Duke Energy Corp (DUK) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to the Duke Energy third quarter earnings conference call. Today's conference is being recorded.

At this time for opening remarks, I would like to turn the conference over to the Group Executive of Investor Relations and Chief Communications Officer, Ms. Julie Dill. Please go ahead.

Thank you, Erin. Good morning and welcome to Duke Energy's third quarter 2006 earnings review.

Leading our discussion today are Jim Rogers, President and Chief Executive Officer, and David Hauser, Group Executive and Chief Financial Officer. Also available to take your questions are Jim Turner, Group Executive and Chief Commercial Officer, U.S. Franchise Electric and Gas; Steve Young, our Controller; Fred Fowler, Group Executive and President, Duke Energy Gas; and Greg Ebel, President of Union Gas. As you know, Fred will be President and CEO and Greg will be CFO of the new gas company, the new name of which we announced this week, Spectra Energy.

Jim will begin today's presentation by providing a general overview of our results. Then David will provide more detail and context around our Company's results and those of each of our businesses. Jim will close with the discussion of how we're fulfilling our commitment to investors and as part of that discussion, Jim will share the results of our merger score card and provide an update on the spinoff of our gas business. Following those prepared remarks, we'll open the lines for your questions.

Before we begin, let me take a moment to read the Safe Harbor statement. Some of the things we will discuss today concerning future Company performance will be forward-looking statements within the meanings of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements and you should refer to the additional information contained in Duke Energy's and Cinergy's 2005 Form 10-Ks filed with the SEC and other SEC filings concerning factors that could cause those results to be different than contemplated in today's discussion.

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 is available on our Investor Relations website at www.duke-energy.com.

With that, I'll turn the call over to Jim.

Thank you, Julie, and good morning, everyone.

Today we reported ongoing earnings per diluted share of $0.48 compared to $0.56 per diluted share for the same period last year.

We didn't have the kind of quarter we expected. We're disappointed that our efforts didn't translate into stronger financial results for the quarter. However, given our solid performance in the first two quarters of the year, we are confident that we will achieve our revised employee incentive target for '06.

Last year's quarter had every one of our businesses hitting on all cylinders. We were not as fortunate this year, as nearly all of our businesses were off the expected mark for the quarter.

In Franchised Electric, we were not able to repeat our near-record performance from last year because of several factors. First, our bulk power marketing sales opportunities were much lower than last year, both on price as well as on volume. Second, weather was not as hot as we experienced last year. And thirdly, O&M calls were higher, with the largest increases occuring in our nuclear operations. Together, the combination of these factors had the single largest impact on our results this quarter as compared to last year.

In DEGT, our costs were up by 35 million due to a number of factors, some of which will come back to us in future periods, but we were down nonetheless.

Weather also played a factor in our international operations. Drier than normal conditions impacted our operations in Brazil and Peru.

Crescent's 2005 quarter was very robust, with two major sales. But this year we didn't have the same level of activity. In addition, we decreased our ownership percentage this year for a portion of the quarter. David will go over all of this in more detail in just a moment.

But before I turn the call over to him, I want to clarify the reference in our press release regarding our employee incentive target for 2006. Many of you might remember that when the Board authorized us to exit all of DENA's business outside the Midwest last year, they also authorized us to change the employee incentive target. That was intended to recognize that we wouldn't have those results for the year. As a result, our target went from $1.60 per basic share to a $1.65, since DENA was expected to produce negative results for the year.

Consistent with that same philosophy, we anticipate that the Board will adjust this year's target as a result of the Board's authorized sale of the commercial marketing and trading business. We had included $0.04 for this business in the $1.90 incentive target, so that amount would be excluded. Consequently, our employee incentive target for 2006 is now expected to be $1.86.

I want to assure you that in no way does this adjustment, or our third quarter performance, diminish our commitment or our ability to deliver on our long-term earnings growth expectations. As we've said before, over at least the next three years, we expect Duke Energy to grow 4 to 6% in ongoing diluted earnings per share, and Spectra Energy expects to grow ongoing diluted earnings per share 5 to 7% over at least the next three years, as well.

Let me turn the call over to David to give you more details around this quarter's financial results.

Thank you, Jim.

First, we'll look at Franchised Electric and Gas. That segment's EBIT increased by 72 million over the third quarter of 2005. As you would expect, the addition of Cinergy's regulated operations had the greatest impact on that increase.

Our new Franchised operations in the Midwest contributed EBIT of approximately 181 million, net of a $17 million charge for rate reductions required as part of merger approvals in Ohio, Indiana, and Kentucky.

