP, IR
Thank you, Tracy. Good morning, everyone, and welcome to Duke Energy's third-quarter 2014 earnings
review and business update. Today's discussion will include forward-looking information and the use of nonGAAP financial measures.
Slide 2 presents the Safe Harbor statement which accompanies our presentation materials. A reconciliation of
non-GAAP financial measures can be found on duke-energy.com and in today's materials.
Please note that the appendix to today's presentation includes supplemental information and additional
disclosures to help you analyze the Company's performance.
Leading our call today is Lynn Good, President and CEO, along with Steve Young, Executive Vice President
and Chief Financial Officer. After our prepared remarks, we will take your questions. Other members of the
executive team will be available during this portion of the call.
With that, I'll turn the call over to Lynn.
2
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
Lynn Good - Duke Energy Corporation - President & CEO
Good morning, everyone, and thanks for joining us.
Earlier today we released third-quarter adjusted earnings results of $1.40 per share. These results were
impacted by milder than normal weather, unfavorable results in Latin America and weaker retail load compared
to the prior year quarter.
Our year-to-date results remain above our internal plan, and we remain on track to achieve our revised 2014
adjusted EPS guidance range of $4.50 to $4.65 per share. Steve will provide more about the financials in a
moment.
Let me spend a few minutes on operational performance and progress on how we are positioning our business
for growth. Our regulated nuclear fleet set a record quarterly capacity factor of 98% in the third quarter. Our
regulated natural gas fleet also performed well, achieving at least an 80% capacity factor at eight of our nine
combined-cycle plants in the Carolinas and Florida.
We also continued to deliver significant benefits from the 2012 merger with Progress Energy. Through the third
quarter, we've generated about $360 million of cumulative fuel and joint dispatch savings for our Carolinas
customers. We are on track to achieve the guaranteed savings of $687 million over the first five years.
By the end of this year, we expect to deliver nonfuel O&M savings of about $550 million, exceeding our original
assumptions.
It has been an active and successful quarter in advancing our strategy. Let's turn to slide 4 and several of our
growth initiative announcements during the third quarter, including new generation and new gas and electric
infrastructure.
I'll briefly summarize a few of our key announcements. In September Duke and Piedmont Natural Gas
announced a joint venture with Dominion and AGL Resources to build and operate the Atlantic Coast Pipeline.
The 550-mile natural gas pipeline begins in West Virginia and runs through Virginia and into eastern North
Carolina. Duke will have a 40% ownership interest in this project through our commercial business. The
pipeline has a total construction cost estimate of between $4.5 billion and $5 billion. The pipeline is over 90%
subscribed and a binding open season for the remaining firm transportation capacity is currently underway.
Our regulated subsidiaries in the Carolinas will enter into 20-year gas transportation agreements with the
pipeline. The utilities commissions in both North and South Carolina have approved our regulated subsidiaries
entering into these agreements.
Since the announcement, the project has received broad support. Over 5,000 letters have been received
across the project's three state regions, voicing support for the pipeline. An independent study estimates that
the project can generate a total of $2.7 billion in economic impact by 2019, supporting over 17,000 jobs. The
project requires FERC approval, which the joint venture will seek to secure by the summer of 2016.
Last week Dominion, on behalf of the joint venture, submitted a pre-filing with FERC which begins the
extensive review process. Construction is expected to be completed in late 2018.
Secondly, we plan to invest in our transmission and distribution infrastructure in Indiana. In August we filed a
seven-year $1.9 billion grid modernization plan with the Indiana Commission under legislation recently
3
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
enacted. The plan uses advanced technology and infrastructure upgrades to improve service to our Indiana
customers. Hearings are set for December with a decision expected in the second quarter of 2015.
As highlighted on our last earnings call, we finalized an agreement for the $1.2 billion purchase of the North
Carolina Eastern Municipal Power Agency's minority ownership in existing nuclear and coal generation. This
transaction provides significant benefits. The proceeds will allow the power agency cities to reduce their
customers' rates and debt burden. Duke Energy/Progress customers will also benefit from long-term cost
savings and increased fuel diversity.
Last month we filed for FERC approval of the asset purchase agreement and the 30-year full requirements
wholesale agreement with the Power Agency. Under the agreement, the transaction must be completed by the
end of 2016. In September we announced plans to commit $500 million to solar expansion in North Carolina.
This supports compliance with the state's renewable portfolio standard.
In addition to signing power purchase agreements with five new solar projects for 150 megawatts, we will
acquire and construct three solar facilities totaling 128 megawatts. We have filed with the North Carolina
Utilities Commission for approval to transfer the certificates of public convenience and necessity for the
facilities to be acquired.
These important growth initiatives support our ability to continue providing our customers affordable reliable
energy from an increasingly diverse generation portfolio, as well as providing a solid foundation for our longterm earnings growth rate of 4% to 6%.
Now let me turn to slide 5, which summarizes our new generation projects in the Carolinas and Florida.
Overall these projects will replace generating capacity that has or will be retired and will help us meet the longterm load growth in our service territories. These projects represent around 3,000 megawatts of capacity and
almost $3 billion of investments through 2018.
During the quarter, the Florida Commission held hearings to review the need for our proposed 1,640-megawatt
combined-cycle facility in Citrus County and the 220 megawatts of upgrades at the existing Hines facility. Last
month the Florida Commission issued certificates for both projects. We expect the Hines upgrade to be online
by the end of 2017 and the Citrus County plant to be online in 2018. Site certification approval for Citrus
County is expected in late 2015.
