Duke Energy 08/03/05_Transcript

PREPARED REMARKS AND Q&A
Q2 2005 Duke Energy Corporation Earnings Conference Call August 3, 2005

CORPORATE PARTICIPANTS Corporate Controller, and Lindsay Hall, our Treasurer will also be
available to answer your questions today.
Julie Dill
Duke Energy - VP of Investor & Shareholder Relations
Today’s call will include a review of the second quarter results for
Paul Anderson
2005.
Duke Energy - Chairman & CEO
David Hauser Before we begin with our prepared remarks let me read to you the
Duke Energy - Group VP & CFO Safe Harbor Statement.
Fred Fowler
Duke Energy - President & COO Some of the things we will discuss in today's
call concerning future company performance
Rich Osborne
will be forward-looking statements within
Duke Energy - Group VP, Public and Regulatory Policy
the meaning of the securities laws. Actual
results may materially differ from those
CONFERENCE CALL PARTICIPANTS discussed in these forward-looking
statements, and you should refer to the
Dan Eggers
additional information contained in our
CS First Boston - Analyst
second quarter 2005 earnings release filed
Paul Fremont
with the SEC on Form 8-K and other SEC
Jefferies & Company - Analyst
filings concerning factors that could cause
Maureen Howe
those results to be different than
RBC Capital Markets - Analyst
contemplated in today’s discussion.
Paul Patterson
Glenrock Associates - Analyst Since we do anticipate questions surrounding our proposed merger
with Cinergy, I would ask you to please refer to the S-4 filing of
Marc Minikes
Duke Energy Holding Corporation on file with the Securities and
Citigroup - Analyst
Exchange Commission for factors and risks related to the merger.
Ashar Khan
SAC Capital – Analyst
In addition, today’s discussion includes certain non-GAAP
Stephen Dafoe financial measures as defined under SEC Regulation G. A
Scotia Capital - Analyst reconciliation of those measures to the most directly comparable
Keith LaRose GAAP measures will be made available on our investor relations
Bradley, Foster & Sargent – Analyst website at: www.duke-energy.com.

Following our prepared comments we will open the lines for your
questions.
PRESENTATION
With that I‘ll turn the call over to Paul.

Paul Anderson - Duke Energy - Chairman & CEO
Operator

Good morning.
Good day, everyone, and welcome to the Duke Energy second-
quarter earnings conference call. Today's call is being recorded. At
This morning we reported earnings of 33 cents per basic share for
this time for opening remarks I would like to turn the call over to
the second quarter of 2005, which included 2 cents per share in
the Vice President of Investor and Shareholder Relations for Duke
special items. Ongoing earnings were 31 cents per basic share this
Energy, Ms. Julie Dill. Please go ahead.
quarter compared with 42 cents per basic share last year and the
street’s expectation of 38¢.
Julie Dill - Duke Energy - VP of Investor Relations
While we may have fallen short of the street’s expectations for the
Good morning and thank you for joining us today. With me are quarter, we did not fall short of our own expectations. The
Paul Anderson – Chairman and CEO, David Hauser – Group Vice company’s results as a whole are on plan with respect to where we
President and Chief Financial Officer and Fred Fowler – President thought we would be at this point in the year. For the full year
and Chief Operating Officer. In addition, Rich Osborne – Group
Vice President for Public and Regulatory Policy, Steve Young –

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2005, I am very comfortable in our ability to achieve our incentive end of the first quarter but we anticipate reaching our annual goal
target of $1.60 per basic share. of no more than a $150 million ongoing segment EBIT loss
provided we see hot summer weather. It seems we are off to a
If you look at the comparison with the second quarter of last year, good start as during the month of July, every plant in DENA was
a number of unusual events that we did not consider special items dispatched at some point during the month.
had a positive impact on 2004 EBIT results that were not repeated
this quarter. These include a particularly attractive transaction at International Energy continues to deliver solid earnings. This
Crescent for $45 million, a $24 million positive mark-to-market quarter’s results were up 26% and benefited from our National
impact at DENA and a $17 million favorable resolution of tax Methanol business, solid operations in Brazil and favorable foreign
issues at Gas Transmission. In addition, results for 2004 benefited exchange. International Energy is operating smoothly and we still
from a $52 million release of tax reserves. expect to see ongoing annual segment EBIT growth in the range of
2 – 3% over the 2005 to 2007 timeframe. However, in 2005
International Energy is now expecting to have an exceptional year
Our major operating disappointment this quarter was associated
as a result of improved Latin American operations, higher prices at
with the effect of mild weather in the second quarter on electricity
sales here in the Carolinas and in California. Weather alone had a our National Methanol business and favorable foreign currency
negative 5¢ impact on the quarter. Based on the weather we exchange.
experienced in July, we would expect to reverse this impact in the
third quarter. Crescent Resources’ results were lower for the quarter primarily
due to a large transaction contributing about $45 million in EBIT
In addition to the effect of mild weather, Franchised Electric’s in the prior year’s quarter. While this quarter did not have a
results for the quarter were down due to higher planned O&M comparable transaction, the expectations for the full year are far
costs, which have been in the program for some time. We expect exceeding our original plan. The real estate market for commercial
segment EBIT for 2005 to be flat, or slightly below, 2004’s results. and multi-family properties continues to be strong and we expect
Franchised Electric remains on target to meets its segment EBIT Crescent to deliver another year of outstanding results. Segment
growth target of 0 to 2% for the 2005 to 2007 time period. EBIT from continuing operations and discontinued operations for
2005 is expected to be at or above comparable results for 2004,
which were approximately $250 million.
Natural Gas Transmission delivered solid results this quarter.
Reported segment EBIT was down about $9 million from the prior
year, which included a $9 million gain on the sale of assets and A $39 million decrease in interest expense also helped offset lower
also benefited from a favorable tax resolution for approximately earnings for the quarter.
$17 million. Barring these two items, results would have been up
6%. Natural Gas Transmission continues to expect its ongoing We’ve always touted the portfolio effect of our different
annual EBIT growth rate to be in the range of 3 – 5% for the 2005 businesses and it’s times like this where you can see the benefit of
to 2007 time period. The recent transfer of Field Services’ our combination of assets and geographic diversity. The
Canadian assets and acquisition of the Empress system from anticipated merger with Cinergy will build on this portfolio effect
ConocoPhillips will contribute to the earnings growth of our by increasing earnings from regulated sources but in a different
natural gas transmission business and will put us at the high end of geographic region. I’ll update you on the merger at the end of our
this range for 2005. presentation.