On a similar note, rate reductions in the Carolinas had an impact of approximately 39 million for the quarter. You'll recall that we agreed to recognize in the first 12 months substantially all of the 5 years of the merger savings that we're sharing with customers. Excluding the impact of these rate reductions, our results in the Carolinas were down 70 million from last year's quarter. Bear in mind, the 2005 quarter was the second highest ever in terms of earnings for Duke Energy Carolinas.

Lower results this year were primarily due to three factors. First, bulk power marketing results were down 40 million. As you know, natural gas prices were high last year as a result of an active hurricane season. That gave us more opportunity to sell our excess power in the markets that depend mostly on natural gas for generation.

For example, in September 2005, we sold bulk power at an average price of $140 per megawatt hour compared to $40 per megawatt hour this September. We've also had less capacity available to sell into the wholesale markets this year due to some unplanned outages. Across our generating fleet, we had 30 more outage dates this quarter compared to the previous year's third quarter.

Secondly, O&M costs were up by approximately 20 million. While a number of factors contributed to those higher costs, the most significant increases occurred in our nuclear operations.

Finally, last year's weather in the Carolinas was 19% above normal, while this year's third quarter was only slightly above normal. This equates to a variance of approximately 17 million.

Offsetting those results, we recorded clean air amortization of approximately 62 million during the quarter, down 23 million from last year. As you'll remember, we booked additional amortization last year as a result of very strong third quarter earnings. In this year's quarter, we were back to normal levels.

Now, let's move on to Natural Gas Transmission. This segment's reported results were down by 26 million compared to the third quarter of 2005. On an ongoing basis, results were down approximately 41 million, excluding a special item: a $15 million gain related to the sale of units by the Duke Energy income fund in Canada.

In the third quarter, the Canadian income trust issued nearly 9 million additional shares to public unit holders to fund the purchase of assets from DEGT. Those units were issued at a per-unit price greater than the carrying value of our original investment. While the number of shares owned by DEGT did not change, its ownership interest in the trust decreased from approximately 58% to approximately 46% as a result of that transaction.

Lower ongoing results for the quarter were due to a $35 million increase in O&M costs primarily related to repairs associated with a lightning strike at one of our processing facilities in western Canada; higher insurance costs this year as a result of 2005 hurricane activity; an $11 million increase in expenses associated with project development costs for the Southeast Supply Header and expansions on the maritimes and northeast and Gulf Stream systems. But keep in mind that those expenses will be capitalized once the projects receive approval from FERC. And a $10 million increase in operations associated with pipeline integrity projects and general timing.

Last year, the FERC mandated an accounting change associated with integrity work. Consequently, those costs were capitalized last year but expensed this year. Also, we completed more maintenance work in the third quarter of this year compared to the same period last year.

Other factors were the impact of revenue sharing at Union Gas and lower equity earnings from Gulf Stream related to project financing.

Strong processing margins at our Empress facility in western Canada, which we acquired in August of 2005, had a positive impact on the quarter. Empress's results were 27 million higher than last year's quarter. Continued strength in the Canadian dollar added another 6 million. On an annual basis, a $1 change in frac spreads affects Empress's EBIT by $25 million.

Now let's turn to Field Services. You'll recall that in July of 2005, we reduced our ownership in Duke Energy Field Services by 19.7%, resulting in a gain of 576 million. In addition, we recognized a benefit of 38 million related to dedesignated hedges.

Excluding those special items, ongoing results from our 50% ownership in Duke Energy Field Services were $71 million higher than last year's quarter. Ongoing results continued to benefit from strong commodity prices as well as improved overall marketing results. Duke Energy field services paid dividends of approximately 75 million and tax distributions of approximately 77 million to Duke Energy during the third quarter.

Now we'll take a look at Commercial Power. As a reminder, this segment includes our Midwest gas-fired plant, the former CG&E nonregulated generation acquired when we merged with Cinergy, and Duke Energy generation services.

We saw a $68 million improvement in segment EBIT from continuing operations compared to the third quarter of 2005. CG&E's non-regulated operations in Ohio contributed 69 million of EBIT before the impact of purchase accounting.

In addition, our Midwest gas-fired plants contributed to 5 million of EBIT in the quarter compared to a 10 million EBIT loss in the third quarter of 2005. This is largely the result of our Hanging Rock and Washington plants in Ohio being certified by PJM in June 2006 to provide regulation services to the ISO. That has enabled these units to realize additional revenue from PJM that they were not able to earn in 2005. Those positive impacts were offset by approximately 17 million in net purchase accounting charges related to the merger.

