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
Analyst Meeting
September 15, 2005
Julie Dill
Slide: Title Slide
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.
Slide: Agenda
Noon Lunch
1:00 p.m. Overview Paul Anderson
1:30 p.m. Power Strategy Jim Rogers
2:30 p.m. Break
2:45 p.m. Financial Objectives David Hauser
3:15 p.m. Integration Efforts Tom O'Connor
3:45 p.m. Q & A
4:45 p.m. Adjourn
Slide: Disclosure Statements
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 Duke's website:
(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
Slide 2: Back on Track
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.
Slide 3: Building 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.
Slide 4: Portfolio 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.
Slide 5: Exiting DENA
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.
Slide 6: Natural Gas Transmission (map)
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.
Slide 7: Natural Gas Businesses Are Positioned to Supply Increasing Demand
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.
Slide 8: Field Services (map)
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.
Slide 9: Natural Gas Businesses Are Positioned to Supply Increasing Demand
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.
Slide 10: Merger with Cinergy
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.
Slide 11: Vision for the Future
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
Slide 12: Title Slide
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.
Slide 13: Multi-regional Regulated Platform
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.
Slide 14: Combined Regulated Operations
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.
Slide 15: Balanced Regulated Generation Portfolio
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.
Slide 16: Operating Performance of Combined Generation Fleet
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.
Slide 17: Diverse Customer Base
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.
Slide 18: Deliver Outstanding Customer Service
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.
Slide 19: Provide Customers with Competitive Rates
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.
Slide 20: Investing in System Growth, Reliability and the Environment
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.
Slide 21: Enhanced Flexibility for Midwest Commercial Fleet
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.
Slide 22: Combined Commercial Portfolio Enhances Ability to Serve Competitive
Markets
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.
Slide 23: Commercial Fleet Positioned to Sell in Most-Developed Markets
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.
Slide 24: Earnings Enhancement from Low-Risk Marketing and Trading Platform
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.
Slide 25: Strong Platform for Long-Term, Stable Earnings Growth
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.
Slide 26: Regulatory Approval Timeline
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.
David Hauser
Slide 28: Duke Energy
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.
Slide 29: Duke Energy + Cinergy
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.
Slide 30: Earnings Growth Drivers
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.
Slide 31: Cash Flow Outlook
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.
Slide 32: Financing Organizational Structure
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.
Slide 33: Purchase Accounting
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.
Slide 34: Finance Key Focuses
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
Slide 35: Title Slide
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.
Slide 36: Integration Vision
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.
Slide 37: Integration Objectives
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.
Slide 38: Integration Structure
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.
Slide 39: Functional and Support Teams
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.
Slide 40: Integration Framework and Expectations
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.
Slide 41: Franchised Electric Business Model
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.
Slide 42: Fleet Services
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.
Slide 43: Cost Savings Distribution
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.
Slide 44: Merger Cost Savings and Distribution
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.
Slide 45: Enterprise-Wide Status Tracking
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.
Slide 46: Measuring Integration Success
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
Slide 48: We Will Provide Our Shareholders With...
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.
###
* * *
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.