Filed by Duke Energy Corporation
Pursuant to Rule 425 under the Securities Act of 1933
And Deemed Filed Pursuant to Rule 14a-12
Under the Securities Exchange Act of 1934
Subject Company: Duke Energy Holding Corp.
Commission File No. 333-126318
PREPARED REMARKS AND Q&A
-------------------------------------------------------------------------------
Duke Energy Corporation Analyst Meeting September 15, 2005
-------------------------------------------------------------------------------
1
CORPORATE PARTICIPANTS
Julie Dill
Duke Energy Corporation - VP Investor and Shareholder Relations
Paul Anderson
Duke Energy Corporation - Chairman and CEO
Fred Fowler
Duke Energy Corporation - President and COO
David Hauser
Duke Energy Corporation - Group VP and CFO
Jim Rogers
Cinergy Corporation - Chairman and CEO
Tom O'Connor
Duke Energy Corporation - Group VP and Integration Executive
PRESENTATION
-------------------------------------------------------------------------------
Julie Dill - Duke Energy Corporation - VP Investor and Shareholder Relations
Good afternoon. For those of you here with us today - welcome to Charlotte -
and for those of you joining by webcast - we're glad you could listen in. Our
speakers for today's presentation are Paul Anderson, Chairman and CEO of Duke
Energy Corporation, Jim Rogers, Chairman and CEO of Cinergy Corp, David
Hauser, Group Vice President and Chief Financial Officer of Duke Energy
Corporation and Tom O'Connor, Integration Executive at Duke Energy.
Let me just briefly review what our agenda is going to be here today. Starting
right now, we'll have a general overview of the strategy with Paul Anderson.
At about 1:30, we'll turn the podium over to Jim Rogers to look at the overall
power strategy and we'll take a break as soon as Jim is completed with that.
At that time, we are going to have a survey placed on your places, at each of
your seats. And so, I would appreciate if you could take the time, it's about
5 or 6 questions, and you can just leave those for us.
After the break, we'll have David Hauser talk about the financial objectives
of the new Duke Energy. Tom O'Connor will follow him at about 3:15 with
integration efforts and then we'll have a Q&A, and we'll have that for about
an hour. But we will have a hard stop at 4:45. I know many of you have flights
that you have to catch. Just a quick reminder, if you could please turn your
cell phones and your BlackBerrys to vibrate it would be very much appreciated.
Before we begin with our prepared remarks let me read to you the Safe Harbor
Statements:
This presentation and our discussion today will include statements that do not
directly or exclusively relate to historical facts. Such statements are
"forward-looking statements" within the meaning of the securities laws, and
include statements regarding benefits of the proposed merger, integration
plans and expected synergies, anticipated future financial operating
performance and results, including estimates of growth. These statements are
based on the current expectations of management of Duke and Cinergy. There are
a number of risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements.
These factors are referred to in the written presentation and there are other
factors that may affect the future results of Duke and Cinergy which are set
forth in their respective filings with the Securities and Exchange Commission.
The written presentation and such filings are available at
(www.duke-energy.com/investors) and Cinergy's website:
(www.cinergy.com/investors) and are filed with the SEC.
In addition, today's discussion includes certain non-GAAP financial measures
as defined under SEC Regulation G. A reconciliation of those measures to the
most directly comparable GAAP measures will be made available on Duke Energy's
and Cinergy's investor relations websites at www.duke-energy.com and
www.cinergy.com.
Following our prepared comments we will take questions from the folks in the
room with us. Since this is being webcast, I will ask that you wait to ask
your question until we can get a microphone to you. And our apologies to those
of you joining us by phone as we will not be able to accommodate your
questions today.
With that, I'll turn the presentation over to Paul Anderson.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
There is an old adage - to truly understand where you are going you must
first remember where you've been. So if you will indulge me, I would like to
begin by taking a quick look at what we have accomplished over the last couple
of years. As many of you know, Duke Energy faced many challenges when I
arrived at the end of 2003. We set out a clear plan to put these challenges
behind us and moved quickly to achieve our goals. Today we can proudly say
that Duke Energy is back on the right track.
We successfully completed a program to stabilize our business which included
divesting non-strategic assets across several of our businesses. The proceeds
from these asset sales coupled with solid business results were used to reduce
debt and build a strong balance sheet. We successfully resolved a number of
regulatory and legal issues facing the company which allowed management to
focus on running our businesses more efficiently and looking for ways to grow
earnings.
The team at DENA worked very hard to reduce the mark-to-market contract
exposure from our disqualified hedges and these exposures were essentially
mitigated by the end of 2004.
All of these actions resulted in maintaining our investment-grade credit
ratings and our dividend. And we not only delivered on our earnings
expectations, we exceeded them by a solid margin.
The Duke Energy team worked very hard and the results are clear. We began 2005
back in control of our destiny and set out to build on our strengths.
The real strength of Duke Energy lies in its portfolio of assets that cannot
be duplicated by anyone, anywhere, at any price. These businesses have been
built over a long history and enjoy a market position that is unmatched in our
industry. This is the real foundation of the company.
We have pipeline assets that deliver gas to the higher growth markets. Our
joint venture in Field Services is the number one producer of natural gas
liquids. Duke Power delivers power to our customers at rates which are 20%
below the national average. And, our international business continues to
improve returns and will have an outstanding 2005.
Yesterday, we made the announcement that we intend to exit the DENA business,
except for the Midwest assets, over the next 12 months. The Midwest assets use
the most efficient technology for gas-fired generation and will serve an
important role in delivering power to the Midwest markets.
As I mentioned earlier, Duke Energy made a concerted effort to strengthen our
balance sheet and maintain investment-grade credit ratings. We have a strong
cash position and we have been busy finding ways to use that cash to enhance
the overall value of the enterprise. You may have heard me say before that I
don't like a lazy balance sheet.
We have the team to put our balance sheet to work, pursue the market
opportunities that will grow this company and deliver shareholder value for
the long term.
Let me assure you that it's not just the executive suite that gets the job
done. We have a deep bench of talent throughout our organization and we will
rely on their good ideas and desire to make Duke Energy an industry leader.
You've met many of the business heads at Duke Energy but they are supported by
outstanding teams who deliver results.
Duke Energy has a long history as portfolio managers. You've seen us buy and
sell assets and businesses through a variety of business cycles. Actively
managing this portfolio is part of our long-term strategy.
Let me remind you what our strategy is. We will actively manage a portfolio of
energy businesses and an affiliated real estate company to create superior
value for our customers, employees, communities and investors through the
production, conversion, delivery and sale of energy and energy services in the
Americas. The strategy is specific in scope but flexible in execution.
This portfolio approach means we are constantly evaluating our asset positions
with respect to market dynamics and long-term value. It's not what the assets
or businesses are doing for you today but what their future holds and whether
or not it ties in with the long-term vision and goals of the company.
Are market conditions favorable or unfavorable for future success? Does it fit
into the long-term vision for the company? Does it provide long-term value for
our shareholders? These are just a few of the questions we ask ourselves every
day.
We have been buyers and sellers of assets and businesses in recent history.
The past 18 months have been very focused on the sell side of the equation. We
sold our Asia-Pacific business and divested underperforming and deferred
merchant generation assets at DENA in 2004. Earlier this year, we sold our
interest in TEPPCO and moved to a 50/50 partnership with ConocoPhillips in the
Field Services business. And now we are preparing for the next major step in
growing Duke Energy by combining with Cinergy.
This merger will build a strong electric business serving 3.7 million
customers in five states. The combined electric businesses will be one of the
largest in the country. This business coupled with our significant gas
business will make Duke Energy a premier energy company with the ability to
operate in both regulated and deregulated markets, and strategically
positioned to serve growing infrastructure needs.
As we discussed yesterday, the Board of Directors has approved a plan to exit
the merchant generation business other than the Midwest assets. Let me give a
brief update to those of you who did not hear yesterday's call.
Over the past eighteen months we have made incredible strides to make DENA
profitable. We have cut the trading book by more than half and reduced our
generation portfolio by over two-thirds. And as you know we have been
resolutely exploring options to create a sustainable model for this business.
The merger with Cinergy certainly helped us by dealing with a significant part
of the portfolio - namely the Midwest assets.
In the West however, we've had difficulty finding a workable solution because
of the size and complexity of the legacy positions in the trading book. And
the Northeast assets, on their own, are simply too small from a `critical
mass' standpoint to sustain. We believe we've explored all of the options
currently available to us and concluded that achieving our objective of
reaching breakeven EBIT by the end of 2006 is not realistic without taking on
an extraordinary level of additional risk. Therefore, we think it is best,
from a shareholder value standpoint, to exit the business.
We expect to fully exit the remaining business over the next 12 months and our
Day 1 impact from an earnings standpoint will be a net charge of approximately
$1.3 billion pre-tax, or about 88(cent) per basic share. This charge will be
considered a special item for the quarter just like the gain of 59(cent) per
basic share related to the sale of TEPPCO in the first quarter. Additionally,
we will recognize a gain in the third quarter of approximately 39(cent) per
basic share on the transfer of a 19.7% ownership interest in Duke Energy Field
Services to ConocoPhillips which will also be considered a special item.
Overall, this decision provides several benefits to the company. It will
result in improved ongoing earnings from our continuing operations in the
future. Duke Capital's credit risk profile will also significantly benefit.
Our long-term liquidity position will improve as we eliminate the current
collateral position. And, we expect the net effect on cash to be positive.
Part of this decision also took into account whether we should simply build
our unregulated business off of Cinergy's commercial platform or combine the
two companies and then rationalize the operations. By choosing the former, we
would be able to accelerate the synergies associated with this business prior
to actually completing the merger. Tom will talk in more detail about this
subject later this afternoon.
This is all we will cover on the DENA exit decision today. We have decided
it's time to move on and put our efforts where they can provide more value for
our shareholders. It's time for a fresh start and time to focus on those
businesses that will be a part of Duke Energy's long-term strategy.
Our pipeline system consists of over 17,500 miles of transmission pipelines in
the U.S. and Canada. This transmission system is linked with over 250 Bcf of
gas storage in both the supply area and the market area. We also serve 1.2
million retail customers through our Union Gas business in Ontario.
Our pipeline and storage assets are primarily concentrated in the east due to
our roots in the Texas Eastern and Algonquin systems. In British Columbia, we
own and operate some of the world's largest sour gas gathering and processing
facilities and a strategically located pipeline. As part of the restructuring
at Field Services, the joint venture recently transferred several gas
processing assets in Alberta to the pipeline side of the business and
ConocoPhillips transferred to DEGT its Empress system. We like our position in
the west, and would like to grow it further.
One of the outstanding characteristics of the pipeline business is that our
customer base continues to be willing to enter into long-term contracts. Our
average contract life on the U.S. pipelines serving the Northeast is
approximately 8 years. Gulfstream averages 20 years and Maritimes & Northeast
12 years. Our Western Canadian operations typically have a much shorter
contract life, which is currently about 4 years.
The gas transportation business continues to see steady demand growth in the
Northeast as a result of load expansion at local distribution companies fed by
new homes and conversions. And while we don't expect much new electric
generation to be built, we do expect increased gas burn will occur at existing
facilities over time.
Based on available forecast data, we expect demand in our key eastern markets
to grow by 2 - 3% annually through 2010. Duke Energy's pipeline businesses
have a market share in these regions ranging from 25 - 50%.
A cornerstone of our strategic position is our access to growing markets and
expanding supply basins throughout North America. This "strength of geography"
has been a key focus for the pipeline business over the last few years, and is
enhanced by our significant natural gas storage position which provides system
flexibility and reliability for our customers.
While there may be some opportunities for consolidation in the pipeline
business, they certainly won't be as numerous as what we expect to see in the
electric sector because a significant amount of consolidation has already
occurred. Growth opportunities in this business are more organic.
You might recall we started talking about the opportunities we saw with LNG in
mid-2004. In December, we had an investor chat which laid out our strategy
with respect to LNG supplies and now we are beginning to see some activity
that supports that strategy. We expect LNG to play a major role in the North
American gas supply outlook. Globally, large stranded gas reserves and a
continuous decline in LNG production costs favor an LNG solution. By 2015, LNG
imports are expected to provide about 14% of gas supplies versus 2% today.
The introduction of LNG supply represents a fundamental change in how and
where natural gas will be brought to the market, and that creates a clear
opportunity for new infrastructure investment in the Northeast U.S., Southeast
U.S. and Canadian Maritimes. To date, we have signed precedent agreements with
two projects in the Canadian Maritimes and three projects on the Eastern
seaboard. Our Algonquin system already has a working relationship with the
Distrigas LNG facility near Boston. In fact, we've already seen an increase in
volumes from that facility.
We believe natural gas storage will be key to managing LNG supplies. We will
continue to expand our gas storage capabilities to handle these new volumes.
Our current efforts are focused on expanding storage at our Dawn Hub, Egan,
Accident and Saltville facilities.