There are a couple of key things to remember about our purchase accounting adjustments. First, while the majority of the impact is recorded in Commercial Power, there are adjustments associated with other items, most significantly, the debt we acquired. And that is reflected in our interest expense line. For 2006, that number will be about 10 million.

Year-to-date we have recorded net pretax charges of approximately 60 million associated with purchase accounting. We expect that the total for the year will be slightly less than 100 million. That amount, approximately $0.05 on a diluted earnings per share basis, is slightly less than what was expected when we discussed these adjustments in the second quarter.

We have continued to make refinements in the valuation of Cinergy's assets and liabilities. And consequently we have reduced our estimate for the change in the impact of purchase accounting in 2006 by $0.03 on a diluted earnings per share basis. At this time, we expect to recognize net pretax charges of approximately 90 million due to purchase accounting in 2007.

As you heard Jim discuss earlier, we are on track to achieve our employee incentive target which is expected to be revised to $1.86 as a result of the sale of our commercial marketing and trading business. But as we told you back in February, when we provided the components of the $1.90 and reminded you again last quarter, any impact of the purchase accounting adjustment that is either above or below the original assumption of $0.03 would not affect the achievement of the incentive target for employees. Because we consider purchase accounting charges to be ongoing, you should expect to see our ongoing earnings for the year to be about $1.78 per diluted share.

How do you get there? Take the new target of $1.86 less $0.08, the difference between that original $0.03 and our new estimate of a negative $0.05.

One final note on Commercial Power. As a result of the recent decline in crude oil prices, we reevaluated the economics of running our synfuel facility at Oak Mountain and restarted that plant on October 12th.

Moving on to International. Ongoing earnings for International were down by approximately 15 million for the quarter compared to the same period in 2005. Ongoing results for the third quarter 2005 excluded a 20 million impairment associated with our equity investments in the Campeche facility in Mexico.

The lower ongoing results in the third quarter of this year were due to, first, higher regulatory fees and lower average sales prices in Brazil as a result of higher priced contracts rolling off. Secondly, higher purchased power costs due to unfavorable hydrology in Brazil and Peru, partially offset by favorable hydrology in Argentina. And finally, lower margins and an unplanned outage at National Methanol.

We don't want to leave you with the wrong impression about the outlook in Brazil, as the fundamentals in that country continue to improve. That can be seen in how the price of power has increased through the auction progress. In 2006 the weighted average auction price was 65 reals per megawatt hour compared to approximately 105 reals per megawatt hour for the 2008 to 2010 auction period, more than a 60% improvement.

Now let's turn to Crescent Resources. Crescent's ongoing results of 54 million were 66 million below the third quarter of 2005, when we closed on a number of large transactions.

The 2006 quarter's ongoing results excluded a 246 million pretax gain related to the creation of a joint venture partnership with Morgan Stanley Real Estate Fund. This occurred on September 7th, at which time Crescent moved from consolidated to equity accounting. The transaction provided Duke Energy with approximately 1.4 billion of after-tax cash proceeds. As part of this transaction, Crescent was recapitalized and borrowed approximately 1.2 billion of new debt, which will be off balance sheet.

Last week, Moody's assigned Crescent a credit rating of BA2, its first rating as a stand-along company, and S&P assigned it a credit rating of BB. We consider this a positive outcome for this type business.

It's worth noting that going forward, interest expense at Crescent will be capitalized as part of individual project costs as opposed to expensing it in the current period. As such, you should expect to see higher earnings in the short-term and lower earnings as the projects are sold in the future.

And finally, our Other category. Other's ongoing loss from continuing operations was 82 million for the quarter, an improvement of 96 million over the third quarter of 2005. Those improved results were primarily due to the negative impact of mark to market charges last year associated with our D-designated hedges and fewer economic hedges this year. The quarterly variance related to this change in the value of the contracts was approximately 124 million.

At the end of the third quarter, the remaining portfolio of contracts was approximately 1.25 million barrels of oil. At this time, we have not hedged any of our production for 2007.

Governance costs were higher by 33 million, primarily due to the addition of Cinergy's businesses.

Our insurance costs were virtually flat year-over-year. You'll recall that we recorded charges of approximately 62 million in the third quarter of 2005 as a result of the hurricanes and other property losses.