We continue to evaluate our options for additional capacity in Florida. We are negotiating with Calpine on the
potential purchase of their Osprey combined-cycle plant. We are also continuing to evaluate the addition of 320
megawatts of peaking capacity at our Suwannee facility. We expect to ultimately move forward with one of
these options. We will keep you apprised of our plans as we finalize our evaluation and make filings with the
Florida Commission later this year or early next year. A potential Osprey acquisition would also require FERC
approval.
Turning to slide 6, I'll provide an update on coal ash management activities during the third quarter. In August
the North Carolina legislature passed the Coal Ash Management Act of 2014, which became law in
September. This law requires closure of all coal ash basins in the state within 15 years, while preserving the
ability to make site-specific closure decisions based on science and engineering. It also establishes a ninemember Coal Ash Management Commission to oversee implementation of the law.
It requires the North Carolina Department of Environment and Natural Resources to evaluate and issue a
proposed classification for all ash basins as either high, intermediate or low risk by the end of 2015. The law
designates the ash basins at Dan River, Asheville, Riverbend, and Sutton as high priority and requires them to
4
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
be closed no later than August 1, 2019. We have begun developing excavation plans, permitting applications
and other work at these four sites.
We will be filing our excavation plans for these four sites with NC DENR later this month.
In a moment, Steve will provide an update on the accounting implications of the law.
During the quarter, we also took proactive steps to advance our Coal Ash Management program. First, we
announced a new centralized internal organization to manage all coal combustion products. We also
announced the formation of the National Coal Ash Management Advisory Board, a panel of nine independent
experts from fields such as engineering, waste management, environmental science, and risk analysis. This
panel will help guide our strategy for permanent ash storage and basin closure.
Before updating you on Edwardsport, let me provide some comments on the EPA's proposed rule for
regulating carbon dioxide emissions from existing power plants. Since issued in June, we continue to evaluate
the rule and engage with our state regulators. We are developing comments and plan to submit them to EPA
by the revised deadline. We have made significant progress over the last decade in reducing the
environmental impact of our generating facilities. We've invested over $9 billion in building new state-of-the-art
plants, as well as $7.5 billion in environmental controls. These investments have resulted in CO2 emission
reductions of more than 20% below 2005 levels, as well as significant SO2 and NOx emission reductions.
It is important that the rule recognize these investments for the benefit of our customers. Our comments will
focus on the composition and achievability of the four building blocks, as well as the interaction between the
building blocks.
We are also focused on the pace and timing of the required reductions, specifically the interim date
requirements and the potential impact on system reliability. Nuclear is an important part of our generation fleet
in the Carolinas. The appropriate treatment of existing and new nuclear generation in goal setting and
compliance will also be an important area of focus. We expect the rule will receive a significant volume of
comments, as well as legal challenges. We will continue to keep you updated on our thoughts on this rule
making as it evolves over the coming months.
Next let's turn to slide 7 and our Edwardsport plant in Indiana, which achieved commercial in-service in June of
last year. We have completed GE's rigorous performance testing protocol and have validated that all major
technology systems are working. To achieve substantial completion under the contract with GE, we are
finalizing the plant's ramp rate performance, which we expect to complete later this year.
Plant output and overall performance has improved during the year. Gasification availability averaged 75%
during the second quarter and 70% during the third quarter, including a planned maintenance outage that
began in September. Gasification availability exceeded 90% during the critical months of July and August. This
plant is well-positioned to reliably serve our Indiana customers for decades to come.
The right side of this slide outlines the status of the regulatory proceedings associated with the plant. IGCC-11
is fully briefed, and we are awaiting a commission order. The commission will hold hearings on IGCC-12 and
13 in February. Orders are expected for all three pending proceedings in the first half of 2015. The commission
will examine the operational performance of the plant in the normal course of reviewing our semi-annual rider
filings.
Any Edwardsport IGCC-related fuel costs are reviewed in connection with the quarterly fuel clause
proceedings. We will continue to update you on these important regulatory milestones.
5
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
Before turning the call over to Steve, let me update you on the sale of our non-regulated Midwest Generation
business to Dynegy for $2.8 billion in cash.
As outlined on slide 8, we expect to close the transaction by the end of the first quarter of 2015. The closing
date will depend on the timing of approvals, including FERC, Department of Justice, and our release from
certain credit support obligations. Use of proceeds for this transaction remains under evaluation and will be
determined as we approach the closing.
Proceeds could be deployed in a combination of funding growth investments, avoiding future holding company
financings, or a stock buyback. We are committed to maximizing shareholder value and expect the transaction
to be accretive to our adjusted EPS beginning in 2015 or 2016, depending on the closing date and how the
proceeds are redeployed. We will keep you updated on our progress in the coming months.
Overall in looking back at everything we've accomplished so far this year, I'm pleased with how we are
executing our business plans, advancing growth initiatives, strengthening our operational performance, and
delivering reliable service to our customers. We look forward to a strong finish to 2014.
Now I'll turn the call over to Steve to discuss our financial performance for the quarter.
Steve Young - Duke Energy Corporation - EVP & CFO
Thanks, Lynn. Today I'll focus on four areas. First, the primary drivers of our third-quarter results. Second, our
retail volume trends and the economic conditions within our service territories. Third, important accounting
changes made in the third quarter. And finally, I will close with our financial objectives, including the status of
our 2014 adjusted earnings guidance range.