In addition to adding LNG-related infrastructure, we are expanding in our
higher growth southeast markets. We recently completed the Patriot extension
on the East Tennessee system and are now looking at another expansion project
in that region, Jewell Ridge. Our Western Canadian pipeline operations are
also expanding to keep pace with local production increases in British
Columbia. These assets have the added benefit of being well positioned to
handle any Alaskan or McKenzie Delta gas supplies should these pipelines get
built.
Over the next few years, our gas transmission business could spend over $1
billion to construct the facilities to provide the required services for these
projects.
We've mentioned over the last few months that one of the growth opportunities
we are evaluating is the formation of a Canadian Income Trust. The primary
difference between these trusts and the MLP structure in the U.S. is that
Canadian Income Trusts are not restricted in terms of lines of businesses that
can be conducted through this vehicle. You'll recall that MLPs are restricted
to energy creation or transportation. Trusts are for everything - from
packaged foods to casinos.
Structurally, the manager or operator is not the owner of the general
partnership but rather is an entity that has a management agreement with the
Trust. Therefore, there is a different governance and fee structure than found
in your typical MLP.
It's important to note that Canadian Income Trusts are a much larger component
of the Canadian market than MLPs are in the U.S. We are looking at this
option, as one of many, in more aggressively capitalizing our Canadian assets.
All combined, our Field Services business has about 58,000 miles of pipeline
and 57 processing plants, which produce about 370,000 barrels a day of NGLs.
We have the largest critical mass of assets in this sector and the most
geographically diverse. On a producing region basis, we may not be the top
processor in every region but we maintain a significant presence in all of the
major producing regions.
The petrochemical and refining industries are by far the largest consumers of
natural gas liquids. These two industries use about 75% of NGL supply.
Residential and commercial consumers are the next largest group of end-users
demanding about 15% of the supply.
Field Services is the number one producer of natural gas liquids in North
America and almost twice the size of its nearest competitor when measured by
NGL production. About two million barrels a day of NGLs are produced by gas
plants in the U.S., and Field Services has a 20-percent share of this market.
The gas processing business is considered a must-run industry. With demand for
natural gas and NGLs growing steadily, our Field Services operation is poised
to handle this growth through the optimization of the existing asset portfolio
of processing plants and gathering systems.
Field Services also anticipates further growth and consolidation opportunities
in the midstream sector and will look to add to their asset base as required
to serve customers' needs. But as always, we will be very disciplined in our
approach, ensuring this growth is profitable on a long-term basis.
You should also be aware that our 50% joint venture affiliate, Duke Energy
Field Services, expects to file an S-1 to form a publicly held master limited
partnership this week that will own and operate midstream energy assets. Once
the S-1 is filed, you will be able to review the MLP's business strategies and
competitive strengths.
While Jim will cover the strategy for the electric side of the business I
would like to review some highlights of the merger.
First, this combination will bring together two strong business operations. It
will increase the already solid earnings and cash flow contribution from our
regulated portfolio and is accretive to earnings. It will also provide some
geographic diversity in terms of weather and customers to our earnings
profile. Longer term, this transaction could allow us to modernize CG&E's
fleet as environmental regulations become more stringent on coal plants.
Cinergy's unregulated generation portfolio, which is largely coal-fired, will
gain fuel diversity when combined with DENA's Midwest generation assets, which
are fueled by cleaner burning natural gas. Duke's combined cycle and peaking
facilities will also enhance flexibility and reliability for the combined
unregulated generation fleet.
By combining these two operations, we will be able to realize significant cost
savings which will approach $300 million by the third year. Tom will provide
more detail around the cost savings and the costs to achieve during his
presentation.
This merger puts Duke Energy on a new path with respect to the power business.
The successful integration of our two companies will provide the scalable
platform needed to participate in future consolidation of the electric sector.
2007 will be the first full year of operations after the merger closes and we
expect to deliver ongoing earnings of $2 per diluted share that year. Using
2007 as a base, we anticipate ongoing earnings growth in the neighborhood of 4
- 6% on a diluted basis. David will talk about this in more detail, but yes,
we will change to reporting earnings on a diluted basis in 2006.
The level of earnings growth from 2007 is supported by our existing businesses
and the organic growth opportunities we see there. Obviously, depending on
market opportunities that follow, this earnings growth could be increased.
This merger gives the power side of the business significant scope and scale.
On a stand-alone basis, the power business would be the 4th largest in North
America using an implied market capitalization. Our gas business already is
the largest based on implied market cap. More importantly, this merger
establishes a solid platform for future growth for both power and gas.
This future growth will be supported by a strong balance sheet, which gives us
flexibility in choosing financing options that provide the greatest value,
such as the Income Trust structure contemplated for our Canadian gas business.
The success of this merger will be critical in setting the stage to pursue
these growth opportunities. This is the first step in creating an electric
platform for the future and we have to get it right. We have an exceptional
energy business and we're eager to take it to the next level.
-------------------------------------------------------------------------------
Jim Rogers - Cinergy Corporation - Chairman and CEO
Before I move into the slides, let me provide some context for why we believe
this combination holds such great strategic value for the stakeholders of both
companies. The merger of Duke and Cinergy is occurring at a time of great
uncertainty - but also great opportunity - in our industry.
Over the past decade, we've seen our industry make a strong move toward
deregulated power markets. We've also seen unprecedented volatility in these
markets. It has ushered in a "back to basics" movement in which dividend
paying, regulated utilities came back into investor favor, and "pure merchant"
players either substantially retooled their business model or disappeared from
the scene altogether.
Today, the industry remains firmly entrenched somewhere between regulation and
deregulation, with retail competition having essentially come to a halt but
wholesale competition continuing to take incremental - albeit uneven - steps
forward. Successful companies will be those that are well positioned to
succeed in both regulated and competitive markets.
Other trends complicate this evolution of our nation's power markets. The
inputs associated with the cost of generating electricity - natural gas, coal,
and emission allowances -have all experienced huge cost increases in the past
couple of years, and significant volatility in these inputs has become the
norm, not the exception.
At the same time the price of coal and natural gas has been rising, the EPA
has continued to tighten environmental restrictions on coal-fired generation.
These restrictions have led utilities to spend, or to propose to spend,
substantial capital to bring older coal units into compliance with the new
regulations or to find technologically innovative solutions - such as IGCC -
that use coal to produce electricity in more environmentally benign ways.
Similarly, a renewed focus on reliability after the blackout of August 2003
has led utilities to take a hard look at increased capital investment in an
aging transmission and distribution infrastructure, and the telemetry that
supports that infrastructure.
I believe this will be the landscape for our industry for the foreseeable
future. It is a landscape with great opportunities for success for certain
companies. In my view, the companies that succeed in this environment will be
companies with large balance sheets; with good fuel diversity; with low cost
operations and a solid track record of customer satisfaction; companies with
strong management teams and a deep and talented bench; with superior
regulatory expertise; and companies experienced in operating in both regulated
and competitive power markets.
Ladies and gentlemen, the new Duke Energy WILL BE one of those companies!
While both Duke and Cinergy are strong companies on a stand-alone basis, this
transaction will substantially enhance our ability to be successful in dealing
with the challenges I have outlined.
We are bringing together two premier, franchised, electric utility platforms.
Duke Energy and Cinergy are both experienced utility companies with
longstanding records of supplying reliable service to their customers at costs
below the national average. Both Cinergy and Duke Power have long traditions
of providing exemplary customer service and have been nationally recognized
for their excellence in this regard. This solid history of providing superior
customer service will be enhanced as a result of the transaction. This will
happen because we will combine the best practices of both companies to deliver
the very highest level of service to our customers.
The combination will permit the elimination of duplicative functions and
systems. The resulting cost efficiencies and economies of scale across the
combined entity will ultimately yield benefits to our stakeholders. Pursuing
the "best practices" from each company will enhance our combined operations.
We will own and operate a strong portfolio of utility businesses with 3.7
million retail electric customers and 500,000 retail gas customers in North
Carolina, South Carolina, Ohio, Kentucky and Indiana. The retail electric
businesses will have more than 26,000 megawatts of generation and broad
operational experience. Greater customer diversity will result in reduced
sensitivity to short-term business volatility arising from the economy,
weather or other factors.
Both Duke Power and Cinergy view low rates and superior customer service as an
investment in future constructive regulatory outcomes. The combined company
will operate in five states that all have constructive regulatory frameworks.
The two companies' will bring their combined regulatory expertise to bear in
dealing with the complexities of regulation and the interplay of regulation
and deregulation at state and federal levels.
Our larger, diversified regulated platform will present expanded reinvestment
opportunities related to our future generation needs and modernization and
expansion of our transmission and distribution systems.
We intend to provide superior operational efficiency, service and reliability.
And, we will leverage the size and corresponding productivity improvements to
the benefit of retail customers and shareholders. We will not compromise
service or reliability.
Both Duke Power and Cinergy have deep, experienced, and committed management
teams. I believe the combination of the people of these two companies will
create tremendous value for all stakeholders in the future.
Our aspiration for this business is that it consistently ranks within the top
decile for:
1. low costs
2. generation performance
3. reliability, and
4. customer satisfaction
We will continue to work with regulators to develop solutions that benefit
both customers and shareholders, and we will work with the local communities
as a partner in their economic development efforts.
In the Southeast, our regulated operations will include Duke Energy's
franchised electric business unit - Duke Power. It generates, transmits,
distributes and sells electricity in Piedmont and western North Carolina and
upstate South Carolina.
In the Midwest, the regulated operations are conducted through:
PSI Energy, a vertically integrated and regulated electric utility that
provides service in 69 of Indiana's 92 counties;
The Cincinnati Gas & Electric Company (or CG&E), a combination electric and
gas Ohio public utility company that serves the metropolitan Cincinnati
region. CG&E's generation is deregulated and is, therefore, not depicted on
this slide.
Our other Midwestern utility is The Union Light, Heat and Power Company
(ULH&P), a combination gas and electric utility serving northern Kentucky.
ULH&P is about to become a vertically integrated company for the first time as
a result of the transfer by CG&E to ULH&P of 1100 megawatts of generation,
which we expect to finalize this year.
You can see the generation mix for both Cinergy and Duke on this slide, with
the next slide presenting it on a combined basis.
With gas prices at historically-high levels, we're seeing firsthand the
importance of having a diverse fuel mix. Diversification of generation will
enable the consolidated company to avoid a disproportionate reliance on
particular fuel types, and mitigates our exposure to the economic and
environmental risks associated with each type of fuel.
The Duke-Cinergy combined fleet of over 26,000 megawatts, which will be 52%
coal, 19% nuclear, 19% gas and oil, and 10% hydro, is very similar to the
overall industry's total fuel mix. Coal remains the primary fuel source for
electric generation in the U.S. The total cost of generating power using coal,
including fuel and O&M, is significantly lower than natural gas. And,
generally, the total costs for coal generation and nuclear generation are
comparable.
In addition to fuel diversity, this mix of assets also provides dispatch and
operating benefits that allow us to match the corresponding load requirements
of our customers.
Cinergy and Duke have been consistent performers when it comes to keeping O&M
costs down. In 2003, Cinergy and Duke were both in the top 10 of lowest cost
generators, placing first and ninth, respectively. Our combination will create
tangible cost efficiencies and economies of scale across the combined entity.
Pursuing sets of "best practices" learned over time from within each company
will enhance our ability to further reduce costs.
Keep in mind that these costs reflect all types of generation. If we were to
exclude Duke's nuclear non-fuel O&M costs, their average cost would drop to
about $4 per megawatt hour.
Duke Power's non-fuel O&M and production costs for its seven nuclear units
rank second best among nuclear operators. We are firm believers in the
long-term busbar cost advantages offered by nuclear technology. Nuclear does
not emit air pollutants or greenhouse gases, and we believe public support for
nuclear generation is growing. We also think it's possible to satisfy the
conditions for new nuclear construction in this country.
Together, we sold over 127,000 gigawatts of power to our retail customers in
2004.
Within the combined company, the breakdown of our customers by class will
continue to be approximately evenly split between Residential (33%),
Commercial (30%) and Industrial (34%).
During this time of relative economic uncertainty, it is important to note
that our industrial customers represent a diverse mix from primary industry to
retail products.
Finally, while the economy has struggled over the last few years, we have seen
consistent growth in our customer base and electric retail sales. We
anticipate continued organic load growth on the order of 1.5 to 2% per annum
over the next 5 years.
We believe our leadership in economic development will continue to play a key
role in the organic growth of our service territories.
Both companies have been independently recognized for leadership with regards
to the service provided to our customers. It is this type of consistent,
outstanding performance that will enable the combined company to continue this
culture of excellence.
As you can see, both companies' call centers have been certified by J.D. Power
for providing outstanding customer service. Both companies scored well in the
most recent J.D. Power's residential customer satisfaction survey. And we both
do well with our manufacturing and institutional customers, with Duke being
ranked 3rd and Cinergy being ranked 12th nationally out of 60 competitors in
the Key Accounts National Benchmark.
In this industry, providing quality service to our customers MUST be a
priority, as the results affect each one of our stakeholder groups.
Keeping costs down translates directly into lower rates for our customers.
