M&A Announcement

Jul 3, 2012

Press Release

Morning, and welcome to the Duke Energy Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bill Curran, Director of Investor Relations. Please go ahead, sir. Good morning, everyone, and thank you for joining us today on short notice. With me this morning are Jim Rogers, Chairman, President and Chief Executive Officer Ann Maynard Gray, Lead Director of Duke Energy's Board of Directors and Lynn Good, Chief Financial Officer. Today's discussion is being webcast and it includes forward looking information. Actual results may differ materially from those projected. You should refer to the information contained in our SEC filings concerning factors that could cause future results to differ from the forward looking information. Jim and Ann will begin today by commenting on the completion of the merger. Lynn will then provide an overview of our key financial objectives. We will then have time for a few questions after these prepared remarks. Now, let me turn the call over to Jim. Thank you, Bill, and welcome everyone. We are delighted to announce the successful completion of the Duke Energy Progress Energy merger following the receipt of approvals from state and federal agencies. With our closing yesterday, we're now ready to embark on a new chapter as the largest electric utility provider in the U. S. Throughout this process, we've told you why this transaction makes sense for our investors, customers, employees and the communities we serve. But it bears repeating. This transaction creates unmatched financial strength and operational scale and scope, an opportunity to leverage best in class practices in every part of the company 3rd, a regulated business that is a higher percentage of the overall business mix than prior to the merger fourthly, significant benefits for all our customers over time and finally and importantly, an enhanced ability to grow the dividend. In today's rising cost environment, the new Duke Energy will be better able to serve our 7,100,000 customers' energy needs in a reliable, affordable and increasingly clean manner. Before I get into additional details on the integration process and how we plan to drive value, Anne is going to briefly expand on this morning's announcement. Anne? Thank you, Jim. In addition to the merger closing, this morning we also announced that our newly Jim will also maintain his responsibilities as Chairman of the Board of Directors. Bill Johnson has resigned as President and Chief Executive Officer of combined company by mutual agreement with the Board. Bill has been instrumental in helping close the merger with Progress Energy. On behalf of the combined Board, I would like to thank Bill for his over 4 years of service as Progress Energy's CEO. We wish him the best in his future endeavors. As for Jim, having served as CEO of Duke and its predecessor companies for more than 23 years as well as leading successful integrations for 2 previous mergers, He is well suited to lead this integration effort and to drive our combined businesses forward. We look forward to working with our new colleagues from Progress Energy to realize our combined potential. This is a tremendous company, a tremendous team and a tremendous opportunity for every stakeholder of Duke Energy. We have a great future ahead of us. Before I turn the call back to Jim, I'd like to note that we won't be commenting further on the Board's discussions with regard to Bill's resignation. Jim? Thank you, Ann. The success of our company will be driven by the talent and commitment of our people. We have a deep bench of proven leaders drawn from both Progress Energy and Duke Energy. Importantly, we have a team of almost 30,000 hardworking employees, who are focused on delivering benefits to our customers and creating value for our shareholders. Since the transaction's announcement in early 2011, an integration team comprised of leaders from both companies has been hard at work to ensure that the critical components of our business were up and running on day 1. I am proud to say that we have started day 1 from a position of strength. Our talented professionals will continue to manage the integration in a thoughtful manner. It will also create new opportunities for our employees to grow in their careers. As we have previously discussed, we see operating efficiencies in 3 primary areas: fuel, joint dispatch and O and M. The significant fuel and joint dispatch benefits we expect from this transaction will flow through to Carolina's customers as they are realized. And equally important, other non fuel efficiencies will benefit customers in all of our jurisdictions and our shareholders over time. These cost savings and efficiencies will help to mitigate potential customer rate increases in the future. We will continue to modernize our systems, generation, transmission and distribution to meet future sales growth projections and environmental constraints. Reinvestment is key to driving value for our customers and for our shareholders. Going forward, Duke Energy's business mix will be approximately 85% regulated compared to a historic mix of roughly 75%. We will continue to look for opportunities to invest in both the regulated and commercial businesses. The bottom line is that Duke Energy remains committed to delivering affordable, reliable and increasingly clean electricity. Before I turn the call over to Lynn, I want to reiterate that one, we've made and continue to make outstanding progress on our integration. 