Let's start with the major earnings drivers for the quarter as outlined on slide 9. Our quarterly adjusted diluted
EPS of $1.40 was below the prior year's quarterly results of $1.46 per share. As we discussed during our last
earnings call, we expected slightly higher adjusted earnings per share in the third quarter compared to last
year.
However, adjusted earnings this quarter were hampered by three principal drivers. First, weather was below
normal by around $0.06 per share. Additionally, unfavorable results at International Energy and lower retail
customer load growth also contributed to reduced third-quarter earnings.
Overall, based on the strength of the first two quarters, we remain on track to achieve our revised 2014
adjusted earnings guidance range of $4.50 to $4.65 per share.
On a reported basis, we earned $1.80 during the quarter compared to $1.42 last year. Reported results include
an approximate $475 million pretax reversal of a first-quarter impairment charge related to the sale of our
Midwest Generation business. This impairment reversal was recorded in discontinued operations and has
been excluded from the Company's adjusted diluted earnings per share results.
Next, let me discuss the key quarterly earnings drivers for each of our major segments. I'll start with our largest
segment, Regulated Utilities, where adjusted earnings were essentially flat during the quarter.
For the second summer in a row, we experienced mild weather compared to normal. However, the weather
this quarter was warmer than last year, driving favorable quarter-over-quarter results. Cooling degree days
were around 10% below normal in the Carolinas and almost 30% below normal in the Midwest.
6
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
Other favorable drivers included higher pricing, primarily associated with our 2013 rate cases at Duke Energy
Carolinas and a favorable effective tax rate. These impacts were offset by higher depreciation and amortization
expense and interest expense, primarily associated with the new assets in rate base and lower retail customer
volumes. We also entered into a fuel settlement this quarter, offsetting the benefit of revised rates at Duke
Energy Progress.
Cost control efforts have helped us achieve flat non-fuel O&M when compared to last year's quarter. We are
driving costs out of the business through our merger-related initiatives.
International Energy's quarterly results were $0.05 per share lower this year, primarily driven by higher
purchase power costs in Brazil, resulting from poor hydrology. We also had an unplanned outage at one of our
hydro facilities in Chile. This outage has been resolved, and the unit is currently online.
As you will recall, we operate hydro generation plants in Brazil that are dependent upon adequate reservoir
levels to generate electricity. In 2014 Brazil has experienced the most severe drought in around 80 years, and
reservoir levels are at near historic lows. In response to the drought, Brazil's regulatory authorities are
dispatching thermal generation at full capacity.
In anticipation of below normal rainfall and challenging hydrological conditions, we reduced our contracted
capacity levels for 2014 and have taken similar actions for 2015. We will closely monitor reservoir conditions as
we move through the fourth quarter and enter 2015.
Commercial Power's adjusted earnings were $0.05 per share higher, primarily driven by increased earnings at
the Midwest Generation business. Midwest Generation was supported by higher PJM capacity prices, which
increased from $28 per megawatt day in the prior year to $126 per megawatt day currently. The other segment
variance was primarily driven by a favorable prior-year state deferred tax adjustment. More detailed quarterly
adjusted earnings drivers for each of our segments are included in today's presentation materials and press
release.
Moving on to slide 10, I'll now discuss our retail customer volume trends. In the third quarter of 2013, we
experienced strong retail load growth of 1.7%, a challenging level from which to grow period over period. As
we saw in the first quarter of 2014, adjusting for weather can be imprecise, especially over shorter periods of
time. For these reasons, we find load growth trends more meaningful when evaluated over a longer term
period.
Through the third quarter, weather normal retail load was 0.7% higher on both a year-to-date and a rolling 12month basis. This is ahead of our full-year expectations of 0.5% growth. We continue to see growth in the
industrial class. In fact, this was the sixth consecutive quarter of growth in this sector. Results in our
commercial and residential sectors have been more volatile.
Based upon historic trends, we believe the consistent growth we have seen in industrial will expand to the
other sectors as the economic recovery gains more solid footing.
Let me briefly highlight some of the recent trends we are monitoring in each major customer class. First, the
industrial sector, where sales grew 0.6% over the rolling 12 months. We have experienced recent weakness in
our Duke Energy Progress territory where sales continue to be negatively impacted by two chemical plant
closures late last year.
Outside of Duke Energy Progress, industrial activity in our other jurisdictions remains strong with overall growth
of around 2% over the rolling 12 months. The Midwest and Duke Energy Carolinas jurisdictions continue to see
7
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
strength in the metals, chemicals, and transportation subsectors. Building product manufacturers have also
shown recent strength.
Next the commercial sector where sales grew 1.1% over the past 12 months. Overall this sector continues to
benefit from recent strength in the health care, education and government areas across all jurisdictions. This
strength has also been supported by positive long-term employment trends.
Turning to slide 11, I'll provide some insight into our residential sector, which has experienced 0.5% growth
during the rolling 12-month period. As you can see in the chart, the total number of customers in our
jurisdiction continues to grow consistently by around 1%. We experienced 1.5% growth in Florida, 1% growth
in the Carolinas, and around 0.5% growth in the Midwest. However, volatile customer usage trends affect
overall residential load growth. Customer usage can be impacted by energy efficiency and conservation efforts,
changes in median household income, unemployment trends and rising demand for multifamily housing.
Overall we continue to be cautiously optimistic about the future based upon the broad trends in the economy.
Economic expansion is projected to continue with GDP expected to grow at nearly 3% for the remainder of
2014.
Employment activity in the states we serve remains generally favorable with unemployment rates at or below
the national average. To date in 2014, approximately 20% of U.S. non-farm job growth is in states served by
Duke Energy, particularly in the manufacturing and construction sectors.