Across all customer classes, the rates charged by both Cinergy and Duke are
below the national average. In our experience, low rates combined with high
customer satisfaction lead to constructive regulatory outcomes.
Our combined rate base will total approximately $15.4 billion. Let me take a
few moments to break that figure down so that you can see how we have arrived
at this amount:
First, in the Carolinas, the calculated total rate base is approximately $9.5
billion. This is split by two-thirds in North Carolina ($6.27 billion) and by
one-third in South Carolina ($3.23 billion).
For Ohio, electric transmission and distribution rate base, a total
approximately $1.1 billion, including an existing authorized rate base of $808
million plus an additional $276 million for the proposed rate base additions
under the pending electric distribution rate case.
For gas in Ohio, the current authorized rate base is just over $400 million.
In Indiana, we are authorized to receive recovery on over $3.6 billion in rate
base.
Finally, in Kentucky, our combined electric and gas authorized transmission
and distribution rate base, together with our pending gas distribution case
and the transfer of the 1,100 megawatts of generation from CG&E to ULH&P at
net book value, total almost $700 million.
Over the next three years, 2006 to 2008, we project that the combined
companies will invest an additional $8.1 billion in its regulated operations.
Keep in mind that almost 25% of this capex amount is related to environmental
projects.
So you can see our regulated operations are strong businesses providing our
retail customers with low-cost power and outstanding customer service and
reliability. Now I'd like to turn your focus to the commercial side of the
power business.
The combination of these two commercial platforms integrates the assets of two
organizations: Coal-fired, baseload generation and gas-fired, combined cycle
and peaking generation. By doing so, we will significantly enhance our overall
operating profile to more-efficiently match our capacity with a greater
variety of market demands and we will achieve cost savings as we combine the
separate generation assets into a larger portfolio.
The addition of DENA's generating plants in the Midwest will significantly
modernize our existing commercial fleet. These assets will add 3,600 megawatts
of practically-new capacity to our existing, albeit older, commercial plants
in this region. Collectively, on an output-based weighted average, the age of
these units will fall from 32 to 19 years.
We will also be well-positioned to succeed in the still-evolving competitive
supply markets. The transaction will give the combined company significant
generation assets that straddle the seam between PJM and MISO with pricing
optionality in both energy markets. By doing so, we will be better able to
benefit from future opportunities in restructured markets, specifically in
Ohio upon expiration of the rate stabilization plan in December 2008.
Because of the way in which it is stacked by generation type, with a large
foundation of economical baseload and mid-merit coal generation coupled with
smaller layers of flexible combined cycle and peaking capacity on top, I have
taken to referring to this particular graphic, somewhat fittingly, as our
"wedding cake."
Specifically, the portfolio will include 2,667 megawatts of baseload coal
capacity, 939 megawatts of mid-merit coal, 2480 megawatts of
combined-cycle-gas-turbine capacity and 1,500 megawatts of peaking capacity.
This portfolio will afford us the ability to offer a broader array of
shaped-load products within the competitive supply markets.
As you can see, the combination of DENA's gas-fired with Cinergy's coal-fired
generation creates a complementary asset mix. The combination of these assets
provides a number of important benefits.
First, it diversifies the combined commercial generation assets, with the
corresponding benefits of owning generation with differing cost, operating and
dispatch characteristics.
Second, this diversification of generation enables the consolidated company to
avoid a disproportionate reliance on particular fuel types, and mitigates our
exposure to economic and environmental risks associated with each type of
fuel.
Third, consolidation of the ownership of generation located in the same region
allows for more conventional types of savings resulting from the consolidation
of operations and the elimination of duplicative functions.
As stated earlier, over the last ten years we have seen both the regulated
model and the merchant model come in and out of favor. In my judgment, to be
successful over the long-term, it will be important to have operations in both
the regulated and competitive supply markets.
This transaction will enhance our ability to withstand the inevitable
volatility of energy markets and persistent tightening of environmental
regulations. The combined company will have a portfolio of regulated energy
companies that will give it a strong base of reliable regulated earnings and a
more stable balance sheet. However, it will also have the ability to take
advantage of opportunities in the competitive supply markets. This flexibility
will position us to deliver superior growth over time.
Geographically-speaking, our commercial plants are located in one of the
nations' most active competitive-supply markets. To demonstrate the size of
this opportunity, both of the RTOs that serve this region (PJM and MISO) are
each more than twice the size of the California market.
Recently updated supply and demand forecasts indicate that the industry's
excess capacity is slowly being worked off. Reserve margins have peaked and
are presently in decline - to approximately 25% on a weather-normalized basis.
In addition, you can see that the Cinergy plants are clustered along the Ohio
River, ensuring cost-effective and reliable access to eastern coal supplies.
Going forward, we view our marketing and trading operations as a vehicle for
providing modest upside to our other businesses. We think these businesses are
natural extensions of our low-cost Midwest commercial fleet and our physical
gas delivery, transportation and storage activities.
Our marketing and trading operations will employ a conservative, low-risk
focus. We will have narrow parameters for risk, offered products and committed
capital. We will strive to achieve recurring earnings from these businesses
over time.
Our focus will be strictly near-term. As it is with Cinergy today, in power
trading, 97% of all contracts have a duration of less than one year; with 98%
for gas trading. In fact, over 90% of Cinergy's power and gas transactions
have terms of less than 6 months.
We also will have measures in place to monitor the credit quality of our
trading counterparties. Today, 93% of Cinergy's trading portfolio exposure is
with investment-grade entities.
To tie this all together for you today, I'd like to leave you with 4 key
points, all of which relate back to the concept of stable earnings growth over
time:
First of all, the new company will be better positioned to grow organically
through the combined strength of our diversified, franchised businesses.
Secondly, we will continue to grow our earnings through the investments that
we plan to make in our combined operations. By doing so, we will be focused on
system growth and reliability in the form of new generating capacity,
environmental investment and the modernization of the delivery system.
The cost savings realized through the merger will be transparent and will
accrue to both our customers and our shareholders. In addition, we fully
expect to realize additional, ongoing cost savings from the institution of
best practices going forward.
Finally, from a competitive supply standpoint, we will also reap the benefits
of fuel, asset and geographic diversification. This will be especially
important in the Midwest, where Duke's gas-fired generation will complement
Cinergy's coal-fired generation. Our low-risk marketing and trading businesses
will continue to contribute to earnings, year after year.
How does all of this tie together? Well, the bottom line is that this merger
will result in a greater contribution of more stable earnings from the
regulated businesses of the combined company, lowering the corporation's
overall risk profile.
This additional scale and scope of both the electric and gas businesses and
the substantial percentage of stable earnings will create the financial
strength to participate in the continuing consolidation of the utility sector.
As many of you know, the teams from Cinergy and Duke have been working hard
over the last couple of months preparing the various regulatory filings. So
far, we have filed merger applications in all five State jurisdictions. We
have filed our 203 application with FERC and filed our initial Joint Proxy
with the SEC. And we have already received "early termination" under
Hart-Scott-Rodino.
We expect that our special shareholder meetings will be held sometime in the
fourth quarter.
We also expect to receive federal and state regulatory approvals in the first
quarter of 2006.
All of which would put us in a position to close during the first half of the
year.
-------------------------------------------------------------------------------
Julie Dill - Duke Energy Corporation - VP Investor and Shareholder Relations
Thanks Jim. Jim mentioned that the older he gets the more he knows he needs to
listen more and talk less, and he finished 30 minutes ahead of schedule, so he
must really be getting old. He does have a birthday next week. You have a
birthday next week. I have a birthday as well. We share our birthdays, but
anyway we are early for a break so we'll go ahead and take that. And if I
could ask you all to be back, we'll have a hard start again at 2:15 and we'll
start over again here with David Hauser. Thank you. (Break)
Excuse me. Can I get everyone to start gathering again? While we're doing that
I just would like to recognize the people that help pull all this together for
us. Kim Parsons, our event planner, my assistant Mary Pope and Joe Crapster
are out of the Duke Energy IR team helped pull all this together, so my
special thanks to them and I hope you've enjoyed the facilities.
You will find on your table the quick little survey that I hope that you will
take and you can just leave it for us here. Of course the $2.00 bill is yours
to take, and this is not payment to fill out the survey. But if you would
either leave it on the table or leave it on the registration table with Mary
at the end I'd appreciate that. I also wanted to make sure that you know I'm
sure you've seen Duke's executives around, and there were many too many to
name as well as several of the executives from Cinergy, so hopefully you've
had a chance to visit with some of them.
So with that I'm going to turn the presentation over to David Hauser and let
him talk to you about the financial implications of the new Duke Energy.
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
I'd like to begin today with a look at Duke Energy's earnings profile before
and after the merger. This first slide is Duke Energy's ongoing earnings
profile for the full year 2005 and has been adjusted for the changes related
to the DENA exit decision.
As expected you can see that our utility and pipeline businesses are the
largest contributors of ongoing earnings before interest and taxes, or EBIT,
at 38% and 36%, respectively. For our Franchised Electric business, we expect
segment EBIT for 2005 to be at, or slightly below, 2004's reported EBIT. But,
they remain on target to meet their segment EBIT growth of 0 to 2% for the
2005 to 2007 time period.
Natural Gas Transmission continues to expect its ongoing annual EBIT growth
rate to be in the range of 3 - 5% for the 2005 to 2007 time period. The recent
transfer of Field Services' Canadian assets and acquisition of the Empress
system from ConocoPhillips will put us at the high end of this range for 2005.
The next single largest contributor is Field Services at 11%. We have split
Field Services' contributions for the first half of the year - which was
recorded as EBIT - from the second half of the year which will be recognized
as equity earnings. Here you can see the contribution is 6% for EBIT in the
first half of the year, or $295 million. Equity earnings will contribute about
5% for the second half, or approximately $200 million, which is net of
interest expense. As we have explained, the change to equity earnings is due
to moving to a 50/50 partnership.
Our international operations are expected to have an exceptional year as a
result of foreign exchange and high commodity prices at National Methanol and
will contribute about 8% to ongoing EBIT. Going forward, we expect DEI's
business to normalize and grow at a compounded rate of 2-3% off of their 2004
base. Crescent Resources, our real estate business, is expected to deliver
2005 results, including any discontinued operations, that will be at or
slightly higher than 2004, which was approximately $250 million, for a
contribution of about 7% to EBIT.
We did not include Other EBIT in the pie chart because it primarily represents
corporate overhead for the company but does include certain parent-level
activities and some minor businesses such as DukeNet Communications and the
wind-down of Duke/Fluor Daniel.
In addition, we anticipate including those DENA business activities that will
not be transferred to discontinued operations in Other EBIT. We are still
evaluating this but we will know whether these amounts remain as a business
segment or can be reported in Other EBIT in time for third quarter earnings.
These business activities include the Midwest assets, certain contracts and
corporate allocations, and the remaining DETM business that has yet to be
wound down.
As we have discussed during the last two quarters' earnings calls, we have put
the mark-to-market fluctuations associated with the de-designated hedges at
Field Service in Other EBIT for the remaining term of those contracts, which
will be completed in 2006. Those that terminate in 2005 are considered special
items and those that terminate in 2006 are included in ongoing earnings.
The hedging sensitivity is also unchanged for the last half of 2005. A 1(cent)
per gallon move in NGLs equates to a $5 million move in equity earnings at
Field Services, partially offset by approximately $4 million in Other EBIT for
the last six months of 2005.
We expect Other EBIT now to be approximately $310 million in expenses,
excluding the mark-to-market fluctuations related to the de-designated hedges.
The guidance for Other EBIT does not reflect any insurance impacts associated
with Hurricane Katrina. We do not anticipate significant losses on our systems
but we do not know the status of the other members in our energy industry
mutuals.
Since we will not provide 2006 numbers until the end of the year, we will give
you a full-year view for this year by combining our 2005 forecasts to get a
sense of what the combined companies will look like.
As you can see, on a combined basis, the most notable changes in the profile
are the contribution from the utility group which increased from 38% to 46%
and the addition of Cinergy's commercial group which will contribute about 5%
to combined ongoing EBIT.
The ongoing EBIT contribution from our combined gas businesses, the pipelines
and gas processing, was reduced from a total of 47% to 38%; however, we see
growth opportunities in the near term to be in these segments of our business.
With the increased flexibility of our balance sheet, we should be able to take
advantage of attractive market opportunities which will add to the earnings
growth potential for each of our gas businesses.
Overall, Duke Energy's earnings profile will still be largely balanced between
our North American gas and power businesses, which make up about 90% of our
ongoing earnings.
It's not very meaningful for us to talk about our earnings expectations
specifically for 2006 since it will be a hybrid year. However, current
consensus street estimates for Duke for 2006 are $1.72. For Cinergy the street
consensus is $2.97. If you were to pro-forma the numbers for the entire year
with no synergy or purchase accounting adjustments, the addition of Cinergy to
Duke would result in $1.77 earnings per share for the combined entity.
Therefore, the merger is 5(cent) per share accretive before any synergies
based on street estimates, and of course, as Paul mentioned earlier, we expect
to deliver ongoing earnings of $2 per diluted share in 2007.