Our Field Services business continues to see an increase in With that, let me turn the call over to David to review our results in
earnings as a result of strong prices for natural gas liquids. more detail.
Segment results for the second quarter increased 75% over last
year. A key event for our Field Services business was the change
David Hauser - Duke Energy - Group VP & CFO
in ownership to a 50/50 partnership with ConocoPhillips in early
July. As a result of this transaction, we have to change how we
Thank you, Paul. Paul gave you the overview for the quarter so let
account for this segment and I’ll let David walk you through those
me move on to the details by business unit.
details and where we expect we’ll end up at the end of 2005.

Segment EBIT for Franchised Electric was $274 million in the
Duke Energy North America reported an EBIT loss from
second quarter of 2005 compared with $338 million for the second
continuing operations of $56 million this quarter. The losses at
quarter of 2004. As Paul mentioned earlier, results for the quarter
DENA were primarily due to lower margins on energy sales as a
were negatively affected by milder than normal weather and higher
result of weak weather in the West, as I mentioned earlier, and
operating and maintenance expenses of approximately $48 million
losses in our gas marketing business. As we’ve discussed before,
related primarily to an additional planned nuclear outage, higher
DENA’s earnings profile is seasonal and the third quarter is key to
right-of-way maintenance expenses and higher storm costs
reaching our full year goal. We’re not as bullish as we were at the

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compared with 2004. The decrease in segment EBIT for the Field Services reported segment EBIT of $166 million for the
quarter was partially offset by improved bulk power marketing second quarter 2005 compared with $95 million for the same
sales. In addition to increased sales, the improvement in bulk period last year. Second quarter's results included a special item
power marketing results was driven by a $27 million charge totaling $22 million related to the de-designation of hedges which
recorded in the second quarter 2004 related to the commencement took place in the first quarter. This amount is the portion of the
of the profit-sharing program with customers in North Carolina charge taken in the first quarter that relates to hedge contracts that
and South Carolina. actually settled in the second quarter. We will continue to adjust
Field Services' reported earnings in the third and fourth quarters by
As we told you last quarter, we expect total O&M for 2005 to be $38 million and $35 million, respectively, to reflect the impact of
about $50 million higher than last year. We have already hedge settlements as they occur.
recognized all of this higher O&M in the first half of 2005.
Results for the quarter benefited from strong commodity prices for
Regulatory amortizations totaled $70 million for the second quarter NGLs but were partially offset by higher operating expenses
of 2005 compared with $69 million last year. We expect the North primarily related to pipeline integrity work and the absence of
Carolina Clean Air amortization for the full year 2005 to be earnings from TEPPCO, which was sold in the first quarter.
approximately $300 million.
The weighted average NGL price for the second quarter 2005 was
While the average number of customers increased 2%, or 75 cents per gallon compared to 61 cents per gallon in second
approximately 42,000, over the second quarter last year, overall quarter 2004.
sales suffered as a result of mild weather in the region. Cooling
degree days were more than 37% lower compared to last year’s Now that we have closed on our 50/50 joint venture with
quarter. ConocoPhillips, you will see a number of accounting changes in
the prospective financial results. With the move from a majority
Industrial sales to non-textile customers have continued to show interest to a 50% interest, we are required to deconsolidate Field
steady growth, up 2% over the second quarter last year. Sales to Services from Duke Energy’s financials.
textile companies in our service territory continued to decline.
Year to date there have been 15 plant closings largely due to the Earnings from this business will now be recorded as equity
expiration of tariffs that previously protected this industry from earnings and the investment in Field Services will now be reflected
Chinese imports. on the balance sheet in the line item “Investments in
unconsolidated affiliates”. We have provided in a Duke Capital 8-
K filed on July 11th the pro-forma effect of deconsolidating Field
I also want to draw your attention to the capital expenditures this
quarter. We will now be including our clean air expenditures in Services for 2004 and for the quarter ended March 31, 2005.
our capital expenditures number. The prior year has been revised
to reflect this change as well. Please be aware that this is not the Now that we have closed this transaction, we wanted to provide an
amortization amount but actual expenditures related to the same update to our earnings expectations for 2005. Field Services
legislation. delivered $295 million in ongoing EBIT for the first half of the
year. For the second half of 2005, we expect to see ongoing equity
Now let’s move on to Natural Gas Transmission. earnings for our 50% interest in Field Services of approximately
$200 million, which is not adjusted for the remaining recognition
Natural Gas Transmission delivered $302 million in segment EBIT of the de-designated hedges equaling a negative $73 million. Keep
for the quarter compared with $311 million for the second quarter in mind this $200 million is also net of interest expense due to our
2004. Ongoing segment EBIT was flat for the second quarter. change in accounting.
Results would have shown an improvement if you also excluded
the tax benefit of $17 million from last year’s results. Because we are 80% economically hedged on our NGL
production, the earnings sensitivity to a 1 cent per gallon move in
Favorable changes in the Canadian currency of approximately $9 NGL prices equates to $5 million in equity earnings over the
million and increased segment EBIT from U.S. pipeline expansion second half of the year, but will be partially offset by
projects of approximately $4 million both benefited results for the approximately $4 million in the Other EBIT line.
quarter.
So now let’s move on to DENA.
As you may have read, our pipeline business has had a number of
recent announcements and Fred will cover these in just a moment. Duke Energy North America (DENA) ended the quarter with an
ongoing segment EBIT loss of $56 million compared with a $28
Next up is Field Services. million ongoing segment EBIT loss in the same period last year.