In this year's quarter, we recorded a charge of 58 million related to our interest in a mutual insurance company which has ceased writing business and is in the process of settling all claims.

Not included in ongoing results are special items for costs to achieve the Cinergy merger and the gas spinoff. In the third quarter of this year, we spent approximately 19 million to achieve the benefits of the Cinergy merger and approximately 10 million towards the gas.

I'll close with just a few more items before I turn it back over to Jim. At the end of the third quarter, we had a net cash balance of approximately 2 billion. 2.9 billion of cash, cash equivalence, and short-term investments offset by 900 million of commercial paper outstanding.

Early in the fourth quarter, we closed on the sale of our commercial marketing and trading business, which brought in pretax cash of approximately 700 million.

We've been getting some questions about what we're doing with all that cash going forward. We've used some of it to pay down commercial paper. We expect the majority of the remaining cash on hand at year end will remain with the Power company after we ensure that the new gas company's working capital needs are satisfied.

The Board has approved the reinitiation of our share buy-back program of up to 500 million beginning in January. We will be putting in place a plan such that shares of Duke Energy post-spend will be bought if the stock price hits the pricing point established in the plan.

Interest expense totalled 337 million for the quarter compared to 228 million for the third quarter of 2005. That increase was primarily the result of bringing Cinergy's debt onto our balance sheet at the time of the merger.

Our effective tax rate for the quarter was 37.1% compared to a rate of 34.5% for the same period last year. This is due to an increase in state taxes as a result of establishing an additional tax reserve in the quarter.

You may have noticed on our special items schedule that the tax recognized along with the Crescent sale was much higher than the normal rate. That's because this reserve is reflected as part of the Crescent transaction.

On a year-to-date basis, our effective tax rate is 34.3%, which is in line with the prior year.

And we want to make you aware that as you look for SEC filings this quarter, the legal names have changed for the following entities: Duke Power Company became Duke Energy Carolina, LLC; Cincinnati Gas and Electric, or CG&E became Duke Energy Ohio Inc.; and PSI Energy became Duke Energy Indiana, Inc. We have also deregistered CinergyCorp, but we will make their financial statements available on the website.

Now I'll turn the call over to Jim to report on how we're meeting our commitments to our investors, including a progress report on our merger goals and the gas company spinoff.

Thank you, David.

In the last 7 months you have seen a fundamental change in the mix of businesses in the Duke Energy portfolio. We believe the strategic moves we made this year will create significant value over time. As I did last quarter, I would like to discuss these moves in the context of what matters most to you.

Our first commitment is growing earnings and dividends over time. This commitment has been overarching despite the incredible amount of work required for one, the merger integration; two, the steps taken to decrease our portfolio risk; and thirdly, the preparations to spin off the gas business by year end.

As I said at the beginning of the call, we are confident we will achieve our revised 2006 employee incentive target. And as I mentioned earlier, we continue to stand by the growth rates for both Duke Energy and Spectra Energy, post-spend.

Our next commitment is achieving the full value of our portfolio. As you know, we've been working to change our mix of businesses in a way that we believe reduces our portfolio risk in the future. In September, we secured Morgan Stanley as a joint venture partner for Crescent Resources. And in October, we completed the sale of the Commercial Marketing and Trading business to Fortis.

These transactions, providing us with nearly 2 billion in after-tax proceeds, have allowed us to recognize gains this year that we would have otherwise received over time. We plan to redeploy the bulk of these proceeds into our lower risk energy infrastructure businesses beginning in 2007.

Rebalancing our portfolio has reduced our risk profile and will create significant value as we reinvest in our businesses going forward. However, this new mix of businesses will translate into something less than our 2007 earnings aspiration of $2 per ongoing diluted share for the two stand-alone companies.

We believe that the tradeoff of lower earnings in '07 for a more stable and lower risk company in the future is in our shareholders' best interest over the long term. Details around each company's 2007 employee incentive target will be provided when we start our road shows in December.

The next commitment is reinvesting in the business. Over the next three years, Duke Energy anticipates an average CapEx spend approaching 3.5 billion annually to meet future customer demand, upgrade our transmission and distribution systems, and install environmental retrofits.

In the quarter we broke ground on the $425 million scrubber project at the Allen Station in North Carolina. To meet evolving federal and state clean air requirements, we estimate investing $1 billion in scrubber construction through 2010. And the majority of these costs are locked in.

We continue moving forward with our plan to build a new nuclear station by filing a request with the North Carolina commission to recover our up-front developmental cost. We estimate that we will spend approximately 125 million by the end of 2007 to do preliminary development work and to prepare a construction and operating license.