As a result of the decision to exit the DENA business excluding the Midwest
assets, we are adjusting our earnings per share target for incentive purposes.
Our original target for 2005 was $1.60 per basic share. The revised incentive
target for 2005 is now $1.65 per basic share. On a diluted basis, this would
be $1.59 per share. As Paul mentioned earlier, we will be reporting EPS on a
diluted basis beginning in 2006.
We are looking at ongoing EPS growth in the near term which takes us from the
$1.59 per share target for 2005 to $2 per share estimated for 2007. Using
these end points you can see that for this time period, we expect to have
annual ongoing earnings per share growth of approximately 12%.
The primary factors for this accelerated growth should be no surprise. First,
we are adding the earnings from Cinergy's businesses and recognizing a portion
of the expected synergies in the first two years. Our existing businesses will
also continue their plans to pursue organic growth opportunities. Our decision
to exit the DENA business will reduce losses in the near term. The other major
item contributing to this earnings growth will be the roll off of hedges
related to our Field Services business, which will be completed in 2006.
With this in mind, we can clearly see our way to attaining the $2 per diluted
share in 2007 and maintaining our financial strength to pursue future growth.
From that base, we expect long-term ongoing EPS growth of approximately 4 - 6%
on an annual basis. We will continue to benefit from realizing additional
synergies from the merger, but the biggest drivers for long-term earnings
growth will be the continued growth of the regulated utility business and the
expansion of our gas businesses.
Our ability to pursue these market opportunities will be enhanced by the added
flexibility of a much stronger balance sheet.
Cash generation of the combined companies is very solid whether we look at
funds from operations or EBITDA.
We have told you that our current target is an approximate 70% dividend payout
ratio. This transaction and the associated dividend increase maintain that
concept, so you can expect an average payout ratio of 70% going forward.
In the near term, we anticipate using a portion of our current cash position
to meet our synergy targets with respect to the costs to achieve those
targets. Tom will speak in more detail about this subject in just a moment.
The other large cash flow item is capital expenditures. Looking at preliminary
capex forecasts for 2007, we expect to spend about $4.7 billion in total.
About $2.1 billion of the total is categorized as maintenance capex and
approximately $800 million is focused on environmental spending. The current
forecast for expansion capital is approximately $1.8 billion. Our utility,
pipeline and real estate businesses will be the primary users of expansion
capex over the next few years. As you are well aware, the numbers I have just
given you will go through extensive review before they actually become budgets
and will no doubt change based on market opportunities.
In addition to the decision to exit the remaining DENA business, the merger
with Cinergy also improves our overall risk profile. We will have a greater
contribution to earnings and cash flows from regulated businesses and a
significant portion of the merchant business at Cinergy is contracted.
Before I discuss the financing nodes, let me remind you that the new Duke
Energy will be incorporated in Delaware. This should be viewed positively as
Delaware's corporate laws are very well developed and considered to be strong
in the governance area.
This slide illustrates the organization of the financing nodes under the new
Duke Energy Corporation. As you can see, we are not expecting to issue new
debt at the holding company level, but only at the subsidiary levels.
It's important to note that the debt to cap structures you see on this slide
do not reflect any allocation of purchase accounting adjustments to Cinergy or
its subsidiaries.
On a combined basis, the balance sheet will result in a debt to total
capitalization of approximately 43% by 2007. This is a much lower debt
percentage than the current capital structure at Duke Energy as we will be
issuing approximately 310 million common shares at the time of closing with
Cinergy. The FFO interest coverage of the new entity will be approximately 5.5
times which should result in strong investment grade credit ratings.
Below Duke Energy Corporation, you can see the first level of financing nodes
- at Duke Capital, Duke Power and Cinergy.
Under Duke Capital, you can see we will maintain pipeline financings at the
appropriate level for regulatory purposes. Westcoast and Union Gas are
currently the largest issuers under Duke Capital. We may also issue
project-related debt at various subs under Duke Capital as appropriate.
On the electric side of the business, Duke Power will be a sub of Duke Energy
Corporation. The ratings you see on this slide are the current credit ratings
at Duke Energy. It bears repeating that it is Duke Energy's intent to remain
obligated at the Duke Power level for the existing senior unsecured debt of
Duke Power and for the servicing of this debt to occur at the Duke Power
level.
Under the Cinergy node, we anticipate CG&E and PSI will continue to finance
their operations at their respective legal entity level.
Each of these nodes is currently investment grade and, on a go-forward basis,
we would look to improve or maintain our current credit ratings at these
levels.
First of all, I would like to reiterate that there will be no change to Duke
Energy's current valuations. Since Duke Energy is the acquirer, its balances
will be carried over at historical costs.
Cinergy's generation assets and other non-regulated businesses will be
affected by purchase accounting requirements. We do not intend to fair value
Cinergy's regulated businesses, except for pension plans.
We estimate goodwill will increase by approximately $4.2 billion, as a result
of the difference between the purchase price and the necessary purchase
accounting adjustments.
My first objective is to maintain the company's financial strength. As I
mentioned before, our goal is to improve or maintain our investment-grade
credit ratings. We will also maintain sufficient levels of liquidity to
effectively manage our day-to-day operations and manage the balance sheet to
maintain an appropriate level of "dry powder" to pursue growth opportunities
as they arise.
Next, we must balance the needs of our businesses with the capital
requirements of the corporation. We have strong cash flow generation from the
majority of our businesses that can be used to invest in our business for
future earnings growth or delivered directly to shareholders. It is our intent
to do a combination of both. The level of capex or dividend growth will
largely depend on future market opportunities.
Another focus for me will be to ensure the company is making good investment
portfolio decisions. We have talked about how we plan to grow organically as
well as pursue other growth opportunities. The finance organization will work
with our businesses to make wise capital investments and will also evaluate
new investments to determine the best financial structure to optimize the
value of the combined portfolio for our shareholders.
Last but not least, we are working to streamline our financial systems. This
effort was already underway before the merger announcement because Duke
Energy's current financial systems vary significantly by business segment. Our
goal is to have a one-company system. Now this effort is even more important
as strong financial systems will be critical to supporting the scalable
platform for future growth.
This scalable platform and a smooth integration process are the primary
focuses for our next speaker, Tom O'Connor.
-------------------------------------------------------------------------------
Tom O'Connor - Duke Energy Corporation - Group VP and Integration Executive
I appreciate this opportunity to share with you the details on how we will
proceed with the integration of Duke and Cinergy and how we expect to deliver
on our synergy targets.
Paul, Jim and David have spoken to you about the exciting vision for the new
Duke Energy. So let me start by sharing with you our vision for the
integration.
This integration is not simply about bringing together two companies, two sets
of processes and systems, two organizations. As Jim emphasized in his remarks,
both companies individually have a strong history of excellence in operations,
a commitment to cost efficiency and are recognized leaders in customer
service.
Yes, this integration is about improving in these areas and adopting the best
of both or adopting a new way if better, but most importantly, this
integration is about building a transformational platform. It is about
simplifying, reducing and standardizing our systems and processes, and
creating an organization which will in the near term assure that we achieve
our synergy targets and in the long term provide a scalable platform to
support future growth.
We have set out several objectives for the integration to provide a clear
challenge for those responsible for making it happen. If we are successful in
achieving these objectives we will accomplish three goals:
1. Rewarding shareholders
2. Building the platform
3. Strengthening the organization
Of course in pursuing these goals we will maintain the highest standards for
reliability, customer service and competitive rates in keeping with the
established standards of Duke and Cinergy.
Achieving the targets for cost savings and costs to achieve is of course first
on our list of priorities. I will speak in more detail about our plans to
deliver on this objective later on in the presentation, but three points are
worth mentioning here.
o The cost savings and cost-to-achieve targets are based on an
informed and reasonable view of the businesses and we are
confident that they can be achieved.
o Our progress will be verifiable and transparent and we will be
able to look back and measure our results.
o We will use pressure on costs as a catalyst for change, forcing
new ideas and new ways of doing business.
Another objective is to develop the scalable platform. You have heard this
term throughout the presentation and will hear it often in our future
discussions, so let me tell you what it means to us.
A scalable platform is a business model established on a foundation of cost
efficiency and best practices, (i.e., a well-run business) but it is also
modular in structure. As the portfolio evolves and businesses are added, they
are readily absorbed by a flexible foundation of systems, processes and
organization. There is no need to start over with each transaction.
There is no question, for example, about which IT infrastructure or which HR
system will be used or how back office services will be provided. The base
from which we will build is established. That is why it is imperative that we
get it right in this integration - that we establish the foundation which
positions us for further cost effective growth.
We also want to build a cohesive team to carry the new Duke Energy forward.
Following the close of the merger, the focus will be on one company and one
stock. We will use the integration as an opportunity to combine the best
talent from both companies, creating one high performance organization with a
common culture and common set of values.
During the integration effort we are challenging the teams to stretch their
thinking about how business should be done to support our vision. Stretching
for excellence means more than just achieving or even exceeding the synergies,
it means identifying and adopting best practices from inside our industry as
well as from other industries. It means looking very hard at efficient shared
service models and outsourcing of highly transactional services where
experienced and competitive service providers are available.
Our focus is on delivering Day 1 readiness and the teams are geared for speed.
The sooner we achieve a cost saving, the more value created. The pace of
integration will be coordinated to the pace of regulatory approvals so that
the companies can operate as one after approvals are in hand.
Maintaining the ongoing business is also an important focus. It is imperative
that we execute the integration while not distracting the organization from
the work of delivering on our 2005 commitments.
We have put in place a separate organization structure for the integration to
ensure high level executive involvement and clear accountability.
A Steering Committee co-chaired by Paul and Jim and including other senior
executives is in place to provide overall direction for the integration. This
group establishes policy and will approve key decisions such as benefits,
compensation, information systems, and location of business activities. The
Steering Committee advises the Board of Directors of the status of integration
at each regular Board meeting.
As Integration Executive reporting to the Steering Committee, I have been
charged with responsibility for the day to day management of the integration,
ensuring that we achieve our targets, meet Day 1 readiness and build the
platform. I have significant experience in this area through the Westcoast
integration as well as efficiency initiatives at DEGT over the last few years.
Reporting to me are 8 Integration Leads which include an equal number of
senior executives from both Duke and Cinergy. These executives are proven
performers with years of broad based experience in the business and
substantial credibility within the organization. Several have played key roles
in previous integration and efficiency initiatives at both Duke and Cinergy.
The Integration Leads will guide and support the functional teams as they
execute the work. The Leads will ensure that the teams drive toward our
synergy targets, stay on track for Day 1 readiness, and employ stretch
thinking around potential new ways of doing our business.
The project management office is supported by 2 Program Managers - one from
Duke and one from Cinergy. The Program Managers provide resources to the
teams, but most importantly, track budgets, commitments and schedules alerting
me to any anomalies versus plan.
I am very pleased with the organization we have in place. This group is
experienced, it is committed and it has really come together as a team which
bodes well for a successful integration.
Twenty-four functional teams have been commissioned to integrate the various
corporate, regulated, and non-regulated parts of our business. These
functional teams are focused on the specifics of the ongoing business; the
staffing, the processes, identifying alternatives and meeting Day 1
requirements. The real work of integration and defining how the new company
will achieve the vision happens within these functional teams.
The support teams in IT, HR and Finance focus on the issues common to the
enterprise such as systems, platforms and HR policies while also providing
technical support for the functional teams.
Each team is headed by a Team Lead from Duke or Cinergy. Team Leads have been
selected based on experience, as well as willingness to challenge the norms
and think outside the box. Accountability for delivering the targeted results
on cost savings, cost to achieve and headcount in their area of responsibility
rests with the Team Leads.
While there is a lot of detail on this slide, my main message is that we have
the resources in place to deliver, the activities are organized, and all parts
of the business will be reviewed.
Since the merger announcement, the companies have been focused on developing
the framework for a successful integration. We took a very deliberate approach
in developing the team, creating the vision and setting the targets,
establishing a clear blueprint and a solid foundation for the work to follow.
This morning we held a kickoff meeting here in Charlotte for the integration
teams. Over 100 Duke and Cinergy team leads and their support groups are
attending this meeting, and today begins the real work of integrating the two
companies.
Over the next several weeks, during the analysis phase, the teams will build a
fact base around the Duke and Cinergy functions identifying differences and
commonalities and determining where potential improvements can be made.
Potential new best practices and outsourcing opportunities will be identified
at this time.
It is in the design phase that the new company will begin to emerge. During
this period of the work, the integration teams will design organizations,
select systems and processes, and layout the pathways to achieving the synergy
targets.
Implementation will begin early in March of 2006 following approval of the
major design features by the Steering Committee. Implementation will initially
be focused on the key activities to deliver Day 1 readiness for April 1, while
other activities not critical for Day 1 will necessarily be completed after
that date.
The timeline is very doable and with oversight from the Integration Leads, we
will track closely the progress of the teams.
The business model for the franchised electric companies is a key part of
building the scalable platform. If we are going to "get it right" this
business model must support the vision.