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Results for the quarter were down as a result of lower generation Now I’ll move on to Other EBIT.
sales due to mild weather in the West and losses related to the
current weakness in the gas transportation business which Other EBIT, which largely represents the cost of corporate
resulted in lower margins in 2005 versus 2004. Generation sales governance at Duke Energy, also includes the change in mark-to-
in the West were down about 27% for the quarter. market value of the de-designated hedges from Field Services
which we discussed last quarter. On a reported basis, Other EBIT
Also contributing to lower results was the absence of $24 million, was an $88 million expense for the second quarter of 2005
or $22 million before minority interest, in mark-to-market gains compared with a $26 million expense for the same period last year.
on disqualified hedges recognized in the second quarter of 2004. Last year’s results included a $21 million gain related to the Enron
As you know, by the end of 2004 we had mitigated the earnings bankruptcy settlement and a $7 million loss on asset sales.
volatility associated with these hedges. DENA’s continued
progress on reducing operating and G&A costs partially offset Included in this quarter's results is a $7 million gain classified as a
these lower results. special item relating to the change during the second quarter in the
mark-to-market value of the 2005 DEFS hedges that have not
Let me take a minute to address some confusion surrounding our settled as of June 30th. On a year-to-date basis, these hedges have
anticipated merger with Cinergy and how the transaction will be deteriorated by $47 million. This amount is classified as a special
accounted for through purchase accounting. According to GAAP item and will net to zero by year end as the 2005 hedges actually
standards, the acquiring company, in this case Duke Energy, settle. The difference between the actual 2005 hedge settlement
would only record changes in value related to the acquired value and the value at the time of de-designation is recorded as an
company’s assets, or Cinergy’s assets. We would not record any ongoing item as settlements occur. To date this amount is $6
change in value related to DENA’s assets or trading book, or any million in expense.
other of Duke Energy’s assets.
The mark-to-market change related to the 2006 contracts was a $22
Now let me move on to International Energy. million loss in the second quarter and is included in ongoing
earnings. Any moves, both positive and negative, in the mark of
International Energy’s segment EBIT from continuing operations this position in future quarters will also be included in ongoing
was $86 million in the second quarter of 2005. This compares earnings.
with $68 million in segment EBIT from continuing operations last
year. We also recognized a charge related to increased liabilities
associated with mutual insurance companies during the quarter.
We are very pleased with the results from our international
operations. This quarter’s results benefited from strong prices at I believe it's important to note that even with the year-to-date
our National Methanol business and our operations in Brazil impact of the mark-to-market movement on the 2006 hedges,
benefited from higher volumes, although at lower prices, and a which are included in our ongoing numbers, we are on plan for our
favorable move in the valuation of the Brazilian real. earnings expectations for the year. We have absorbed, year-to-
date, approximately $78 million associated with these 2006
Next up is Crescent Resources. hedges.

Crescent Resources, our real estate business, delivered segment EBIT Guidance
EBIT from continuing operations of $39 million for the second Ongoing Other EBIT is still expected to be about $200 million in
quarter of 2005 compared to $87 million for the same quarter last net expenses, excluding any changes due to mark-to-market
year. Last year’s second quarter benefited from a $45 million fluctuations on the de-designated hedges as we have no way of
positive EBIT impact related to a sale of commercial property in estimating what that variance would be at this time.
the Washington DC area.
Now let me move on to briefly review some other income
Let me also point out that even with the strong sales we saw last statement and balance sheet items.
year and our expectations for the remainder of 2005, Crescent’s
portfolio of properties is growing. The current book value of their Duke Energy’s consolidated debt balances are $464 million lower
real estate portfolio is approximately $1.3 billion, compared to from year-end 2004. Total debt at the end of the second quarter
$1.1 billion at the end of 2004. was just under $18.4 billion. Included in this amount is
approximately $2.25 billion of debt belonging to Field Services
I’d also like to point out that Crescent’s forecasted capital which will be deconsolidated in our third quarter reports as a result
expenditures have been increased from $475 million to $625 of the change in ownership to a 50/50 partnership with
million for 2005. ConocoPhillips.