Our affordable electricity rates continue to attract businesses to our service territories. Our economic
development teams are actively pursuing potential projects within our six-state footprint. So far this year
several new business relocations and expansions have been announced in our service territories, representing
around $3 billion in investments and more than 9,500 new jobs.
Based on the retail sales growth we've experienced over the rolling 12 months and the underlying favorable
economic forecasts, we remain confident in our longer-term growth expectation of around 1%. We expect
individual quarters to vary, but the longer-term economic trends are generally favorable.
Let me spend a moment discussing two important accounting matters that occurred during the third quarter as
outlined on slide 12. First, accounting rules require the recognition of an asset retirement obligation or ARO
liability of approximately $3.4 billion as a result of the passage of coal ash legislation in North Carolina in
September. This obligation has been capitalized on the balance sheet as property, plant, and equipment for
active sites and as a regulatory asset for retired sites. The ARO is based upon a discounted probabilityweighted assessment of various ash basin closure methodologies, costs, and timelines. The ultimate cost will
rely on the site-specific risk classifications and closure methodologies approved by NC DENR and the Coal
Ash Management Commission, as well as the anticipated federal rules for coal ash. We will update the ARO as
closure plans continue to evolve.
We also had two accounting implications related to the sale process of the Midwest Generation business. As
you may recall in the first quarter, we recognized a pretax impairment of $1.4 billion based upon the estimated
fair market value of the assets. Our agreement to sell the Midwest Generation business to Dynegy for $2.8
billion is higher than our original estimated fair value. Therefore, we have reversed around $475 million of the
previously recognized impairment in the third quarter. This reversal was recorded in discontinued operations
and has been excluded from our adjusted diluted earnings per share for the quarter. As a result of the Dynegy
agreement, our Midwest Generation business now meets the accounting criteria to be classified as
discontinued operations for GAAP reporting purposes.
As we announced at the commencement of the sale process, the earnings from this business will continue to
be included in our adjusted diluted earnings per share in 2014.
8
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
Despite the mild third-quarter weather and poor Brazilian hydrology, we are ahead of plan for the year. We are
confident in our ability to achieve our revised 2014 adjusted earnings guidance range of $4.50 to $4.65 per
share. This range implies fourth-quarter adjusted earnings between $0.80 and $0.95 per share.
Slide 13 outlines the key drivers to consider when evaluating our expectations for lower earnings-per-share in
the fourth quarter as compared to the prior year. Many of these drivers are consistent with what we have
encountered during the year.
Let me briefly discuss a few of the drivers that may not be as intuitive. First, we do not expect a significant
quarter-over-quarter variance for revised customer rates as our prior year rate cases were all in effect for the
entire portion of last year's fourth quarter. Related to 2013 rate case activity, we expect a negative driver in the
fourth quarter due to the implementation of nuclear outage cost levelization in late 2013.
You might recall that we realized $0.11 of favorable earnings per share in 2013, mostly in the fourth quarter as
we implemented this accounting treatment. This year we expect about $0.05 to $0.06 of a lower benefit in the
fourth quarter.
We also expect lower results in Latin America, principally driven by the impacts of drought conditions in Brazil
and unfavorable foreign currency exchange rates. Finally, we expect a higher effective tax rate in the fourth
quarter than the 31% we recognized last year. We anticipate a full-year adjusted effective tax rate of 32% to
33%.
Slide 14 highlights the building blocks of our long-term adjusted earnings growth objective of between 4% to
6% through 2016. The left side of this slide shows the components of our base plan, which supports our
adjusted earnings per share growth of around 4%. This base plan is underpinned by around $3 billion in annual
growth investments and assumes modest retail and wholesale load growth coupled with effective cost
management.
Lynn outlined the progress that we've made this quarter advancing our incremental growth opportunities,
including the Atlantic Coast Pipeline and the NCEMPA asset purchase. These incremental opportunities, along
with load growth in excess of 0.5% and optimization of our Commercial portfolio, give us confidence in our
ability to achieve our targeted 4% to 6% adjusted earnings-per-share growth objective through 2016.
Slide 15 outlines our financial objectives for 2014 and beyond. These objectives have remained consistent
over time, and we have an established track record of achieving each of these objectives. We are on track to
achieve our 2014 revised guidance range and our long-term adjusted earnings growth objective.
We are also focused on the dividend, which is central to our investor value proposition. During the third
quarter, we increased our dividend by 2%. This was the seventh consecutive year we have increased the
dividend. We expect to move into our targeted long-term dividend payout ratio of 65% to 70% this year,
providing additional flexibility going forward.
Our balance sheet and credit ratings remain strong, allowing us to invest in our business without the need for
new equity issuances through 2016.
As we normally do, in February, we will provide updated financial plans for 2015 and beyond.
Now I'll turn it back over to Lynn.
Lynn Good - Duke Energy Corporation - President & CEO
9
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
In closing, the third quarter demonstrated significant positive momentum in delivering value for our customers,
communities and shareholders, and we are laying a strong groundwork and foundation for the future.
Now we welcome your questions.
QUESTION AND ANSWER
Operator
(Operator Instructions). Julien Dumoulin-Smith, UBS.
Julien Dumoulin-Smith - UBS - Analyst
Hi, good morning. First question, on the ARO and the overall CapEx/OpEx composition of potential spend with
the coal ash, could you just give a little bit of flavor around how much of this could turn into an earnings
opportunity and whatever parameters you can describe?