Our current thinking for the franchised electric business model, shown here,
has been provided to the integration teams as the concept for how we should
operate. As we move through the integration process and the teams do their
work, the model may change if we uncover better, more efficient ways of
achieving our objectives.
The teams have been cautioned that this is not an organization chart. We would
expect more information on high level organization charts to come forward
around Thanksgiving.
Four key principles guided our work in designing the regulated electric
business model:
First, we want to establish clear local accountability for delivering
financial performance and preserving the local brand. Therefore we are
proposing 3 utility CEOs for the Duke, PSI and CGE/ULHP businesses. These
business unit CEOs operating from Charlotte, Cincinnati, and Plainfield will
have accountability for profit and loss at these units by direct management of
the revenue generating functions shown and matrixed responsibility for service
functions including generation, transmission, distribution and customer
service in their franchise area. Nuclear operations in the Carolinas would
report to the Duke Power CEO.
Our second key principle was to create a sharp focus and clear accountability
for establishing best practices and cost efficient operations in the areas of
fossil/hydro generation, power and CG&E gas delivery and customer service
field operations. Therefore, our business model would have these key parts of
the business managed as an integrated function across the geography of
companies. Reporting through a common COO, these functions will operate as
service providers to the business unit CEOs, focusing on reliability, cost
efficiency, and performance metrics.
Our third principle was to integrate common back office functions across the
regulated and non-regulated generation fleet which we will accomplish through
a generation fleet services function as shown on the next slide.
Generation fleet services is really a combination of several different
back-office functions including engineering, project management, maintenance
and other activities coordinated across the fleet and provided as a shared
service. This model will allow us to establish common standards and work
practices, efficiently source materials, coordinate outages and maintenance
projects to more efficiently use our capital and human resources and better
serve our customers. Commercial functions for the regulated and non-regulated
fleet would be separate.
Our fourth principle was to establish a model which is scalable - a business
framework which can be readily expanded if further consolidation of utilities
were to occur. Clearly this model is modular and could easily absorb further
additions to the portfolio.
The integration of the corporate center will primarily be a combination of the
two existing operations with corporate functions located in Charlotte. Our
objective here is to efficiently consolidate these areas consistent with good
governance.
With yesterday's announcement on DENA and our intention to move forward using
the Cinergy platform for the non-regulated gas marketing business, integration
will focus primarily on folding this business into Duke and determining the
various locations for operations. More will emerge on these decisions over the
next few weeks.
On May 9, we showed this chart which presented our expectation that the
combined operation would yield Year-3 cost savings of $400 million pre-tax
before costs to achieve. As you may have seen in our most recent regulatory
filings, our total savings expectation has been revised to $440 million, based
on additional work completed since the merger announcement.
This amount includes $160 million of non-regulated cost savings, which due to
the proposed actions with respect to DENA, will be accelerated and for the
most part captured in discontinued operations.
The remaining savings, estimated at $280 million, is expected to come from the
corporate area, shared service functions and the utility business. The
majority of these savings, approximately $200 million, will come from
corporate and shared services. Based on our current modeling, approximately
60% would be allocated to regulated operations, with the balance to
unregulated operations. Savings at the utility are estimated at approximately
$80 million.
As discussed in May, some level of sharing of the regulated portion of the
savings between customers and shareholders is expected.
Let me now turn to the next slide where I can provide you with more detail on
our savings and cost to achieve projection. Again I will focus only on the
corporate, shared service, and utility areas.
Cost savings are expected to build from $170 million in year 1 to a run rate
of $280 million by Year 3. Year 4 and 5 increases primarily reflect inflation.
Cost savings reflect the sum of projected O&M reductions as well as an
appropriate capital carrying charge for estimated savings which would normally
be capitalized. Projected 5-year gross savings are approximately $1.3 billion,
with total net savings of $655 million.
Our cost to achieve is currently estimated at $675 million. Costs to achieve
have been revised from the May 9th presentation to reflect updated information
consistent with our regulatory filings and to remove the costs to achieve
related to DENA. Costs to achieve include employee-related costs such as
separation, retention, and relocation; system integration costs (primarily
IT); and merger execution costs which include regulatory processing,
integration and transaction related charges. Approximately 80% of the cost to
achieve will be incurred within the first two years after we close the
transaction. We are currently estimating that 60% of these costs should be
capitalized.
The pie chart provides detail on where we expect savings to originate. 38% of
our projected cost savings will come from reductions in staffing associated
with combining the corporate, shared service, and the franchised electric
groups. We have targeted a headcount reduction of approximately 1,000 from
these areas.
28% of projected savings will come from A&G and corporate programs. This
category includes items such as overheads and facilities savings associated
with a reduced employee population and expected efficiencies in spending for
benefits administration, insurance and professional services.
Projected savings on information technology constitute 17% of the overall
savings and result from elimination of duplicate systems, migration to common
platforms, consolidation of data centers and work station savings from a
smaller employee base. Currently, the combined companies spend over $200
million per year in this category operating individual systems. Substantial
savings are derived from a common approach of a bigger company.
The supply chain category includes savings from contract services and
materials and supplies. Combined, the companies spend over $1.2 billion per
year in contract services and over $500 million per year on materials and
supplies for generation, transmission and distribution. Our savings
expectation of 2 - 5% in these categories is based on economies of scale,
moving to common standards, improved sourcing and vendor consolidation.
A question, which always arises from mergers such as Duke and Cinergy, is can
the projected synergies be realized. I want to assure you that we have done
substantial work to define cost savings opportunities, and we are confident
that the savings presented are achievable. Our estimates reflect not only our
own view, but are consistent with what other companies have experienced. You
should be aware that substantial stretch goals have been assigned to the teams
to beat savings and cost-to-achieve targets, and our intent is to bake the
targeted performance into operating budgets beginning in 2006.
Transparency around savings and cost to achieve is important, therefore we
have designed a tool which allows us to closely track our performance and
provide the Steering Committee with up-to-date information on progress towards
our goals.
The tracking tool shown here is one that we developed during the successful
integration of Westcoast during 2001-2002. It will form the basis of how we
provide internal tracking for the Duke/Cinergy integration. The tool is simple
in its application yet provides all the information needed to assess the
progress toward the integration objective. It provides functional area,
targets in both dollar values and headcount and in subsequent screens,
progress toward the objectives. Importantly, it clearly defines
accountability. With this tool, management can clearly see performance versus
target, and through a rollup, an overall picture of integration progress.
Typically, there have been two main measures of integration success: deliver
on Day 1 readiness and achieve the targeted synergies. While we continue to
anticipate a closing in the first half of 2006, I am targeting Day 1 readiness
for April 1st, which provides us with substantial flexibility around the
timing of regulatory approvals. I have no doubt we will be ready on Day 1.
There is always a healthy skepticism about the ability of merging companies to
achieve savings targets. However, this integration is clear in its objectives;
it is well organized with a commitment of senior talent from both companies;
these are people who have been through integrations and efficiency initiatives
before; the teams will be challenged with stretch goals which exceed the
target synergy levels; and the accountability for delivering these results is
clear. Both Duke and Cinergy are very focused on delivering the results from
this merger and we will provide you with quarterly updates on our progress.
In addition to these two key metrics, we will measure our success in terms of
establishing the scalable platform and moving forward with a high performance
organization. Success in each of these areas will position Duke for the long
term and it is important that we get it right.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
The new Duke Energy will be prepared on Day 1 to deliver solid earnings and
will be committed to the company's vision. The larger regulated earnings
profile will provide earnings stability and strong cash flows, which will give
us the ability to deliver shareholder value in terms of business growth and
dividend growth.
The first full year of operations in 2007 is expected to deliver ongoing
earnings of $2 per diluted share and from this base we will grow, on average,
4% - 6% annually.
You will recall that my compensation is entirely stock-based and none of that
stock can be sold before 2007. When Jim becomes CEO of the new Duke Energy, he
will also have a compensation package that is all stock-based. We will both be
totally aligned with our long-term investors.
Our promise to you, our investors, is this - we will grow our businesses in a
disciplined manner and deliver long-term value to our shareholders in the form
of increased earnings and dividend growth.
-------------------------------------------------------------------------------
Julie Dill - Duke Energy Corporation - VP Investor and Shareholder Relations
I would ask the four speakers, or three speakers, to please come up. While we
are doing that, just a reminder for those that are flying out this afternoon,
immediately after the conclusion of this, there will be buses down on the
College Street side. So if you would just go down the escalator and go out to
the front, there will be buses to take you to the airport. That will be
immediately after the conclusion of this.
Again, I would ask you when you ask a question, just for the purposes of the
Webcast, I would ask you to give your name and the company that you are with
so we can capture that data for the Webcast.
Please wait for a microphone as well. So with that, we will open it up for
questions.
QUESTION AND ANSWER
-------------------------------------------------------------------------------
Unidentified Audience Member
Can you give us an update on your gas transmission -- potential strategic
options with that and where we stand with that?
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Oh, our study of the potential split of the gas business and the electric
business?
-------------------------------------------------------------------------------
Unidentified Audience Member
Yes, that is correct.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Ok -- sorry the light is in my eyes, and it's keeping me from hearing.
The potential - - I want to put this in context - - because we have talked
about the fact that the merger with Cinergy gives us the potential to separate
the gas and electric business. We have not made any decision on those lines as
to whether or not that it is a good-thing; we just have the capability to do
it.
If we were to do it, we are talking something that would be a year or more
from today. So, if any of you who are looking for a press release tomorrow,
don't even think in those terms.
We have talked to the board about this. We have started a study on this. We
have not reached a conclusion. The one thing that we are absolutely committed
to is we are not going to take any action if it doesn't create significant
shareholder value.
During this period, in looking at the advantages of having the two businesses
split - - we have actually discovered that there a number of things that would
come with the split that you could possibly accomplish without a split. One of
them is to recapitalize some of the Canadian Operations. That was one of the
things that sort of jumped out at us, was that jeez, there are ways to
recapitalize Canadian Operations without necessarily splitting them out.
Another thing is -- I had talked about the problems with the affiliate rules
-- the fact that we have trouble moving people between parts of the
organization. In the model that we are developing now for the combined entity,
the electric platform would be very scalable and the corporate part of that
would allow you to plug or unplug the gas business. In fact, to a certain
extent, puts a buffer between the two parts of the organization, as the
affiliate rules require that you have a buffer in.
I guess all this means we are a long ways away from having made a decision on
whether or not it makes sense to split and we won't make that decision unless
it does create significant shareholder value.
-------------------------------------------------------------------------------
Unidentified Audience Member
Can I just ask a follow-up on that though? Have you looked at the tax
implications with the regards to a split? Or, is the company aware of a way to
avoid tax leakage, shall we say?
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Well certainly that's part of the whole study that we are looking at. We
obviously have to look at the implications from a tax standpoint, from
earnings standpoint, from a shareholder base standpoint. It's not simply
saying that if we split this into two pieces, how would the market value each
piece and would it be more than those two pieces together. You have to look at
what is the cost of separating them, what is the future growth that might be
given up, having a larger market cap versus a smaller market cap. There is a
lot of consideration and tax is one of those.
-------------------------------------------------------------------------------
Unidentified Audience Member
I have a couple of questions, first the simpler one.
On the $2 - 2007 -- EPS assumptions, what kind of energy price assumptions
might be implicit in that for DEFS. I understand that you may not have
specific numbers down to the penny to throw out there, but if you could give
us a sense relative to where things are today or the future strip, that would
be helpful?
The second question is --Tom mentioned about the scalability of the platform
that you are putting together -- you all have commented a couple of times
about David's problem with cash these days.
So, I wonder if you could comment about the question that always come up
which is ongoing industry consolidation. Maybe more specifically, now that the
balance sheet is looking better and better and you have some good cash flow,
could we start to see large multi-utilities such as yourself start to
participate in mergers that are not just equity for equity?
-------------------------------------------------------------------------------
Tom O'Connor - Duke Energy Corporation - Group VP and Integration Executive
I'm going to let Jim answer the second and I'll answer the first.
-------------------------------------------------------------------------------
Unidentified Company Representative
Thank you.
-------------------------------------------------------------------------------
Tom O'Connor - Duke Energy Corporation - Group VP and Integration Executive
With regards to the $2 a share, I think it's very important that you
understand that this is a goal and is not a forecast. We've set it as a goal
and we've set it as our goal thinking that it was a very reasonable goal
because we have forecasts that go out to 2007 and beyond and they have a whole
range of outcomes. We don't have a single point forecast. This is where we
think the future is going to be. We have a range of outcomes based on
different energy prices. We have a range of outcomes based on taking various
actions.
At the break somebody asked, well does this assume there's an income trust
involved? Well, some of the forecasts have an income trust. Some have an MLP
in them, some have robust economic growth. Some have a recession in mind. We
have an array of potential outcomes and we feel that given that array of
potential outcomes in 2007, that $2 is a very reasonable target for us to set
for this management team, for that first full year.