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For interest expense, Duke Energy reported a $39 million I’d like to review some of the business activities we’ve been
reduction from last year, from $336 million in second quarter 2004 focusing on over the past few months.
to $297 million in second quarter 2005. This reduction is the
direct result of the debt reductions which took place over the last Ruth Shaw, president and CEO of our Duke Power business, held
year. We continue to expect interest expense for the full year 2005 an investor chat in June that covered in detail the operations of
to be approximately $1.1 billion. Duke Power and their future expectations. I would encourage you
to listen to a replay of the call for an in-depth review of that
The effective tax rate for the second quarter was approximately business.
33%. As a result of the Jobs Creation Act and its impact on taxes,
our Franchised Electric business will have a reduction to income However, there are a couple of things I would like to mention
tax expense of approximately $10 million this year. This will about the power company.
negatively affect Duke Power’s segment EBIT by about $15
million in 2005 as we must consider this impact on our return on On July 22nd, Duke Power filed with FERC to amend its Open
equity calculations. Access Transmission tariff and implement a system by which an
Independent Entity would be retained to give users of the grid
Cash and cash equivalents along with short-term investments additional confidence that decisions affecting them are made
totaled approximately $2.05 billion at the end of the second independently and fairly. The proposed changes have a relatively
quarter. Had the change in ownership for Field Services occurred modest price tag and address certain of FERC’s concerns but
on June 30th, cash, cash equivalents and short-term investments functional control of the grid is left under the jurisdiction of the
would have been about $90 million higher, or $2.14 billion. The state regulators.
important distinction being that the $2.14 billion is now directly
available to Duke Energy. Our customers set a new all-time record last week with peak
demand of 18,687 megawatts. Our generation and distribution
While Duke Energy retired the 30 million shares associated with systems performed exeremely well in meeting our customers’
the share buyback in the first quarter of 2005, Merrill Lynch is still needs.
in the market repurchasing these shares and will continue to do so
until mid-November. As of July 31st they had repurchased 20.4 Even with record demand across our region, we have adequate
million shares. An additional 2.6 million shares were repurchased supplies of coal to meet projected demand. Generally, Duke
on or before May 6th under a separate agreement with Merrill. We Power contracts for up to 2-3 years for varying percentages of our
suspended any further repurchases under this second agreement coal supply. We currently have commitments for 100% of our
when we announced the proposed merger with Cinergy. projected coal needs for 2005 and more than 75% contracted for
2006. As of July 28th, we had 2 million tons of coal on hand,
Next I’d like to address the legal structure anticipated with the which is about a 28-day supply.
Duke/Cinergy merger.
In Natural Gas Transmission, the Maritimes & Northeast Pipeline
We have received numerous calls from the financial community reported a strong response to its open season for the 2007-2008
asking about the restructuring associated with the merger that we timeframe. As a result, two new precedent transportation
have outlined in several regulatory filings. At issue is the agreements were finalized with two major energy companies,
language surrounding step 5 in the restructuring process which Anadarko and Repsol, for a total capacity of more than 1.5 billion
says “Holdco assumes, or becomes co-obligor on, the senior cubic feet per day. Gas supplies for these contracts will be from
unsecured long-term debt of Duke Power LLC.” the proposed LNG terminals planned by each company.
Transportation services are planned for 2008.
Without walking you through all of the details, let me assure you
that it is Duke Energy’s intent to remain obligated at the Duke In addition, our Algonquin pipeline recently filed an application
Power level for the existing senior unsecured debt of Duke Power with FERC to build a 16-mile pipeline that will connect a proposed
and for the servicing of this debt to occur at Duke Power. deepwater LNG project to Algonquin’s system. This LNG project
is being proposed by Excelerate Energy. The new pipeline will
This concludes my prepared remarks and now I will turn the call have a capacity of 800,000 MMBtu per day with an in-service date
over to Fred Fowler. expected in 2007.

Our total investment to support the addition of LNG supplies could
Fred Fowler - Duke Energy - President & COO
be as much as $1 billion over the next few years. This investment
would be in the form of incremental expansions of our existing
Thank you, David. asset base.

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In June, the Gulfstream pipeline began flowing 350,000 MMBtu
per day of natural gas to FPL under a long-term firm transportation Our international operations continue to improve their returns and
contract. Gulfstream also contracted additional firm capacity of our marketing teams in Brazil continue to have success in
50,000 MMBtu per day to Progress Energy. These contracts bring contracting available capacity. We remain contracted for 100% of
Gulfstream’s contracted capacity to 700,000 MMBtu per day out our available capacity for 2005 and we are now 84% contracted for
of a total available capacity of 1.1 Bcf per day. 2006.

We are also studying the formation of a Canadian income trust for Let me turn the call over to Paul for his closing remarks.
a portion of our Canadian assets. We are in the very early stages
of evaluation and no decisions have been made yet.