2, we have an experienced and dedicated team committed to improving our levels of safety, operational excellence and customer satisfaction. And finally, I am personally committed to the successful integration of the 2 teams and to the execution of our strategy going forward. With that, I'll turn it over to Lynn. Thank you, Jim. From a financial perspective, Duke Energy remains well positioned. The closing of this merger provides us with unmatched financial and operational scope and scale and the strength to manage through a time of transition in our industry. Additionally, the transaction gives us the ability to leverage best in class practices in every part of the company. The higher level of regulated operations also lowers our overall business risk profile, supporting the strength of our balance sheet and growth in earnings and the dividend. Let me provide you with some thoughts on where we are from an earnings perspective for 2012. On a standalone basis, Duke Energy had an adjusted diluted EPS guidance range of $1.40 to $1.45 for 2012. With the 1 for 3 reverse stock split, which was completed in connection with the merger, this standalone guidance range becomes $4.20 to $4.35 per share. We will be prepared to discuss more specifics on our combined 2012 earnings guidance during the Q2 earnings call, which is currently planned for August 2. However, we continue to target 2012 earnings guidance for the combined company in the range of $4.20 to $4.35 per share. Our actual results for the year will be largely dependent upon the 3rd quarter, historically our most significant, which is still ahead of us. Now that Duke and Progress have merged, we are keenly focused on aggressively and quickly achieving merger savings associated with bringing these two companies together. Our planning efforts over the last 18 months provide us with a great platform for delivering significant savings, which will be important to the earnings power of the combined company. These savings are primarily expected to come from the elimination of duplicate corporate functions and systems, streamlining of processes and reductions to employee headcount resulting from our voluntary severance plans. Additionally, we will be prepared to provide our 2013 earnings guidance and long term earnings growth rate by early 2013. We continue to target a long term earnings growth range of 4% to 6%. More details on our long term outlook and growth drivers will be forthcoming after we finalize our 3 year financial plan with the new management team and the Board of Directors. In summary, our financial objectives have not changed. We remain focused on maintaining the strength of our balance sheet, providing earnings growth opportunities and supporting growth in the dividend. The dividend policy as a combined company is consistent with Duke Energy's existing policy. To grow the dividend on an annual basis targeting a payout ratio of 65% to 70% of adjusted diluted earnings per share. Consistent with this plan, early last week, we announced an approximate 2% increase to our quarterly dividend payable in September. The earnings growth potential of the combined company will continue to be anchored by investments in the regulated businesses, reasonable regulatory outcomes, aggressively achieving merger savings and managing our costs. Additionally, our non regulated businesses are expected to provide valuable diversity and growth opportunities. I am pleased that we finally made this transaction a reality. Our focus will now turn to achieving our financial and operational and efficiently and effectively bringing these two companies together. Let me now turn the call back over to Jim. Thank you, Lynn. To recap, the combination of progress and Duke creates the largest utility in terms of size and scale. We are focused principally on our regulated business mix in the regions we serve. With our earnings and dividend growth potential that Lynn outlined, we believe Duke Energy is poised for growth and success. In conclusion, as I'm sure you can appreciate, today is a busy day for all of us and we have time for only a few questions. We look forward to speaking with many of you in a 1 on 1 setting over the coming months. We will now take your questions. Operator? Thank you. Your first question comes from the line of Dan Eggers with Credit Suisse. Hey, good morning guys. Good morning. Good morning, Dan. Congratulations on getting the deal done finally. I guess, just to make sure I understand on the kind of the update to earnings outlook and growth rates, either 4% to 6% that you guys have talked about. You still feel comfortable with that number at this point in time with more details coming in the I guess the Q1 of 2013. Is that the right way to interpret what you're saying right now? Yes. And Dan, the messages and comments on growth rate and outlook long term have not changed. So we continue to target 4% to 6%. The synergies or non fuel efficiencies are an important part of that. We'll be aggressively pursuing those merger savings as we move into the next several months. And we'll be able to give you a greater feedback, guidance, growth drivers, etcetera, as we look into 2013. Got it. And I guess, Jim, in the ongoing CEO responsibilities, can you give any updated thoughts on the Crystal River III process and when we would expect to see a plan out of you guys to kind of the rebuild or the exit of that project? Absolutely. And thank you for that question. Crystal River is something we continue to watch and we continue to monitor. Our teams have been working to complete the engineering work. We are working with Neil and our Florida team is working with the regulators in Florida. And it's my judgment that we will be able to resolve hopefully by year end and at the least the early part of next year a resolution of Crystal River. Are you worried about kind of the deadline as far as it relates to the ROE and all those sort of mechanisms by year end? Or does it sound like that kind of getting to the right decision could take longer than the year end deadline that was I guess originally envisioned? Lynn, you want to comment on that please? Sure. Dan, as you know, there are incentives within the regulatory framework of the Florida settlement that make year end important. And as Jim indicated, we have a number of steps that we will be going through between now year end, finally cost estimates, engineering, technical solution, Neil. We'll continue to keep you updated as we move through