But it is not in any means a forecast and therefore we can't answer questions
like, well what was the oil price that was assumed in there, what was - any of
those. What we've done is we've set a target based on a whole bunch of
outcomes that we have forecast.
-------------------------------------------------------------------------------
Jim Rogers - Cinergy Corporation - Chairman and CEO
With respect to consolidation, if you look back over the last two decades,
what you'll see is that we started the early 1990s with a first wave that
peaked in 1999 and then as you had the implosion in California, the merchant
issued arrived, you saw a fall-off in consolidation. I believe we're on the
front end of another wave of consolidation in our industry. It's a very
fragmented industry. If you look at the average market cap in the top 20
companies, it's below $10 billion, so you have a very fragmented industry.
You have an industry that's going to be experiencing probably for the first
time in a decade and a half, real increases in prices, in part to hold prices
up, gas prices up, that they should allow prices up, or stringent
environmental regulations and one of the strategies from a customer
perspective to the extent you can do this is use some of those savings to
offset these increases, that will be an advantage for public policy, the
regulators' perspective. But it will also allow for - to take the organic
growth in our industry and then have certain acquisitive growth tied to that
that will allow you to outperform others.
But let me be clear about this - we have got to earn the right and the things
that Tom talked about in terms of what we're doing in integration, we have got
to demonstrated convincingly that we have earned the right to do another
combination. Whether it's cash or equity, I can't predict that, but I think
taking a position and having a track record of delivery in a period of rising
real prices in electricity and natural gas, it is going to be critical to be
positioned to take advantage of what I believe will be a second wave.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Listening to Jim, I forgot to tell him that my first year in Charlotte I
almost died from a sinus problem and probably the toughest thing you're going
to find is when you move here you will not be feeling good for about a year.
-------------------------------------------------------------------------------
Unidentified Audience Member
All right. Two questions. First question is on CapEx. I know that you had
about a $1.8 billion for expansion CapEx in 2004 and then you had, I think,
$800 million for environmental. Can you just guide us towards in future years,
like the direction of those numbers, would they trend higher, lower, like what
kind of numbers are those in a cycle of CapEx?
-------------------------------------------------------------------------------
Unidentified Company Representative
That sounds like a CFO question.
-------------------------------------------------------------------------------
Tom O'Connor - Duke Energy Corporation - Group VP and Integration Executive
You're asking beyond 2007 what those numbers would look like?
-------------------------------------------------------------------------------
Unidentified Audience Member
Yes, I guess for environmental I'm just trying to understand is that like a
peak year of CapEx -- of environmental spending or is that kind of a more
average level through the end of the decade and then on the expansion CapEx,
just in big terms like is that kind of a middle of the range number or is that
low-end, high end, just because I noted you talked a lot about regulated
investment expansion.
-------------------------------------------------------------------------------
Tom O'Connor - Duke Energy Corporation - Group VP and Integration Executive
I tell you the way to view is it that number totaled $4.7 billion and this
corporation would be in a position where it generates adequate cash to support
a $4.7 billion kind of CapEx program. So, I think you should see this
corporation in that range going beyond 2007, but I suspect you would see the
split different depending on the opportunities, and I don't think you'd see
the same number every year.
You'd see some down years and you'd see some up years as you're building
generation. So, I think you'll see a pretty good range but I think you should
feel comfortable that on a run rate basis this company can support $4.5 to
$4.7 billion of CapEx if that was the right investment strategy.
-------------------------------------------------------------------------------
Unidentified Audience Member
And then it just seems like there's a lot of discussion of regulated
reinvestment and not a lot of discussion about international expansion and I'm
just curious if you could comment on the long term strategic outlook for the
international business.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Well, with regards to the international business, we view that pretty much as
a strategic investment, which means it's not critical for our core operations
to have international operations. If you look back, at one time we had
international operations that were all over the place within Duke Energy and I
think, Jim, your international operations are quite a bit smaller but you're
outside the Americas but we've pulled back to just Latin America, got out of
Asia Pacific, got out of Europe and took on the task of getting the returns up
to an adequate level in those operations.
The returns have been improving and that's really my compact with those guys
is if you can carry your cost of capital, you can be part of the portfolio
unless somebody comes along that offers us more money than we think you're
worth. And that's kind of what I would call a strategic asset, is if it's
worth more to somebody else, we would be willing to sell it but if it's worth
more to us we're willing to keep it, but we don't feel it's an integral part
of our business, that it's part of the core, and as such we would not
aggressively invest in that.
-------------------------------------------------------------------------------
Unidentified Audience Member
I have a question about the 4% to 6% rate of targeted growth. That is
obviously an aggregate of the earnings contributions of each business and I'm
wondering if you could take each business and give us the range of the
expected earnings contribution, multiplied by the weight of that contribution?
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Sounds like you are looking for a forecast - that actually sounds like a CFO
question.
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
I think you're taking us into a bit too much detail. So, you're looking at 4%
to 6% off of the $2. There's a lot of ways to get that and certainly it is
grossed within the electric business, it's grossed within the gas business, it
could be acquisitions and it could also be reducing the denominator. You buy
back stock you increase the growth rate, too. So, I don't think we have a
specific forecast of the 4% to 6% after 2007 and how we're going to get there.
-------------------------------------------------------------------------------
Unidentified Audience Member
A follow-up please. If you just take the $2 for 2007, what would be the
makeup of that $2 from each of the businesses?
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Again, we're getting back to trying to make this a forecast instead of a goal
and as I said, there are a dozen scenarios out there that get a range of
values and $2 is within that range and we've set that as a goal, but we do not
-- the last thing I want to do, I've seen so many CEOs of companies spend half
of their life going through and explaining, well, you know, the price of oil
we assumed in that guidance we gave you was X and O, we didn't have that
particular thing but we did have that, and everything is just reconciling to
forecasts.
We're happy to set it as a goal, we're happy to say that we have forecasts
that will get there and there's a range of forecasts, but we're not going to
start defining exactly what's in that $2 and then go back every single meeting
that we have with analysts, and say what changed in that. It's a waste of
resources.
-------------------------------------------------------------------------------
Unidentified Audience Member
You spoke to the utility merger, or the merger as it relates to utility
operations and the savings as well as the scalability issues that you raise.
Could you give us any metrics as to how you look at this merger on a
cost-per-customer basis? Or, what you hope to achieve with regard to cost per
customer over a period of time, where you think you can take it? And secondly,
I know it's early in the merger process, but Jim, could you give us an idea of
how you think the regulators will look at it in terms of sharing savings, etc,
on a going-forward basis that might help you -- or help make it easier if you
decide to pursue another merger after this one?
-------------------------------------------------------------------------------
Jim Rogers - Cinergy Corporation - Chairman and CEO
I think with respect to the whole sharing mechanism, we are proposing about
50% share with our customers. That's based on the projections that Tom shared
with you in terms of what we thought we could achieve in the utility as well
as a percent of the corporate overhead. And I believe that that will be a fair
way to resolve this. I think one of the keys is given the prior experience we
had with a merger is a situation where we were able to recover both the cost
to achieve as well as the savings that we netted the two out. But certainly
that will be the position that we'll take in every jurisdiction with respect
to that.
But again, delivering there is really all about the capability of hitting our
targets, exceeding our targets and it goes back to that fundamental point,
we've got to earn the right to do this the second time and so we're going to
be, as they say, hell-bent on getting it done this time and delivering the
numbers, so that when we come in with the next opportunity, we'll be able to
say, look at our track record and you can -- and we will have credibility with
respect to what we propose.
With respect to your first question, I would observe that both of our
companies are very low cost. Our rates are almost 20% below the national
average. We are almost in the top decile -- we are in the top decile in some
areas, like O&M per customer, etc. But I think across the board, we haven't
got it completely quantified to a specific target but I think as a general
rule, our approach is going to be top decile every way you measure the
business.
Customer satisfaction, cost, operational efficiencies and I think that all
rolls -- is all underpinned, the notion that to earn the right to do this
you've got to be able to demonstrate to regulators and to you that we're a low
cost operator, we still deliver superior reliability and customer
satisfaction. So, it will be those measures that will drive us.
-------------------------------------------------------------------------------
Unidentified Audience Member
You mentioned that you have strong financial flexibility and you can sustain
this $4.7 billion capital spending program. I assume that you still have some
more free cash on top of that and you talked about maintaining the financial
flexibility and at the same time becoming a good investment portfolio
decision-maker.
So could you give us some idea about what the discipline do you use finally
for this -- for some of the decisions you make? Like, are you looking at
return on capital implied or are you looking at some other ways to decide
whether to go into a new business or new expansion and how do you decide to
return it back to shareholders rather than reinvesting?
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
When we look at an investment, we have a lot of different business units
looking at ideas and as those ideas develop, they roll through into the
corporate center and we end up in a spot where we compare the various ideas,
determine if we can fund them all or determine if we can only fund some of
them. We're looking at them on an apples to apples basis, with the risk
adjusted return on capital employed and making a determination of which
project we'll fund.
So, I think you should feel comfortable that it's pretty strongly reviewed at
the corporate center before the investments are made. But you can assume our
investments would largely be in the regulated business, but whether they'd end
up more in the pipes or more in the power, I would say depends heavily on
where the best opportunities are.
-------------------------------------------------------------------------------
Unidentified Audience Member
Hi. I have a question for Tom and then one for David. Tom, you talked about a
lot of the synergies all seeming on the cost side and yet you guys have also
talked about putting the Midwest gas plants together with some of the Cinergy
base load fleet, which suggests to me maybe a revenue synergy.
I am wondering why you didn't talk about revenue synergy at all, if there are
any and - or is it buried in there? And my question for David is around cash
flow. I'm just wondering when you might have free cash after dividend payments
in your model, given the fact that there is substantial environmental CapEx
over the next few years? Thanks.
-------------------------------------------------------------------------------
Tom O'Connor - Duke Energy Corporation - Group VP and Integration Executive
I think on the first question, we have focused primarily on the cost saving
synergies and that's how the transaction was pretty much put together and all
of the numbers that I showed you are around the cost savings aspect of the
synergies. So, we feel very comfortable with getting to the numbers that we've
laid out and I even personally think there is significant upside there as we
have pressed some of the teams to think about things differently and maybe do
things a bit differently.
In having the focus on cost savings gives me a lot of comfort around the
transaction because it's things that on the cost side that we can primarily
control. Now if you look ahead, one of the strategic considerations of the
transaction is something Jim mentioned, is that Cinergy is short power in the
future and we have a lot of very efficient gas power generation in the Midwest
which we would look to find a way to serve the need of Cinergy in the future.
But that will have to go to a process that will have to get approved by the
regulators, so right now, while it's a future opportunity on the revenue side,
we are very much just focused on the cost side in bringing the two companies
together at this time, but that would be a future upside opportunity.
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
The cash flow question. If you look at the first 12 months of this entity
with the costs to achieve this entity would be a cash user but of course, we
are in a very strong cash position so we've planned on that. After this entity
gets up and running full-scale, the numbers I've seen are pretty close to
balanced, depending on the year you look at. So I think we'll have flexibility
to balance the numbers if that's the goal or to invest more capital in the
business if the returns are there. The question was how we decide between
investing the capital, buying back shares, raising the dividend. Well we gave
you the thought process of the 70% payout ratio. We won't do that all the
time, it will move around that, but that is certainly one dynamic. But as far
as share buybacks we see those really occurring using cash as kind of one-time
generated. You don't use your ongoing cash for share buybacks.
So that's the way I view a share buyback and I think the balance will be what
sort of growth capital opportunities are there. If there are plenty of growth
capital opportunities, my bias would be to do that instead of buyback shares,
but it's an economic -- it's a set of math and I'd be happier to do whichever
generates the highest results at the end of the day.
-------------------------------------------------------------------------------
Jim Rogers - Cinergy Corporation - Chairman and CEO
If I could, I'd like to touch on the revenue question just for a moment, with
respect to the Midwest assets. To make the observation is you have to kind of
think through how the rate stabilization plan in Ohio plays out, because a lot
of the base load coal plants are dedicated to 2008. So that's an important
thing to look at to get a grasp of -- to understand the potential but the real
revenue opportunity is really tied to putting these two fleets together, in
bidding on variable load in the future. If you look at the prices summary, you
see the around the clock price up significantly, the peak price is up.
If you look at First Energy's auction last year, they had a $54, $55 price per
megawatt hour and that was prior to the run-up in prices this summer. If you
look at the competitive supply markets in PJM, whether it's in New Jersey or
Maryland, all those prices are up and in the mid fifties and the sixties,
seventies. So, I think the opportunity for combining those two fleets is
terrific over time, particularly given the direction that market prices for
power are moving.
-------------------------------------------------------------------------------
Unidentified Audience Member
I apologize for asking a question that turns the calendar back to yesterday,
but I just wanted to ask Paul a clarification on the target for DENA to break
even in 2006. And I think that what was said was we would have to take on a
significant amount of risk to achieve a break even in 2006, which we weren't
willing to do. And I just wanted to get a clarification or just your thought
process in terms of what would have been that scenario, which you decided that
you didn't do, but I just was curious what was the thinking?