The most notable event for Field Services was that in July we
Thank you, Fred.
closed on the change in ownership of Duke Energy Field Services
with ConocoPhillips. We sold a 19.7% stake to ConocoPhillips
Overall, I am very satisfied with the quarter. We are delivering on
which brings our ownership to a 50/50 split.
our plan and we have taken significant strides in optimizing our
portfolio by closing on the change in ownership of Field Services
We are also evaluating opportunities to launch a master limited
and announcing the proposed merger with Cinergy.
partnership within the Field Services business later this year. Field
Services has already identified a number of existing assets that are
Let me give a brief update on where we are in the merger process.
appropriate for an MLP structure. Once in place, the MLP would
To date, we have filed for regulatory approval from all five states:
then be in position to buy third party assets to add to that portfolio.
Indiana, Ohio, North Carolina, South Carolina and Kentucky. On
the federal level, we filed the preliminary draft of the S-4 with the
For our DENA business, we spoke to you at the beginning of the
Securities and Exchange Commission on June 30th; and, we
year on what it would take to improve DENA’s earnings. It
submitted information required under the Hart-Scott-Rodino Act
basically came down to three items: Increased generation sales,
and filed for approvals with FERC on July 12th. We still need to
lower operating and G&A costs and the rebuilding of our gas
file with the Nuclear Regulatory Commission and the Federal
marketing business.
Communications Commission but we don’t have expected filing
dates at this time.
DENA has had good success in lowering its costs. And while
weather did not help our generation sales in the first half of the
As you are well aware, new energy legislation is expected to be
year, we did see an increase in demand for the month of July.
signed into law on Monday in New Mexico. This new legislation
DENA’s gas marketing business however has not fared as well as
includes a wide variety of provisions aimed at enhancing the
we’d hoped. We are working to rebuild this business but it’s
reliability, affordability and availability of energy, and creating
taking more time than we had originally anticipated because
jobs. Duke Energy believes the bill addresses issues that have long
we’re being very cautious. However, if we have decent summer
obstructed the development of a rational energy infrastructure.
weather for the balance of the third quarter we still feel we can
meet our target of no more than a $150 million ongoing segment
The legislation repeals the Public Utility Holding Company Act six
EBIT loss for the year.
months after enactment, and vests certain consumer protections
with FERC and the states. With respect to our anticipated merger,
You may recall when we announced our proposed merger with
we would not expect to register under the 35 Act. This results in
Cinergy, we indicated that one of the benefits would be a ‘kick
simpler, more cost-effective operations, and gives us options with
start’ to our gas marketing business, as Cinergy already had a
regards to Crescent.
profitable business model in place. Many of you are also
probably aware that Cinergy reported lower earnings from their
While we will be focusing our efforts on preparing for day one of
gas marketing business this quarter. Rest assured that we will be
the merger, rest assured we are not losing sight of our primary goal
taking a close look at this part of Cinergy’s business as part of our
this year. Everyone at Duke Energy remains committed to
integration efforts to determine the best path forward on that part
efficient and safe operations, reaching our incentive goal of $1.60
of the business.
per basic share and delivering value to our shareholders.
And we are still working on a sustainable business model for
It bears repeating that we are comfortable with our results to date
DENA. Our view of what that model should be is evolving as we
and we are on plan for our expectations.
revisit options and additional capabilities that the merger with
Cinergy provides. While its not a complete solution, the
Now we’ll be happy to take your questions.
combination with Cinergy is a major step forward in delivering
positive earnings from our merchant generation business.

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QUESTION AND ANSWER David Hauser - Duke Energy - Group VP & CFO

I might just add the biggest thing we did with DENA was cost
reductions, which were $95 million in year one of the merger and
Operator
$125 million in year two of the merger.
Dan Eggers, CS First Boston.
Dan Eggers - CS First Boston - Analyst
I think that's a good point, because if you look at the synergies, the
synergies were based solely on cost reductions. They were not
I'm going to ask a question everybody probably is going to die to
based on new business development.
ask, and that is with Cinergy's second-quarter earnings release as it
was and the suspension of 2006 guidance, is this going to affect the
outlook for the deal, the terms of the deal? And did this shape Dan Eggers - CS First Boston - Analyst
anything about the value of the transaction?
Great. One last question. David, is there going to be any other
financial benefits we should be looking for out of the Energy Bill
other than avoiding the nuisance of having to comply with the 35
Act with the deal?
The simple answer is no. It doesn't really change it at all.
Obviously when you do a deal the size of our deal with Cinergy,
you're doing it for the long-term; you're not doing it for the next David Hauser - Duke Energy - Group VP & CFO
quarter. If you look at Cinergy's results, and I have talked to Jim
Rogers about that and he pointed out that they had 12 great I think the biggest one is it gives us flexibility with regard to
quarters in gas trading and 1 bad quarter. They addressed it Crescent. Assuming this passes and the Holding Company Act is
immediately with some changes in management. Obviously we're repealed, then we would not be required to sell Crescent as a result
going to be taking a quick look and a hard look, as Fred said, at of this merger. So that gives us some flexibility there.
that part of their business.

In terms of the rest of the business, it was very solid. And all the
reasons that we want to do the deal are still there. So I think the
There will be some benefits that aren't necessarily immediately
fact that one quarter was a disappointment, probably not only to
identifiable with financial benefits. For instance, some of the
The Street but to ourselves, is not at all a setback in terms of what
provisions of the Energy Bill should expedite our pursuit of
are we trying to do for the long-term here.
Islander East, which has kind of been dead center for three years.
And the bill provides a venue for us to be able to have a federal
hearing on the issues that we've got with the state.