Steve Young - Duke Energy Corporation - EVP & CFO
We have recorded at this point the ARO liability, and we have not begun to spend any significant funds. We will
begin spending that money in 2015 as we have identified four plants that we are going to work on pretty
quickly. Our focus right now is getting these plans approved, getting the permitting done, getting the logistics in
place. The ultimate cash spend will be impacted by the decisions made by DENR and the Coal Ash
Commission regarding many of the sites. Ultimately the cost recovery aspect has been kicked to the utilities
commission. We've made no applications for recovery because we haven't incurred any costs. So ultimately
the disposition of that into customer rates has yet to be decided.
Julien Dumoulin-Smith - UBS - Analyst
Fair enough. And turning to the international business, I would be curious, where do you stand in the strategic
review? And specifically, do the latest hydrological developments in Brazil impact that review in any sense, and
really what's on the table at this point as the process continues?
Lynn Good - Duke Energy Corporation - President & CEO
So we are continuing to review all options and have set an internal timeline of late 2014, early 2015 for our
review, and we are on pace for that, Julien. I wouldn't say specifically that the hydrology in the year of 2014 is
impacting that review, but certainly hydrological risk, regulatory risk, market risk, and opportunities are part of
what we are assessing. So when we reach any important milestone in that review, we will certainly update you,
but at this point don't have anything further to discuss.
10
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
Julien Dumoulin-Smith - UBS - Analyst
Great. And then if you will, just turning to Florida quickly, NextEra has talked about some other opportunities
potentially adding solar in the state, gas reserves. I'd be curious what's your thought process on pursuing those
avenues, as well?
Lynn Good - Duke Energy Corporation - President & CEO
You know at this point, our focus is on the generation -- significant generation build that we have underway to
replace capacity in the state. So we are focused, as we remarked in our comments, on combined-cycle, up
rates and adding additional capacity. We certainly believe that solar represents an opportunity for the state of
Florida as it makes sense for public policy and the requirements of our customers, and we'll pursue that at the
right time. But I would say our focus at this point is on the gas capacity.
Julien Dumoulin-Smith - UBS - Analyst
Great. Well, thank you very much.
Operator
Greg Gordon, Evercore ISI.
Greg Gordon - Evercore ISI - Analyst
Good morning. Going back to page 7 on Edwardsport, can you review the dollars that are being reviewed for
recovery in the rider proceedings and what the risk is if the commission were to decide that you weren't
performing up to their expectations?
Lynn Good - Duke Energy Corporation - President & CEO
You know, Greg, I think we can take you offline on the specific dollars in each of the filings. The team would be
ready to do that as soon as the call is over.
Let me just give you some color generally about the proceedings. So the commission will be taking up IGCC12 and 13 in February. They will be focusing on the operating results of the plant. There have been challenges
by certain of the interveners during November of 2013 around the concept of negative generation, when the
plant was down and was drawing power from the grid.
We also have discussed previously that we had some challenges during January with freezing, 30 degrees
below normal temperatures in Indiana. We expect the commission to be reviewing operating activities during
that period.
11
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
So I think between the IGCC filings, as well as fuel, there will be a comprehensive review of operations, and
our focus has been on continuing to improve performance, and I think the demonstrated results that we shared
on the call with 90% availability for the gasifier in July and August and the overall capacity factors demonstrate
that we are moving in the right direction.
Greg Gordon - Evercore ISI - Analyst
Thanks. I'll get them offline. That's all I have got. Thanks.
Operator
Stephen Byrd, Morgan Stanley.
Stephen Byrd - Morgan Stanley - Analyst
Good morning. I wanted to just discuss your tax position and your Latin American assets. Granted, we don't
know where ultimately you'll come out in terms of your strategic review. But if you were to think about selling
assets and repatriating the money back to the U.S., can you discuss your tax position at a high level? I know
you have a large U.S. tax loss position. Just curious how we should broadly think about tax implications if you
were to try to repatriate a fairly large amount of capital from Latin America.
Steve Young - Duke Energy Corporation - EVP & CFO
Okay. Let's look at the cash on hand, and we've got about $1.6 billion overseas offshore right now. If we were
to make an assertion that all the previous earnings were to be repatriated over time, we would record a tax
liability in the ballpark of $300 million to $350 million. We have not accrued any U.S. taxes on the international
operations. But if we said all of the past earnings we are going to ultimately repatriate, that's what we would
record on our books. And because of our current NOL position and under the current tax laws with the
expiration of bonus depreciation, we would expect to come out of the NOL in 2015 and start utilizing tax
credits. We would not be a significant tax payer until 2016 or 2017, so the actual cash outlays related to
income taxes on our international operations wouldn't be made for a few years down the road.
Stephen Byrd - Morgan Stanley - Analyst
Okay. So you do essentially, Steve, get some benefit from that tax loss position that you have, when you think
about bringing capital back, but there is still an accrual? There is some degree of a cash cost when you bring
that money back?
Steve Young - Duke Energy Corporation - EVP & CFO
Yes, that's correct. We booked the accrual to catch up taxes on all of the previous earnings, and then the
actual cash outlays would be a bit later.
12
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
Lynn Good - Duke Energy Corporation - President & CEO
So the GAAP accounting, or the generally accepted accounting principle, would require recognition of the
liability, but the cash payment would occur as Steve indicated after the NOL is absorbed and we move through
the utilization of renewable credits and so on.
