Duke Energy Earnings Call Insights: Senate Bill 10 and Capacity Filing in Ohio

Duke Energy Corporation (NYSE:DUK) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Senate Bill 10

Daniel Eggers – Credit Suisse: I know you’re going to talk about a lot of these issues at your Analyst Day, so I’ll maybe ask a couple of policy questions. Can you, maybe Jim, share your thoughts on what’s going on, on the Senate Bill 10 in North Carolina kind of the trajectory of that legislation and what you think might happen to the Commission if there is momentum behind it?

James E. Rogers – Chairman, President and CEO: Sure. Dan, given that Duke and our customers are impacted by many of the State Boards and Commissions, and our Company is committed to working constructively with all of them, it is not appropriate for us to comment on this bill. We cannot speculate on the probability of the proposed legislation passing. Nonetheless, we are focused on achieving the benefits of the merger for our customers in the Carolinas.

Daniel Eggers – Credit Suisse: Jim, can we talk a little bit about the State of the Union last night and the President’s comments on global warming type of legislations or rulemaking. How do you – based on what you know, how do you guys see this playing through from an EPA perspective if they can’t get legislative support, and is that going to affect maybe investment decisions you guys are looking at making from a coal plant remediation perspective?

James E. Rogers – Chairman, President and CEO: Dan, that’s a very good question. We’ll continue to digest what the President said and how people are interpreting it. But the way I interpret it is I couple it with what he said in his inaugural address. It’s clear that climate is going to be an important issue for him to address. Of course, you’ve got the other important issues in terms of getting a budget, dealing with immigration; a variety of other issues. But I do think this is one of the front-burner issues. I continue to believe that the EPA is not equipped to put a price on carbon. That is going to take legislation. I think there are many things that we can do to reduce our CO2 emissions. One thing the administration has already done is raise the CAFE standards, and that will have an impact. But I think the technological innovation of shale gas has been transforming even in terms of the carbon footprint of our industry. Today, in the United States, we are at the same place in terms of CO2 emissions as we were in 1992 and our per capita base is the same place we were in 1960. I say that to say we made tremendous progress at reducing the burn of coal and have increased dramatically the burn of natural gas which has about 50% of the carbon footprint of coal. And so, we’ve already made huge progress. And I’d say it another way, we’re on track to hit the Waxman-Markey 2020 number just based on the reduction in emissions that we see as a consequence of burning base-load gas. So, I think much has been done to reduce carbon, but at the end of the day they will have to put a price on carbon. That can’t be done by the EPA. That can only be done by Congress and they need to act. And the good news is, is because we have the prices of solar dropping, the gas prices at $3.50 an MMBtu and projected to stay in that $3 to $4, $4.5, $5 range. We’re in a period where you could start with a low price on carbon and let it escalate over a much longer period of time thus minimizing the impact on the economy. So, I think again, there are a lot of ways to be thinking about this. I think the technological innovation has made a difference. I think other innovations in technologies are evolving. It’s going to reduce our carbon footprint of existing buildings in our country. So, I think that we’re on the road to decarbonizing our economy even without legislation, but having a price on carbon would be important for the future to drive even further our successes that we’ve achieved so far.

Daniel Eggers – Credit Suisse: Jim, I guess (you need certainly) about $5 billion of environmental CapEx still to go. Is that number prospectively under review or the places where you put that money under review based on the greater attention on CO2 policy?

James E. Rogers – Chairman, President and CEO: I think virtually all that is really placed on tighter regulations with respect to ash ponds, with respect to the air and SOx, NOx mercury and primarily mercury. So, I think it’s a combination of all of those. I don’t think we have a net number, anything that really goes to additional regulations on carbon. However, as we’ve seen, if the modernization plan that we just undertook dramatically reduces our carbon intensity of every kilowatt hour that we deliver on a blended basis. So, more to come on that. But the consequence of our modernization program that puts us in some perspective in terms of the risk going forward is going to allow us to retire almost 7,000 megawatts of old coal plants and that’s almost 50 units that will be retired. And it will be replaced with a more efficient coal and more efficient gas plants and that translates into lower emissions and lower cost on the margin for our customers. So, I think we have looked around the corner. Our modernization plan is ahead of most utilities in the country. If you look at Southern today, they are just now starting down the road of modernization of their generation fleet. So, I think we have already at the point of putting it behind us and being well-positioned for the future.

Capacity Filing in Ohio

Kit Konolige – BGC Financial: Just a couple of questions. Can you kind of just update us on where we stand with the capacity filing in Ohio? And when you referred to – I think you gave us some guidance on that when do we expect that to be completed, and when you referred to it informing your thinking on strategic direction, can you give us a little any further color on what’s implied by that?

Lynn J. Good – EVP and CFO: So, Kit, the procedural schedule for the cost base to pass the filing includes hearings in early April. So there are testimony filings on our part as well as the interveners and staff between now and early April, but that’s the procedural schedule. You may recall that we undertook a strategic review of these assets back in 2012 and put that strategic review on hold as we began pursuit of the cost base capacity filing. And so, we will evaluate and continue to pursue the cost base capacity filing. We believe that we fit those fact and circumstances well within the State of Ohio and we’ll work through that process and not take up another strategic review of the assets until that is complete.

Kit Konolige – BGC Financial: And one other question on the North Carolina case. You filed for 11.25 ROE. What did you earn in 2012 in North Carolina?

Lynn J. Good – EVP and CFO: Kit, we will have some perspective on earned returns on Analyst Day in February. But I would think about it in the range of maybe 10%.

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