And then on the gas marketing business, I know you're going to
assess that more thoroughly. But historically that business back in
the old days was a $50 million to $100 million business for you
Got it. Thank you guys.
guys. I think aspirations were getting to $50 million or better. Was
any of that put into the Cinergy expectations in the deal originally?
And how should we think about DENA's earnings power with or
Operator
without that gas marketing piece?

Paul Fremont, Jefferies & Company.

Paul Fremont - Jefferies & Company - Analyst
We took a very conservative view as to what to expect in that
arena. I would say that our bias was to cut expectations as opposed
Thank you. I'm curious if we could get a comment on the Dynegy
to add expectations in terms of what the merger would bring to the
sale of their gathering and processing properties and what you
party. I'm not the least bit uncomfortable with the assumptions that
thought about the cash flow multiples on that transaction and
we took to the Board versus what we're seeing there right now.

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whether that sort of improved the outlook. Or how does that impact want to get into any more detail. Probably this time next quarter
what you see happening potentially with your Field Services, either we will be in much better shape to talk about it.
MLP or other transactions?

Maureen Howe - RBC Capital Markets - Analyst
Can you perhaps elaborate also just on your thoughts on your
I'm not sure that -- I obviously never want to comment on natural gas transmission assets in general? Are you going to look at
somebody else's deal because unless you're there and know all the alternatives for those assets perhaps before completing the Cinergy
facts it's always dangerous to say that was a good deal or bad deal. merger? Do you have any thoughts in that regard? Does the new
We obviously looked at those assets along with everybody else, energy legislation give you greater flexibility? And has your
and our conclusion, or I guess our knee-jerk reaction, is that they thinking perhaps either evolved or changed?
got a very good price for it.

As far as what it means to us going forward, Fred, why don't you
make a comment or two?
Our thinking will be evolving, but I guess I don't want to get too
far down the road in exploring alternatives until we get our
Fred Fowler - Duke Energy - President & COO approvals for this merger because the worst thing that you want to
do is come up with a great idea and start pursuing it and suddenly
I'm not sure it means a lot going forward. There's no doubt that set find that you have to re-file under all these filings that you've
of assets is a good set of assets. It's been well run. It's basically the made. So I have kind of put my mind in neutral with regard to
same set of assets and another good management team. So very strategy with regard to the options for the gas business until we get
viable competitors, no doubt about it, but they have been before. through the approval process. And then once we get things
So I don't see it having major impact on us. approved, then I think we will jump in with both feet. But we don't
want to get out ahead of ourselves until we get through the
approval process.
Paul Fremont - Jefferies & Company - Analyst

Thank you.

Just one final question. Does the passing of the US Energy Act
Operator
change your thoughts with respect to timing of the completion of
the merger?
Maureen Howe, RBC Capital Markets.


I would say it gives us more confidence that we will be able to do
I'm just wondering if you can elaborate a little bit on the potential it in a year. Rich Osborne is here, and I'll just ask him to comment
income trust of the Canadian gas assets. And I believe most of on that because he's in the middle of that approval process.
assets are regulated, and I'm wondering if you're in discussions
with the National Energy Board or the Ontario Energy Board about
Rich Osborne - Duke Energy - Group VP, Public and
the potential of putting those assets into a non-taxable structure and
Regulatory Policy
still collecting the tax and rates.

Thanks, Paul. As Paul says, it gives us a lot more confidence that
we can accomplish it in the time we had estimated.

That study is being done by Fred, but let me answer that question The Holding Companies Act typically required 30 to 60 days
because I don't want him to get into too much detail on that. beyond receipt of all other approvals. That will be gone. We will
not have to file and register as a 35 Act company. So it will take a
We're in the very preliminary stages in terms of looking at income month or two off the estimated time to complete all the regulatory
trusts. I think you know, as you realize there are some assets that approvals. I would say we're still looking at the first half of next
fit into that structure and some that don't. And beyond saying that year; probably not the summer of next year, but the first half.
we're in the preliminary stages of looking at it, I don't think we

8


And Europe doesn't have the same issues that we hear at least
being talked about here, is that correct?
That's great. Thank you very much.

Operator
That's correct.

Paul Patterson, Glenrock Associates.
Paul Patterson - Glenrock Associates - Analyst

Okay good. And then the weather impact, I know that there was
obviously a benefit to utility and -- I mean a hurt at utility and at
I was wondering if you could give us an idea of the currency
DENA. I was wondering if you could just tell us sort of corporate-
impact corporate-wide was for the company for the quarter.
wide what the impact of weather was or what it would have been if
it was normal.

Sure. David, do you want to do that?

You're talking about for July?

Yes. It was about $9 million in Brazil, and that's on their EBIT.
And then it's about the same thing for the quarter in DEGT. Those
No. Well, that would be interesting. But no, for the quarter.
were all set in interest expense and the bottom line is about $8
Versus normal?
million of net income impact.


So $0.05 a share was the weather impact for the quarter.
I noticed that this National Methanol has done very well and that
it produces MTBE. But it is located in Saudi Arabia and sort of a
regional producer. Should we assume there's no -- none of those Paul Patterson - Glenrock Associates - Analyst
litigation issues that we're hearing about in North America would
apply to them being located that far away? Or could you discuss
For the whole Company? That's versus normal?
that a little bit?