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Well, originally when we set the objective of getting to break even by the end
of 2006, we were making some assumptions with regard to how well the market
would develop and whether or not there would be capacity payments in place by
that time, whether or not just the power markets themselves would have
strengthened and of course some assumptions with regard to what was likely to
happen to gas prices, etc.
Then there was an assumption with how much should we fill in with our trading
operations by more aggressively trading, even taking proprietary positions or
trading further around the assets and the balance of those was risky enough to
start with. I think what we have seen over the last six months or so is that
the market conditions have not improved to the level that we had hoped they
would.
I would say that we're probably a year behind where we thought we were going
to be and so when we look out there, what it does is it puts the burden on
taking larger trading risks to be able to get you to that point and our
feeling was that we're not going to be rewarded to get to zero if we do it
through an enlargement of the book and a riskier position that leads to a lot
of volatility, and so that was really it. It was the fact that with the gaps
that the trading book had to make up had grown from where we thought it was
going to be when we originally thought we could get there.
-------------------------------------------------------------------------------
Unidentified Audience Member
I guess this question is for Paul. The gas-electric split, I think we've
talked a lot about that in the past, but the thinking today is a little bit
different. Can you explain what we should expect in the future? Will that
corporate entity provide a sufficient buffer on the affiliate side that allows
you to pursue gas asset development in the region where you have an electric
footprint? And should we expect in the electric side that you would instill
the wider merchant footprint with more regulated assets, because the two
regulated footprints are currently separate?
So, it's kind of a complex question because where you would overtly find gas
infrastructure growth isn't exactly where you have assets now -- looking at
the Rocky Mountains in the U.S. but you've got certain strategies on the gas
side to deliver infrastructure to market to position itself for supply-receipt
flexibility. Can you talk about how -- can you execute the two strategies
together, and does that corporate buffer prevent you from violating these
affiliate rules?
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
I'm not sure I understand the question, but I'll answer it anyway and then
you can tell me if I've missed something here. The way that we will be
organizing going forward in the org charts that we showed back on May 9th, if
you recall, we put the gas groups as kind of a little box off to the side and
the electric group operating kind of independently. That's really the way that
we will be handling this integration. We're not trying to get common systems,
except where they make economic sense.
We're not trying to get the gas operations as part of the scalable platform of
the electric operations. We would like them to be plug and play relative to
those operations, so that the gas operations could either be part of the
portfolio or separate from the portfolio without a massive tariff one way or
another. Assuming we accomplish that, then there is less drag, if you will, on
the gas operations by having to comply with and follow the processes and
procedures that are on the electric side.
There will probably be less movement of people. The gas operations will have
more independent operations in terms of what our currently now shared services
and there will be less concerns in terms of affiliate rules of people moving
back and forth information, flowing back and forth and will handle it more as
if it were a standalone entity. Once you've done that, you solve a lot of the
issues that the negatives of having a part of the same portfolio. If you can
do some recapitalization of parts of the gas group, as part of the total
portfolio, then you get down to just really a couple of basic questions.
One is are two pieces of paper viewed better or worse by investors because as
is gas business going to be valued on cash flow and the power business on
earnings, and therefore are we getting the full value with one piece of paper
versus what we would get with two pieces of paper. That is sort of a tradeoff
against what's the value of the size and flexibility and the degree of freedom
you get by having a $37 billion company instead of one that's in the 20s and
another that's in, say, the $12 billion, $13 billion range.
So, the scope and scale issue has to kind of be balanced against the
shareholder base issue and like I say, we're quite a ways away from answering
that but I think we have made a lot of progress in saying how can we work
around some of the other issues regardless - does that answer your question?
-------------------------------------------------------------------------------
Unidentified Audience Member
Hi. Paul and Jim, I have a couple of questions. You talked a lot about having
a focused portfolio, gas and power assets, capital allocation and risk
adjusted returns. So my two questions are -- the first one is, the company's
focused on EPS growth of 4% to 6% percent from 2007 and management gets
compensated on an earnings per share target. It's a very capital intensive
business, sounds like it's going to be very capital intensive going forward,
and is there any sense to change the compensation metrics with which you get
paid to also look at return on invested capital versus the EPS targets? That
was my first question.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Well, currently within Duke Energy we have a return on capital employed
target that we use for the operating folks. We've got it for the corporation
at the top and then each operating unit has a return on capital target. I
don't have any -- I just worry about the share price but I guess the rest of
the management group does have return on capital.
-------------------------------------------------------------------------------
Jim Rogers - Cinergy Corporation - Chairman and CEO
Historically we've been focused on earnings per share as the target for the
annual bonus. Our long term plan is really tied to the S&P 500 Composite and
how we perform relative to everybody else. But I think as we go forward, and
as we look at the challenges we have in front of us, it's really going to be
incumbent upon us to make recommendations to the compensation committee to
make sure we've allied the incentives with our challenges.
And as we look out I think we need to kind of step away and think through what
specifically should be at the various levels. The two companies aren't
together yet, but I suspect over time Paul and I will work through that to
make sure the incentives are lined up. But I'm in exactly the same place Paul
is, because as Paul said I've taken all my future compensation in stock and so
I am tied to that with respect to the performance of the stock going forward.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
I would just one additional comment about -- the way Duke Energy got in
trouble the first time with building in the assets and things, was in part
because too much of a focus on EBIT. And there's a hunk of us that aren't
going to let that happen again.
-------------------------------------------------------------------------------
Jim Rogers - Cinergy Corporation - Chairman and CEO
Technical term?
-------------------------------------------------------------------------------
Unidentified Audience Member
The second question is -- and still focusing in on a more focused power gas
company and portfolio allocation, what is the future Crescent in the combined
company?
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Crescent is sort of like our international operations. It's been churning out
earnings and it's been churning out cash and it's been doing it consistently
for a long period of time, so we don't feel any impetus to do something or any
burning need to do something.
One of the issues with Crescent is that a lot of people would say, well, gee,
there are plenty of people out there that would just love to buy Crescent, and
indeed there are, we get phone calls every day. But they want to buy it as a
collection of assets, not as an ongoing business and so as an ongoing business
it's certainly worth more than as a collection of assets.
We will continue to assess it as a strategic asset and I think if there's a
way to realize more value by a partial or total sale of it - we're not really
wed to anything. I'd let my mother go if necessary if it created shareholder
value. It's very dispassionate as far as our view of it.
-------------------------------------------------------------------------------
Steve Fleishman - Merrill Lynch - Analyst
I'm Steve Fleishman from Merrill Lynch. You mentioned pretty much two
transactions today. This Canadian Income Trust and MLP of DEFS. Maybe a little
more color on each of those and on the Canadian Income Trust and the goal of
since you're recapitalizing the 30% equity from 50%, how much equity or cash
does that free up to the company, potentially. Second on the MLP, how much of
DEFS's assets are really available to put into the MLP, give a sense of that
scale as well.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Unfortunately I can't do either one. The MLP, the S-1 will be filed tomorrow,
Monday, Tuesday, sometime in the next few days, so you'll get a real good view
of it at that point in time and I think Keith would strangle me if I started
to feed out bits and pieces that were in that S-1 today, and with regard to
the Canadian Income Trust, right now it's in very formative stages in terms of
does it make sense, how does it make sense, what would you want to put in it,
etc. So, to speculate on it at this point in time doesn't make sense.
-------------------------------------------------------------------------------
Steve Fleishman - Merrill Lynch - Analyst
Let me ask the question in kind of another way, then. Just taking your equity
down to effectively 50% invested at the parent to 30%, how much does that free
up? Is that kind of your goal is that you've got too much equity at the parent
to cover what's supposed to be 30% equity in that business.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
Well, if we didn't answer it the first way, we're not going to answer it the
second way.
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
A couple of people hit me at break with the question on this. Some people were
confused about -- are we pursuing an MLP of all of DEFS and that's absolutely
not the case, it is a portion of DEFS that works for this. This isn't about
reducing our positions in DEFS, this about creating a new growth vehicle. It's
kind - the question is a little bit backwards, I guess. This isn't about
reducing our equity. It's about creating a new vehicle that will grow. And I
probably went further than I should have.
-------------------------------------------------------------------------------
Unidentified Company Representative
Too late.
-------------------------------------------------------------------------------
Leslie Rich - Columbia Management - Analyst
Leslie Rich, Columbia Management. I wondered if you could clarify what your
energy trading strategy is post yesterday's announcement. I know what it was
at the time you announced the merger, but I'm just not clear how that changes
in light of a lot of the DENA assets no longer being part of the portfolio.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
As you know, the DENA operations will be in Discontinued Operations and there
obviously will be a lot of blocking and tackling to work through those various
positions, but I think as a practical point, the way we will operate clearly
until we close, we haven't fully discussed exactly the parameters, but I
thought we tried to lay it out rather clearly. It's going to be a low risk
approach, narrowed parameters of products as collateral. It will be very
focused on short dated positions to stay in the liquid part of the curve. And
it really is a business where we're trading around our asset positions with
some -- with a bar of $3 to $5 million, and that basically is a small
proprietary book.
But the key is to keep it focused and managed that way it would be the liquid
part of the curve. If you compare DENA historically, for instance, the Cinergy
approach, they're fundamentally different in terms of how Cinergy is very
short-dated versus long-dated market-to-market positions, fundamental
difference in the size of the bar and fundamental differences in terms of how
we operate. So, I think if I had to think through or give you a sense, I think
the approach is going to be kind of consistent with the way we described it
this afternoon.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
I'd add one thing to that. That approach means trading will not grow faster
than other operations. And I think that's very important to understand because
if you are trading around your assets, you can't grow that trading business by
15% a year if your assets aren't growing by 15% a year, so it will grow in
line with the assets. And I think that's where companies got in trouble
before, including Duke Energy, is trying to grow the trading business faster
than the asset base was letting it do.
-------------------------------------------------------------------------------
Unidentified Audience Member
First off I have a CFO question. David, you mentioned earlier that special
events or special items are when you would use the share repurchase with the
DENA proposed sale. Is that money that would go to share repurchase or
something along those lines given the fact that your cash-rich as it stands?
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
We haven't made that decision at all. We'll see how much cash comes in the
door and we'll see what the total cash position is and look at our cost to
achieve and our other capital numbers and make that decision. You don't expect
me to answer it any further than that, did you?
-------------------------------------------------------------------------------
Unidentified Audience Member
Going back to Steve's question, I'll ask it more broadly. As you continue to
reduce the risk exposure at Duke Energy by adding Cinergy, which is more
regulated and getting out of DENA. What is the right capitalization for Duke
Energy on a long term basis? What is the right cash balance you need to carry
and how should we think about 2007, 2008 capital structure.
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
Well, you may get different answers to that question among the group up here.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
I think there are a couple things that are clear. When we announced that
we're going to exit DENA, that really doesn't do much for your credit because
you've got to exercise on it. So once that's actually done, I think you will
see a significant improvement in our risk profile and I think that gives you
the capability, then, to decide what leverage you want on the balance sheet.
We have consistently said 50%-50%, and I think that's a good way to look at it
but depending on what we do with Canada and how the world works out, we could
leverage it a bit more, I think, with our risk profile if we wanted to.
As far as the cash, I think we want to keep some cash flexibility, but that
depends on two things. One is if you get your CP ratings back up where you can
hit that market very comfortably at any time, so you're a one instead of a
two, then that reduces the amount of cash you need. You essentially keep zero
cash because you're able to hit the CP markets readily. But I'd be very
comfortable with an available number of like $500 million.
-------------------------------------------------------------------------------
Unidentified Audience Member
If I can focus back to the consolidation issue. I guess one of the rationales
for this merger is that it is a roll-up going forward. Could you just tell us
as you look at this roll-up strategy, what market cap would you be looking at,
what geography would you be looking at, is it east of the Mississippi, what
size electric properties, and once - assuming the merger closes in May of next
year, when could we see the next transaction in a reasonable manner?
-------------------------------------------------------------------------------
Jim Rogers - Cinergy Corporation - Chairman and CEO
I think I'd start by saying I don't want to put the cart before the horse and
what that means to me is we have to do this trade - we have the capability to
put these two companies together first and harness the savings. I have
terrific confidence in Tom and the people that pulled together to get that
done but we've got to do that first, and once we get that done and we've got
good regulatory settlements, we've worked our way through this, we're
delivering on the savings, then we'll be in a better position to assess that.
As a practical point, you're going to - with PUHCA basically eliminated, I
think still have an issue when you do this roll-up and that's the pediment of
local presence. You've got to make sure you do that right. So I think the
short answer is we've got a lot of work to do to prove that we can do the next
one before we speculate about what the next one is.
-------------------------------------------------------------------------------
Unidentified Audience Member
Can I follow-up on the synergies? You had mentioned that on the unregulated
side the majority of them are going to fall under Discontinued Operations.
Could you quantify it as how much is in the Discontinued Operations?