Stephen Byrd - Morgan Stanley - Analyst
I see. If you were to try to bring capital back, let's say, in late 2015, would your tax loss position allow for some
degree of a shield of the cash that would be coming back from Latin America?
Steve Young - Duke Energy Corporation - EVP & CFO
I'd have to look back at the numbers more closely, but I believe there would be some tax shield there for a
period of time -- a couple of years perhaps.
Lynn Good - Duke Energy Corporation - President & CEO
Coming into 2014, the NOL was $2.7 billion, Stephen, and I think the other thing that we would need to
evaluate depending on what happens in the lame-duck session is bonus depreciation extended. And I think
there are a number of other moving pieces that could impact that assessment as well that you may want to
consider.
Stephen Byrd - Morgan Stanley - Analyst
That's a good point. I just wanted to shift over to your pipeline investment. And I wanted to better understand
how to think about the actual cost of gas that you will be procuring. When you source the gas, would you be
procuring gas at sort of the overall Henry Hub price, or would it need to be at a discount to Henry Hub because
it's essentially coming from low-cost shale plays and you've got to factor in transport costs? In other words, is
the cost of the pipeline kind of in your minds a sunk cost and then you will pay prevailing Henry Hub rates, or
does that transport need to factor in and, therefore, you would be paying a lower price for gas, essentially, than
what we might see in the Gulf of Mexico?
Lynn Good - Duke Energy Corporation - President & CEO
So I think the combination of things that you are talking about are still under evaluation on specifics, Stephen.
So we don't have a specific price of natural gas that we have locked into in Marcellus. We will have a price
that's implied in the transport as we look at making that multi-year commitment for the utilities.
13
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
But as we stand back and look at the diversity of supply, look at the pricing out of Marcellus, look at the pricing
of this additional transport facility into the Carolinas, we think there's a very compelling business case for our
customers to have access to low-priced diverse sources of gas. So that's exactly the business case that we
believe exists for underpinning this investment for the benefit of our customers.
Stephen Byrd - Morgan Stanley - Analyst
Understood. Thank you very much.
Operator
Jonathan Arnold, Deutsche Bank.
Jonathan Arnold - Deutsche Bank - Analyst
Good morning. Just one thing -- I might be reading too much into this, but last quarter on your 4% to 6%
growth buildup slide, you said finalizing International strategic review, and now you dropped the word finalizing.
Were you close to something that you are now not close to and the process has sort of extended out a bit, or
were you communicating anything there?
Lynn Good - Duke Energy Corporation - President & CEO
I think you are reading more into it. We should use you as part of finalizing our slides, Jonathan, to point out
where we've used language differently. No, in all seriousness, we are on the same page we were on second
quarter, and I would love to tell you that analyzing international tax is something that can be done quickly, but
there are a variety of complexities in the analysis. We are taking our time. This is an important part of our
business that has contributed well for a long period. So when we have an update on that, we will certainly
share it, but we are on target to complete our work late 2014, early 2015.
Jonathan Arnold - Deutsche Bank - Analyst
So you are fairly confident then that you will know the outcome on that by the time you give your 2015 outlook,
I guess, with the year-end call?
Lynn Good - Duke Energy Corporation - President & CEO
So that's certainly our target, Jonathan. And just to step back for a moment, when we undertook this review,
we were looking at several dimensions. One dimension is, how do we optimize cash? We've had opportunities
to bring home cash in a couple of large transactions over the last several years, but we would love to solve
cash in a way that was more predictable and more consistent with funding of the dividend.
And then secondly, we are evaluating is there a way to improve the growth profile of the business in light of
what we see as midterm, near-term to midterm headwinds -- currency, pricing, etc. So our intent, as we finish
14
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
our review, would be to share our perspectives on both of those objectives and the work we've completed that
could accomplish some or all of those objectives as we complete our work.
Jonathan Arnold - Deutsche Bank - Analyst
Thank you. And this is a somewhat similar question, I'm afraid, but when you first announced the Midwest
Generation sale, you sounded more robust about the idea that it would be accretive.
Now you are saying that it depends on the timing and the ultimate use of proceeds. Whether it is erring one
way or another on use of proceeds, it makes you less confident that this is an accretive deal?
Lynn Good - Duke Energy Corporation - President & CEO
Jonathan, we continue to see accretion. What we were trying to communicate is the timing is not completely
firm. We were hoping actually when we started to close by the end of 2014. We think it's probably more early
2015. So we are just kind of talking about that timing if we share that perspective.
Steve Young - Duke Energy Corporation - EVP & CFO
But ultimately we do see this as an accretive transaction, certainly.
Jonathan Arnold - Deutsche Bank - Analyst
All right. Great. Well, thank you very much.
Operator
Michael Lapides, Goldman Sachs.
Michael Lapides - Goldman Sachs - Analyst
Hi, guys. Just curious, anything change in terms of your thought process regarding rate case timelines in the
Carolinas? The only reason why I ask is the solar CapEx, the development of the Lee facility, just curious
about how you get those in rates.
Steve Young - Duke Energy Corporation - EVP & CFO
We have no direct plans for rate case activity in the Carolinas right now. We'll look at our cost structure as we
move forward. Typically when you try to plan rate cases or think about data points on rate cases, you will look
at when a baseload plant moves into service because your cost structure changes at that time. Lee has been
scheduled for late 2017 or during 2018 for commercial operation in the Carolinas, so that might be a point that
you would look at there. Shortly following that, our planned additions for DE Progress[WB1] as well, so that's
15
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
kind of your starting point. But we'll look at our cost structure between now and then in light of other factors,
and that could compel us to move earlier or it could push us back later if other events occur.