Yes.
Sure. The markets for MTBE are in Europe. Obviously energy
markets are all sort of interrelated and some of these things are
fungible. But as far as liability for MTBE producers and what have
you, National Methanol is primarily a supplier to Europe.
And then finally, with the LNG facilities and the CapEx that
Fred, do you have anything to add to that? you're putting in there as well as in Crescent and what have you,
do you guys -- I know that you cut back on the buyback and what
have you. Any ideas about how that's all going to be financed or
any idea or any projections you can sort of give us? I know you
have got the merger going on as well and what have you, but any
No, I think that's exactly --
thoughts there? Do you think you're going to need any additional
equity or do you think we're okay?

9


That sounds like a Hauser question.
Mark Minikes - Citigroup - Analyst
How much do you have invested in these mutual insurance
We don't anticipate needing any additional equity. We are companies?
achieving our capital structure that we've set out to achieve, so I
don't think you'll see us using any equity for that. I do think you'll
see us using some of our cash balances for that.

These are part of our captive insurance and I don't have the answer
Paul Patterson - Glenrock Associates - Analyst to how much we have invested. I don't think it's a consequential
number.
Okay. Thanks a lot.

Great, thanks.
Let me make one clarification on the $0.05 of weather. That's
really compared to last year as opposed to normal. I don't have
right in front of me how last year compared to normal. But it is
compared to last year.
You should actually be seeing these similar sorts of movements in
other companies because there has been an accounting change that
Paul Anderson - Duke Energy - Chairman & CEO I don't think many people had picked up until fairly recently.

Last year I think it was a little bit better than normal.

Operator That's correct.

Mark Minikes , Citigroup.

Mark Minikes - Citigroup - Analyst Great, thanks.

Just a question for you on your other EBIT. You had a charge
Operator
taken for increased liability associated with mutual insurance. Is
this a one time item or is this an ongoing item? Could you just
Ashar Khan, SAC Capital.
elaborate on what that was and maybe the magnitude of it?

Ashar Khan - SAC Capital - Analyst

Paul, any update on the strategic side versus work on the gas-
This is another Hauser question.
electric breakup and DENA -- an update on DENA, how things are
going? Any thoughts whether still on the cards that you could do
David Hauser - Duke Energy - Group VP & CFO something more strategic before the transaction closes?

Yes, I can elaborate on that. Under accounting rules now you have
to record the liability for a mutual insurance company. The amount
we recorded in the second quarter was $24 million. That's
As I mentioned with regard to whether or not it makes sense to
associated with two different mutual insurance companies and it's
separate gas and electric, we really are not actively pursuing that
events that have happened in the first half of the year. So you'll see
until we get through our approval process because we don't want to
us recording every quarter something associated with those. It
come up with an option that would screw up any of the filings that
could be positive if there's more events so that there's an expense
we've made.
or it could be negative as they settle out events. So it will move
both ways over time.

10


As far as where we are with DENA, I'll let Fred comment as to
where he sees DENA at this point. But the actual strategy as to where we're going hasn't changed an
awful lot. I think he's been very helpful in understanding the
landscape. But the bottom line is that at the current time the market
for international assets is weak enough that these assets are worth
more to us than they would be to others. And we've gotten to about
I think from the standpoint of DENA's operation, it’s just double-digit returns, which when I first came that was our first
operations in general, I feel much better. We continue to get objective, was can we get to at least double-digit returns.
ourselves better control around our costs. Again, we think we have
the business well positioned for the third quarter. We set it up on So it's been a good quarter for International. It looks like it's going
that basis because we saw the dry hydro year setting up in the to be a good year for International. It's sort of like DENA -- we
Northwest. So we actually covered in some of the hedges that we don't feel compelled to do something. In fact, we feel even less
had on our West Coast assets to position for it, if we did have a compelled because they are a profitable operation. We don't feel
good -- some summer weather that we could see some tightness in compelled to do something unless we can get a really good price
the West. So far that's setting up as planned, but we will have to for them.
see. July was good. Hopefully we will continue to see follow-
through. So I think from the standpoint of just the basic day-to-day
operations I continue to see improvement there.

We continue to have a lot of discussions with a lot of different Thank you very much.
people concerning different options about, as I said, trying to get it
to a more sustainable model. To me, what we've really done with
Operator
the Cinergy deal is put that business in a position where it is
earnings and cash flow positive. I am a little more patient in
Stephen Dafoe, Scotia Capital.
looking at options when I'm not losing money. So I think we've
kind of improved our negotiating position from the standpoint of
doing a strategic deal. Stephen Dafoe - Scotia Capital - Analyst

In your reply to Maureen's question about which Canadian assets
are being considered for an income trust, you said some assets fit
and some don't. I can think of Canadian gas distribution utilities
I think that's really the critical point that at this point we don't feel
that sort of fit and Canadian gas pipelines that sort of fit. That
compelled to do something if it's not -- if it's not going to create
describes most of your Canadian assets. Could you elaborate a bit
value. We don't feel compelled to sell at the bottom of the cycle or
more on which ones are being considered? And further on that, if
to cut an unfavorable deal. Once Cinergy and Duke join together
any of your assets end up not fitting for whatever reasons, the stars
we will have a profitable merchant function.
are not aligning, would you consider other means of monetization
of those assets?