that process and we'll have an opportunity second quarter, third quarter to give you further feedback. Okay, great. Thank you guys. Have a great quarter. Thank you. You too. Your next question comes from the line of Greg Gordon with ISI Group. Thanks. Good morning, guys. Congratulations. Good morning, Greg. Thank you. Dan asked the specific questions that I wanted to ask. But can I ask one you elaborate a little bit? As you try to pull together this plan to achieve your earnings growth aspirations for the coming years 4% to 6% and you look at the combined company, Jim, you always led a little bit by aspiration and you've always been a very creative guy. What are the biggest challenges you think the company faces to sort of get solidly within that range for the next 3 to 5 years? Greg, that's a very good question. The way I think about this is, this is day 1 and we are all one group of employees. And so I am really focused on making sure we come together, work together and stay focused on capturing the synergies and achieving our objectives. So I think that has to be one of my top missions. I think the second thing that we have to do is harvest the synergies. That is so critical into the earnings growth. And we will make a our teams have worked long and hard to get us to where we are today. The key going forward is really to drive that integration process, harvest the savings. And thirdly, we have to get a good resolution at Crystal River and that we have a clear focus on that issue. Thank you, Jim. Thank you. Thanks, Your next question comes from the line of Michael Lapides with Goldman Sachs. Hey, guys. Congrats on closing what has obviously been a long and contentious merger and dealing with the FERC, but a very well run Board kind of take a review of the various businesses that don't necessarily fall under the U. S. Regulated umbrella? I'm thinking Ohio generation both coal and gas. I'm thinking renewable maybe even DEI. In terms of where they fit in terms of strategic importance to the broader enterprise? Michael, let me answer it this way. Our first mission is to bring these two companies together and achieve our integration goals. That is kind of 1st and foremost, because that's going to drive our earnings going forward. Every year, we do a review of our international operations. We do a review of our generation in the Midwest. And we make decisions as to the best way forward given market conditions. And we're actually in the process of doing that now. So again, we review all of our businesses every year And we will have always had a special focus on our commercial businesses each year. Okay. One follow-up just on the synergy savings. It's been a while since I think you guys have talked about it. Traditional utility deals, I think some of the commentary when yours first got announced around 5% to 7% of total non fuel O and M is kind of the normal savings level. Just curious when you think about the combination of your companies and you've had 18 months to work on it where you think the greatest opportunities are and where you think the where they're where you want to manage expectations because the opportunities for synergy savings may not really exist in certain businesses? Michael, the guidance that you talked about 5% to 7% of nonfuel O and M is certainly the way we have been thinking about it. And we'll be aggressively looking for ways to drive efficiencies through the business. You can think about corporate center, duplicate functions, improvements in processes as being our keenest focus as we start. But all of this needs to be balanced within the context of safety, reliability, customer satisfaction, meeting the requirements that we have of delivering those services to customers. So we'll be thoughtful about it, but aggressive at the same time. And as we have more visibility into implications to earnings, of course, we'll share that with you. Got it. Okay. Jim, Lynn, thank you for obviously holding this call and congrats on the merger. Thank you, Mike. Your next question comes from the line of Jim Von Reissman with UBS. Hi, good morning, everyone. Hi, Jim. Good morning, Jim. Can you just follow-up on some of these synergy questions? And one thing that strikes me is I want to know, I mean, there were a lot of people at Progress who were loyal to Bill. How do you expect to retain or how do you plan on retaining the Progress team that you need in order to get the synergies to support those earnings targets? Well, Jim, let me just respond by saying that I reached out last night to all the SMC members and talk through where we're going in the future and how we have to pull together. And my expectations is that all will lead in making this a great success. And I'm confident that each will contribute to the company going forward. We've had a deliberate and balanced process in the integration. We have a very experienced team from both companies and I look forward to working with everyone to integrate this company. We are not 2 teams today. We are one company. And that's a very important point. So we're going to make this happen together. Okay. And then I guess my thank you. And then my second question is for Mrs. Gray, who indicated that there would be more discussion as to how the Board made its decision and everything else. When might that come out? Actually, I said that I would not be commenting further on the Board's deliberations. I'm sorry if I misstated or you misunderstood my comment. Okay. Thank you. Thank you. Thank you, Jim. Ladies and gentlemen, this concludes the question and answer portion of today's call. I'd like to turn the call back over to Mr. Rogers for any closing remarks. Again, I want to thank you all for joining us today. We look forward to speaking with you over the coming months. We're going to have a very detailed earnings call on August 2. And I wish all of you all a happy 4th July. Thank you very much. Thank you. This concludes our conference call for today. Thank you for your participation.