Michael Lapides - Goldman Sachs - Analyst
And can you give us -- changing topics a little bit -- when thinking about the Indiana smart grid rollout, what the
average annual revenue increase tied to that would be?
Lynn Good - Duke Energy Corporation - President & CEO
So it's about less than 1% to around 1% lower for industrial. The industrial class will not participate in all of the
investment. And we are targeting somewhere around $250 million of spending a year over the seven-year
period.
Michael Lapides - Goldman Sachs - Analyst
Got it. Thank you, Lynn. Thanks, Steve. Much appreciated.
Operator
Hugh Wynne, Sanford Bernstein.
Hugh Wynne - Sanford C. Bernstein & Company, Inc. - Analyst
Thank you. My question goes to slide 14 where you outlined sort of your 4% to 6% EPS growth trajectory and
the drivers that will get you there. Four percent growth over 2015 and 2016 and earnings of kind of an 8%
increase against a 1% increase in retail load over that period, a 6% growth over 2015, 2016 would be a 12%
increase in earnings against maybe a slightly more than 1% growth in retail load. I was just wondering if you
could help me understand how you are going to close that gap in a way that's tolerable to ratepayers. I
understand that 4% range -- you are hoping to do it with wholesale growth and cost control, and the 6% range
you are hoping to do it with accretive acquisitions, but I wonder if you just might give more color on how you
close that gap. And secondly, what the long-term implications for EPS growth of 5% load growth are beyond
2016.
Steve Young - Duke Energy Corporation - EVP & CFO
Yes. So let me discuss the growth trends broadly here. As Lynn mentioned, we have put together some
investments in the pipeline -- the NCEMPA acquisition. Those provide a strong earnings growth. The Senate
Bill 560 during a three- to five-year period will start to produce some earnings as well. So we feel confident
about the earnings growth rates on a longer-term basis.
When you look year to year, some of the drivers to think about -- you've got weather normalized customer
growth, and that's modestly forecasted at 1%. We also have wholesale sales growth and contracts that we are
16
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
stepping into that have produced earnings for us, as well. Some of our investments, although not put into rates,
do accrue AFUDC between rate cases, and that can provide some earnings enhancement as well. Our
commercial renewables business has provided a solid 1% earnings growth on a total company basis, as well.
We think that business will continue to grow for us.
So those are some of the metrics that we look at when we think about our longer-term earnings growth rate
trajectory. And the ability to control O&M between rate cases is critical to utilities as well, and we certainly
demonstrated that.
Hugh Wynne - Sanford C. Bernstein & Company, Inc. - Analyst
Okay. Let me just ask a more specific question about the international business. Steve, you mentioned that
you had this very severe drought in Brazil. What are the earnings implications of that beyond the quarter? Are
you expecting a year of depressed earnings, or will it take even longer to reestablish reservoirs in Brazil?
Steve Young - Duke Energy Corporation - EVP & CFO
I think when you are thinking about Brazil hydrology, one of the -- probably the key factor to think about is the
upcoming rainy season, which typically runs November, December through March, April. And I think the results
of that rainy season will be critical to decisions made in 2015. I wouldn't try to guess at what that rainy season
would look like, but I don't think that you would see any rationing occur unless there was a third consecutive
poor rainy season. And it's the forced rationing that really has an impact on earnings.
Hugh Wynne - Sanford C. Bernstein & Company, Inc. - Analyst
Great. Thanks a lot.
Operator
(Operator Instructions). Ali Agha, SunTrust.
Ali Agha - SunTrust Robinson Humphrey - Analyst
Thank you. Good morning. Steve, I've wanted to be clear on some of the growth rate targets you had talked
about, the 4% to 6%. So, as you pointed out, some of your growth initiatives like the pipeline and the additional
buyback of the assets from the municipalities, etc., those are going to start really contributing to you more in
the time frame beyond 2016.
So, if I am hearing you right, should we assume that that contribution keeps you on the 4% to 6% growth rate
beyond 2016, or should we think of those actually taking you above the range? How should we think about
these growth initiatives, relative to the 4% to 6%?
Steve Young - Duke Energy Corporation - EVP & CFO
17
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
You know, we will be rolling out beyond 2016 in February as we have traditionally done. That's the point at
which we will be discussing the longer-term projections of earnings. But right now we feel comfortable through
2016 with the 4% to 6% earnings growth rate.
Ali Agha - SunTrust Robinson Humphrey - Analyst
Okay. But in the high-level sense, is it fair to say this keeps you on track for that kind of run rate?
Lynn Good - Duke Energy Corporation - President & CEO
You know, Ali, I'll jump in -- 4% to 6% is our long-term growth aspiration. We spent a lot of time in 2014 laying
the foundation and groundwork for that by putting projects in place that will give us an opportunity to deploy the
capital necessary to achieve that growth rate, and so we are on track to do that. We think we've demonstrated
that with tangible projects that will deliver earnings that are consistent with what we're trying to accomplish,
consistent with a strong dividend paying company.
So we will, as Steve said, update you with more specifics in February, but we believe that we are putting the
pieces in place to deliver a strong growth rate.
Ali Agha - SunTrust Robinson Humphrey - Analyst
And then, Lynn, can you remind us the grand jury investigation around the coal ash spill, what's the status of
that? Is that still ongoing or what's happening there?