Paul, one comment, if I remember my memory right, you had
mentioned about a member of the Board who had joined in who
I don't think you can necessarily categorically say that all of them
was going to give you advice on your International operations by
fit, because it depends on how they are treated by the regulators.
the middle of the year. And I was trying to check in on that
And while gas pipelines probably fit, distribution assets are less
whether you got some new assessment of the International
likely to fit. I don't want to get into too much detail. Fred, is there
business or what the thinking is there.
anything you would like to say?


Roger Agnelli is the Board member who we put on, I think it was
All I would say is that I think if you look in terms of regulated
in September of last year or maybe it was November before he was
assets in Canada right now the NEB is not particularly -- has not
effective because of the FERC approval. But Roger and I have
been particularly favorable about the treatment that they are
chatted a bit, and he's had meetings with our International folks. In
willing to give about moving those assets over and what happens
fact, we're going to have a major operating meeting in Brazil in the
on the taxes. So that seems to be evolving as well. And I think just
first week of December where we will take all the troops through a
kind of in simple terms probably if we do decide to do this you
kind of team building and development session.

11


would probably start out with your unregulated assets. And we Of course just the fact that you have a larger fleet to trade around is
have quite a few unregulated assets in Canada when you think in a benefit. The fact that we can take the two organizations and take
terms of the fact that we just did the deal where we took in all of the best of best practices from each, combine the ways that they've
Field Services' processing assets in Canada. done operations and maintenance with the ways that we have,
there's some upsides there that not necessarily cost-related, but
they could be financial nevertheless.
Stephen Dafoe - Scotia Capital - Analyst

Keith LaRose - Bradley, Foster & Sargent - Analyst
Thank you.

That's helpful. This question may not be completely clear because
Operator
the bill is not completely clear to me yet. But in the Energy Bill,
are there opportunities with that merchant fleet relative to the
Keith LaRose , Bradley, Foster & Sargent. regional capacity issues in the bill that might build in generating
capacity in smaller regions, if I understand that correctly? Does
that question make sense?

You highlighted most of the synergies with the Cinergy deal, $95 Paul Anderson - Duke Energy - Chairman & CEO
million in year one and $125 million in year two. Can you speak to
the prime mover synergies in the deal as opposed to just the cost I'm going to ask Rich if he knows even a partial answer to that
reduction synergies of the deal? question because the bill is pretty new at this point.

David Hauser - Duke Energy - Group VP & CFO Rich Osborne - Duke Energy - Group VP, Public and
Regulatory Policy
You mean what will we be able to do to create value that isn't
associated with cost reductions? Are you referring to the reliability provisions?

Keith LaRose - Bradley, Foster & Sargent - Analyst Keith LaRose - Bradley, Foster & Sargent - Analyst

From a prime mover perspective, as I look at the assets that you That's right.
have within the unregulated businesses of the two companies, what
synergies and benefits do you get at the prime mover level of this
Rich Osborne - Duke Energy - Group VP, Public and
transaction beyond just cost reduction, just beyond overhead?
Regulatory Policy

I think we'll have to see what the FERC does to promulgate those
before we know whether -- well, I'm sure there'll be some impact
Probably the biggest benefit -- well, you know, there's a little on the regulated and unregulated generation as they promulgate
scope and scale in there. But the biggest benefit is the flexibility in them. But we really couldn't address what that impact would be
size and compatibility of the fleet, particularly in the Midwest. We until the FERC starts to explain how they're going to implement it.
now have a full range, from very low cost base coal-fired
generation, to a much more flexible, but higher cost gas-fired
peaking, to the mid-range generation there of gas-fired combined
cycle. We were 100% gas, as you're probably well aware and
I'll ask the question a different way maybe and more directly. And
Cinergy was 85% coal and they had no real mid-range. So you put
it will be my last one. Is there an opportunity for any of these
the two fleets together and it gives you a lot more dispatch
merchant assets to move into a regulated base?
flexibility to be able to have that mid-range combined with the
base and the peaking. They kind of have a hole in the middle and
we were kind of focused on the middle up and we didn't have any Rich Osborne - Duke Energy - Group VP, Public and
base load. I would say that’s probably a good example of one of Regulatory Policy
the best synergies, if that's what you're looking for, of putting the
two together.
Certainly there's nothing explicit in the Energy Bill that would
open that door. I think again that's going to depend upon how the
FERC structures its response to reliability. They could have

12


aspects of reliability, and you see some of these in some of the
RTO’s and some of the grids that are out there, where they do pay
for capacity in a long-term contractual mode, and a fixed mode.
That would have a sort of regulated aspect to it, although it's
technically not regulation the way you and I might think of it. But
we really have to see how they implement. I think it's just
speculation at this point.


I appreciate the time, gentlemen.

Operator

That's all the time we have for questions today. Speakers, I will
turn the conference back to you for additional or closing remarks.

Julie Dill - Duke Energy - VP of Investor Relations

Thank you Kim. Thanks everyone for joining us today.

Just a quick reminder, Duke will be having an analyst or
conference day in conjunction with Cinergy, to discuss more on
the merger on September 15th, here in Charlotte. Please hold the
date and we will be sending more information. As always, my
team and I are available to answer any other questions that you
might have. Thank you so much.

Operator

That does conclude our conference call today. Thank you all for
your participation.

13

Duke Energy 08/03/05_Transcript

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