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
I think right now - I'll answer, if David has anything to add to it. It would
be too early to get too specific around what would go in Discontinued
Operations and what would fall under Other. There is more work for the teams
to do in order to clarify some of the accounting around that and how that
would be handled but some of that should get clearer as we go through the
integration process over the next month or so and I think David commented by
the third quarter earnings release, he should be able to provide more detail
on that.
-------------------------------------------------------------------------------
Unidentified Audience Member
And if I could just end up, David, as you look at 2007 should we assume that
year two in terms of the synergy achievement in terms of what the targets have
been given as to how the synergies are achieved over a five year period. Is
that a good --
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
You're trying to figure out the $2, aren't you?
-------------------------------------------------------------------------------
Unidentified Audience Member
No, I'm just trying to figure out, I guess, how you lay out -- is that year
two, is that a good assumption?
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
For purposes of what we've done in modeling all this, we've assumed we've
closed consistently July 1st, and that's again the synergy process.
-------------------------------------------------------------------------------
Unidentified Audience Member
A couple of DEFS questions, but before I get to that if I could ask David a
clarification on what you said a minute ago about a goal of getting a higher
CP rating. Is there a time frame involved? Is that a financial target now that
you have to get higher ratings in order to get a higher CP rating?
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
Well, I would think there is a very reasonable chance when DENA is disposed
that you would be able to increase your CP rating.
-------------------------------------------------------------------------------
Unidentified Audience Member
And the overall bond rating?
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
And that would be within a year.
-------------------------------------------------------------------------------
Unidentified Audience Member
Great. On DEFS, two things. One was just if you could comment in the current
environment with the big run-up in natural gas prices post the hurricane, what
this has meant for the frac spread and how much that mattered in terms of the
profitability of DEFS for the second half of this year and going forward and
then secondly, now that you've revised the ownership structure from 70%-30% to
50%-50% with ConocoPhillips, do you think that's a sustainable relationship
long term.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
I'm going to answer the second one first. I think our relationship with
ConocoPhillips has actually improved now that we're 50%-50%. We both feel
committed to this joint venture and I feel much better about being a 50%-50%
than being a 70%-30%. I see no reason that it can't be sustainable, but
history would say that joint ventures go through periods where everything goes
well for 10-15 years and something happens that causes it to not stay - as far
as either one of us are concerned I think both parties feel that it's
sustainable as far out as they can see.
In terms of what the gas price run-ups have done, obviously -- well the first
thing that has happened is you don't have gas processed in the Gulf Coast but
to the extent that we do have gas processed, high gas process prices hurt you
on keepwhole contracts but they don't on percent of proceeds or processing for
fee contracts and we have migrated away from keepwhole contracts substantially
over the last couple of years. That's been one of our objects was to migrate
away from keepwhole contracts. I don't have -- Fred, I don't know if you have
a number or anything -- any feel for that you could give but --
-------------------------------------------------------------------------------
Unidentified Company Representative
As a result of gas liquids prices had really been kind of lagging crude in
recent times and gas and what we really saw in the hurricane was we saw the
liquid prices improve pretty dramatically, so actually in the short run it's
been an improvement in frac price.
-------------------------------------------------------------------------------
Fred Fowler - Duke Energy Corporation - President and COO
Keep in mind we are 80% hedged for the back half of the year so basically
when you carry through to the bottom line a cent per gallon is a million of
EBIT.
-------------------------------------------------------------------------------
Unidentified Audience Member
Next question is probably for Jim.
We've seen a number of Ohio companies trying to basically modify rate
stabilization plans. Is that something you would consider to bring the Duke
Energy plants into the fold sooner or are you comfortable riding out your plan
and then hopefully bidding into what I guess would be a BGS style option in
2009?
-------------------------------------------------------------------------------
Jim Rogers - Cinergy Corporation - Chairman and CEO
I think there's a couple different ways to think about it. I think we have a
plan that we like in place through 2008, but there may well be an opportunity
in the future to look at the possibility of either extending the plan or
changing the terms. I think there's a robust conversation going on in the
state today to start to plan and think about what do we do after 2008?
And some people have the point of view that extending the plans under the
right terms, one, that First Energy's talked about is the idea of tying power
prices to come from the companies or the state to 90%, for instance, market
prices. That's a discount to consumers, but it allows you to tie the output of
your plants to the market. So there are a lot of ideas floating around. I
think there will be a lot of activity. I think the one event that could be a
catalyst to acting is sort of - as we do the run-up to the governor's election
in 2006, it might well again be a catalyst to rethinking and extending some of
these deals.
To date, these rate stabilization plans have been terrific deals for
consumers, because if they had the - if we were pricing our generation at
market today, prices would have gone up dramatically in the state, so that the
commission took a bold and innovative step by creating these plans and it's
really endured to the benefit of consumers.
-------------------------------------------------------------------------------
Unidentified Audience Member
I'm slightly confused about the $500 million or higher proceeds from the sale
announcement yesterday. Is there more upside potential from the assets or the
trading book, or could you discuss upside potential and its relation to each
of those two pieces.
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
I think the way to look at it is you'll generate cash from selling the assets.
Obviously, you're taking the write-down on the trading book, so presumably
you'll use cash to dispose of the trading book, and the net of all that,
combined with the various tax impacts, is the $500 million, and we said we
would expect it to be north of $500 million.
-------------------------------------------------------------------------------
Unidentified Audience Member
But the north part -- so you're saying the north part would be as a result of
higher asset sales being sold at higher prices? It sounds like the trading
book is almost like an annuity.
-------------------------------------------------------------------------------
David Hauser - Duke Energy Corporation - Group VP and CFO
Well, it's a netting. The trade is that you're going to spend money disposing
of the trading book, effectively, and you're going to get money from the sale
of the assets, and the net, combined with the tax benefit, is the cash.
-------------------------------------------------------------------------------
Unidentified Company Representative
You spend less money getting rid of the trading book, that's just as good as
getting more per asset.
-------------------------------------------------------------------------------
Unidentified Audience Member
A question for Tom. In your merger planning, you first studied as to what
factors might cause the merger to fail or fail to realize this synergy. So
what have you decided, concluded as to what factors there are to eliminate or
avoid so that the synergies are not realized.
-------------------------------------------------------------------------------
Tom O'Connor - Duke Energy Corporation - Group VP and Integration Executive
I'm missing the last part of the question.
-------------------------------------------------------------------------------
Unidentified Audience Member
What have you - in your study for this merger integration planning, what
factors have you felt that those are the reasons why some of the other mergers
may failed to realize. What are you doing to avoid those mistakes?
-------------------------------------------------------------------------------
Tom O'Connor - Duke Energy Corporation - Group VP and Integration Executive
Yes, some of the key things that have caused other mergers to not succeed,
not achieve the targets, actually, we're having the team go through that this
morning and we've had three experts come in and talk to them about that.
They're experts from Duke Energy and two from Cinergy, people who have been
through it and what they've seen, and what has constituted the effort around
having a successful integration. Some of the key factors are not moving
quickly enough.
You know, a dollar in the door today is one that means more than one down the
road. And once you bring the companies together and don't have the plan to
achieve the dollar - it's very hard to get the dollars after you close. The
second thing is to avoid the internal gymnastics and focus on the end result,
which is getting the dollars, getting the plans laid out to achieve the
targets and not worry so much about how -- where am I going to end up in this
merged company going forward.
And I'm happy to report on that that so far things have gone very well. And
the third thing is setting stretch targets. And I talked about setting stretch
targets. Not everything you lay out early in the merger is going to come to
pass. We realize that. Some will be up. Some will be down. But if we set
stretch targets, it's been my experience that you will achieve the overall
target and you will even exceed it. So, those are the three of them that come
to mind real quick, but it is focused on the big dollars, focus on getting
them quickly and then stretch your targets to achieve both on the cost side
and on the cost to achieve side.
-------------------------------------------------------------------------------
Paul Anderson - Duke Energy Corporation - Chairman and CEO
I'd like to add one thing to that, because I've been involved in several
mergers. All were very successful, except one. And if you look at the
difference between the one that wasn't successful and the ones that were, it
was that the CEOs never talked to each other in the one that was not
successful and did not share a common view and allowed the teams to break
down.
I really think that if the CEOs have a common view and a common way of
operating and are absolutely committed to eliminating intramural politics and
not allow themselves to be played off of each other, which the organization
would love to do, then I think you have a much better chance than if you have
one of these contentious deals where you're jockeying for position.
And Jim and I share just almost a total fit in terms of our view of the
future, how we think the company should be run. We've even gone through
preliminary views of people and we come out assessing strengths and weaknesses
almost identically. I'm very encouraged from that standpoint.
-------------------------------------------------------------------------------
Jim Rogers - Cinergy Corporation - Chairman and CEO
Let me just add to that. Paul and I in terms of how we think through this and
how we think through the people, how we recognize making the hard decisions
early rather than delaying them. There's always the temptation to delay hard
decisions. You guys do the hard decisions first. That's critical. You've got
to have the right people really leading it. I think we've really got the right
person with Tom and all the people that are working with him.
And I think the other is that we're doing, and a mistake I remember that we
made with the CG&E - PSI merger is we didn't put the financial systems
together fast enough. And I think one of the things that we're doing here is
we're doing that, and I think that is really at the end of the day what makes
the difference.
-------------------------------------------------------------------------------
Julie Dill - Duke Energy Corporation - VP Investor and Shareholder Relations
Okay, I am afraid that we are going to have to call this to an end. So I
would like to thank you all very much for, number one, braving Ophelia and
coming to Charlotte. Thank you so much. Thanks to our speakers. Please, if you
haven't already done so, fill out the little surveys, buses are downstairs on
the College Street side, and please travel safely back home. Thank you very
much.
* * *
Forward-Looking Statements
This document includes statements that do not directly or exclusively
relate to historical facts. Such statements are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These forward-looking statements
include statements regarding benefits of the proposed mergers and
restructuring transactions, integration plans and expected synergies,
anticipated future financial operating performance and results, including
estimates of growth. These statements are based on the current expectations of
management of Duke and Cinergy. There are a number of risks and uncertainties
that could cause actual results to differ materially from the forward-looking
statements included in this document. For example, (1) the companies may be
unable to obtain shareholder approvals required for the transaction; (2) the
companies may be unable to obtain regulatory approvals required for the
transaction, or required regulatory approvals may delay the transaction or
result in the imposition of conditions that could have a material adverse
effect on the combined company or cause the companies to abandon the
transaction; (3) conditions to the closing of the transaction may not be
satisfied; (4) problems may arise in successfully integrating the businesses
of the companies, which may result in the combined company not operating as
effectively and efficiently as expected; (5) the combined company may be
unable to achieve cost-cutting synergies or it may take longer than expected
to achieve those synergies; (6) the transaction may involve unexpected costs
or unexpected liabilities, or the effects of purchase accounting may be
different from the companies' expectations; (7) the credit ratings of the
combined company or its subsidiaries may be different from what the companies
expect; (8) the businesses of the companies may suffer as a result of
uncertainty surrounding the transaction; (9) the industry may be subject to
future regulatory or legislative actions that could adversely affect the
companies; and (10) the companies may be adversely affected by other economic,
business, and/or competitive factors. Additional factors that may affect the
future results of Duke and Cinergy are set forth in their respective filings
with the Securities and Exchange Commission ("SEC"), which are available at
www.duke-energy.com/investors and www.cinergy.com/investors, respectively.
Duke and Cinergy undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Additional Information and Where to Find It
In connection with the proposed transaction, a registration statement
of Duke Energy Holding Corp. (Registration No. 333-126318), which includes a
preliminary joint proxy statement of Duke and Cinergy, and other materials
have been filed with the SEC and are publicly available. WE URGE INVESTORS TO
READ THE DEFINITIVE JOINT PROXY STATEMENT-PROSPECTUS WHEN IT BECOMES AVAILABLE
AND THESE OTHER MATERIALS CAREFULLY BECAUSE THEY CONTAIN IMPORTANT INFORMATION
ABOUT DUKE, CINERGY, DUKE ENERGY HOLDING CORP., AND THE PROPOSED TRANSACTION.
Investors will be able to obtain free copies of the joint proxy
statement-prospectus as well as other filed documents containing information
about Duke and Cinergy at http://www.sec.gov, the SEC's website. Free copies
of Duke's SEC filings are also available on Duke's website at
www.duke-energy.com/investors, and free copies of Cinergy's SEC filings are
also available on Cinergy's website at www.cinergy.com/investors.
Participants in the Solicitation
Duke, Cinergy and their respective executive officers and directors
may be deemed, under SEC rules, to be participants in the solicitation of
proxies from Duke's or Cinergy's stockholders with respect to the proposed
transaction. Information regarding the officers and directors of Duke is
included in its definitive proxy statement for its 2005 Annual Meeting filed
with the SEC on March 31, 2005. Information regarding the officers and
directors of Cinergy is included in its definitive proxy statement for its
2005 Annual Meeting filed with the SEC on March 28, 2005. More detailed
information regarding the identity of potential participants, and their direct
or indirect interests, by securities, holdings or otherwise, will be set forth
in the registration statement and proxy statement and other materials to be
filed with the SEC in connection with the proposed transaction.