Lynn Good - Duke Energy Corporation - President & CEO
So the litigation continues, Ali, and I can't discuss any specifics on those matters. What I will say is we are
cooperating fully, defending the Company. We cannot predict the outcome of these proceedings at this point
but, of course, would provide updates when milestones are met.
Ali Agha - SunTrust Robinson Humphrey - Analyst
Okay. And my last question, as you talked about using the proceeds from the Midwest sales, one of the
potentials of that is share buybacks. But if I put that in the context of these big mega-projects, the pipeline and
the acquisitions coming up and put them in the equation, Steve, you said no equity issue issuance through
2016. Should we think of this as no equity issuance even beyond 2016 when some of this big capital spend is
going to be used in that 2017-2018 period?
Steve Young - Duke Energy Corporation - EVP & CFO
Well, again, right now I can't project beyond 2016. We'll be finalizing our plans for beyond 2016 and discuss
that in February, but we will be looking at our various spend for coal ash and other investments such as the
18
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
pipeline and NCEMPA as we make those decisions. And we will be firming up beyond 2016 in February for
you.
Ali Agha - SunTrust Robinson Humphrey - Analyst
Okay. But conceptually you are okay with buying back stock now if you think that makes sense, but then
issuing equity in a year or two later if it's required? Conceptually that's not an issue?
Lynn Good - Duke Energy Corporation - President & CEO
No, Ali, I would say that as we look at the options for the Midwest Generation, we will be considering the timing
of all these matters, including investments, and our objective is to optimize proceeds and investments in a way
that creates the greatest value for shareholders. So I would say all options are on the table at this point, and
we will share more specifics as we move forward.
Ali Agha - SunTrust Robinson Humphrey - Analyst
Fair enough. Thank you.
Operator
Andy Levi, Avon Capital Advisors.
Andy Levi - Avon Capital Advisors - Analyst
Hi, guys. Good morning. Just a very, very quick question. Just on the International -- I guess with, again, oil is
up actually today. But with oil down so much I just remember from your additional guidance that you gave back
in February, you had a sensitivity on Brent crude. I think it was a $10 movement is like $0.02 and never really
paid a lot of attention to that.
So, as you get into next year, obviously we don't know where Brent crude is going to be, but I guess it's down
about $30, $35 from the beginning of the year. How should we think about that for National Methanol?
Steve Young - Duke Energy Corporation - EVP & CFO
Well, the sensitivity that we gave, Andy, is correct. About a $10 movement is $0.02, and that's a $10 average
movement on an annual basis, to make sure that's clear. So that's the sensitivity, and that relates to our
National Methanol subsidiary, which is a portion -- roughly 25% of our international business. So we will bake
that into our forecasts and keep an eye on where oil prices are moving as we make our projections in
February.
Andy Levi - Avon Capital Advisors - Analyst
19
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
And the Saudi policy, that has nothing to do with it at all as far as how they allocate oil to Asia or to the U.S.
and their pricing there?
Lynn Good - Duke Energy Corporation - President & CEO
No. And, Andy, this correlation that we are sharing with you is a rough correlation. We are not actually in the oil
business.
Andy Levi - Avon Capital Advisors - Analyst
Right, right, right.
Lynn Good - Duke Energy Corporation - President & CEO
So the correlation has generally worked over time. We make more money when oil prices are high and less
when oil prices are low, but it's not a perfect correlation.
Andy Levi - Avon Capital Advisors - Analyst
Okay. Thank you.
Operator
Greg Gordon, Evercore ISI.
Greg Gordon - Evercore ISI - Analyst
Thanks. I have a follow-up question on the pipeline. Just maybe you can clarify a bit. Traditionally the shippers
bear the cost of moving gas to where it's consumed. I guess the question is whether or not because the cost of
transportation on new pipes like this, especially given the negative basis that the Marcellus producers are
already facing versus Henry Hub is so high, it might be prohibitive for them to make it economic. Is it likely that
transportation costs will be borne to some degree by the consumers?
Lynn Good - Duke Energy Corporation - President & CEO
So we are entering into long-term transport contracts on the part of our utilities. That was what we put in front
of the commission, Greg, this quarter, so that we could, in turn, enter those multi-year transport contracts, and
that's part of the transaction. So the utility customers will bear the transport.
Steve Young - Duke Energy Corporation - EVP & CFO
20
NOVEMBER 05, 2014 / 10:00AM EST, DUK - Q3 2014 Duke Energy Corp Earnings Call
That's right. And these costs are typically passed through the fuel clause mechanisms.
Greg Gordon - Evercore ISI - Analyst
No, I completely understand. It's just a nontraditional framework relative to what E&P analysts generally think
about your pipeline, as well as some others have gotten push back from E&P investors. It just seems like very
expensive transportation costs, and I pointed out to them that these are consumer-sponsored pipes. So I just
wanted to get some clarification on that.
Lynn Good - Duke Energy Corporation - President & CEO
That's right. Demand-sponsored versus supply. So I think that's a key distinction. But you know, Greg, as we
look at the need for natural gas in the Carolinas and our dependency on a single pipeline, we think this
diversification makes sense for our customers.
Greg Gordon - Evercore ISI - Analyst
I completely agree. I just wanted to understand the economics. Thank you.
Operator
This does conclude today's question and answer session. I'd like to turn the conference back over to Lynn
Good for any additional or closing remarks.
Lynn Good - Duke Energy Corporation - President & CEO
So thank you, everyone, and thanks for your interest in Duke. We look forward to seeing many of you next
week in Dallas at EEI. So thanks again.
Operator
This concludes today's conference. We thank you for your participation.
21