We filed our application with the Indiana commission for a new IGCC plant.

And last week we filed updated cost estimates with a North Carolina commission relating to the modernization of the Cliffside steam station. We wanted to bring to the attention of the commission, before it issues a certificate of public convenience and necessity, the significant increases and equipment and labor costs that are being experienced throughout the industry.

While we believe that building Cliffside unit 6 and 7 continues to be the right way to meet the future demand of our customers, we want to make sure our regulators and other stakeholders have a full understanding of the cost pressures we're beginning to see. We expect the commission will reopen the record for additional evidence in December and we anticipate a decision from the commission in the first quarter of next year.

We are also reinvesting in the gas business. Over the next three years, Spectra Energy anticipates an average CapEx spend of about 1.5 billion annually, with over a billion of that being expansion capital.

This map illustrates the more than two dozen projects we have. Some are under construction and others are in various stages of development.

In the third quarter we announced our intent to build the Lebanon, connector, a joint venture between DEGT, Alliance Pipeline, and NGR Pipeline Company. And the Southeast supply header, a joint venture of DEGT and CenterPoint, signed an agreement with Florida Power and Light for about half of its planned capacity.

The open season on the Mid-continental crossing pipeline ended in July. The results made it very clear that additional pipeline capacity is needed to provide market access for the Barnett, Woodford, and Fayetteville shale reserves, as well as other mid-continent reserves.

It's still too early to know what the final scope of this proposed project might ultimately be. However, we are currently focusing our commercial discussions on a 300-mile pipeline segment that would run from Arkansas to northern Alabama.

Due to the competitive landscape, it's possible that all of the projects you see on the slide won't be built as currently proposed. However, we continue to see growing demand in the Northeast and Florida markets. And as you've heard Fred say, this may be the most opportunity-rich environment we've ever seen for gas infrastructure.

The next commitment is developing a strong leadership team with a deep bench. In September we announced the organizational structure and executive leadership for the stand-alone electric company. You may remember that during the merger Paul said we had to get bigger to get smaller. In that context, I really believe there comes a time when you have to get more streamlined and more focused to get stronger.

This slide shows Duke Energy's senior leadership, post-spin. We've created a more centralized organization with clear lines of authority and accountability. Because much of our growth and expansion will occur in our regulated generation and nuclear areas, the heads of these operations now report directly to me. It is important to have a top level spotlight on the new plant initiatives in these areas.

Each player on this team has broad and extensive experience in the energy industry. I've done the math and my direct reports have an average of 20 years experience in the energy business. We have a deep bench in almost every spot. I think it is important for you to get to know our team. And we are committed to creating opportunities for you to meet them over the next year so that you can judge for yourself.

Lastly, we are committed to delivering clear and transparent communications. When we completed our merger with Cinergy, I announced that we would keep a merger score card to track our progress on a number of key metrics. I told you then that regardless of the results, we would come back this quarter and report them to you.

While we're going to show you the entire score card, I am not going to comment on each category. We'll discuss it in more detail along with the other measures during our road show.

First, we're on target to achieve our 3-year work force reduction goal of 1500. We've already reduced our work force by 1200, which exceeds our target of 960 for this year. And with the centralization of the corporate center and shared services of the Power business, we expect additional work force reductions.

Costs to achieve the merger are well within our target number of approximately 450 million. Those costs through September total about 240 million.

The progress we've made toward achieving our nonfuel O&M target was masked primarily by higher nuclear costs. Nevertheless, we are seeing significant cost benefits for the merger.

By way of example, our power delivery and supply chain areas have identified more than $50 million in annual savings by sharing best practices from the Carolinas and the Midwest and by collaborating on processed improvements. And as David mentioned earlier, virtually all of these savings are currently being offset by the five years of rate reductions we agreed to provide our customers in the first 12 months.

Under operational results, you can see that we are not where we want to be in three of the four categories we are tracking. At this time, it appears that we will not make our reliability targets this year, and that is due in part to unplanned outages at two of our largest baseflow generating units.

In regard to customer and employee engagement, we are on target for customer satisfaction based on customer surveys we have been conducting.

We are tracking 17 individual savings initiatives, our integration milestones, for such thing as IT, HR, and accounting system. All of these are on target for completion this year.

While it's not reflected in the score card, we're actively managing 228 separate merger conditions that we agreed to with our 5 states. They fall into 5 categories: Day one requirements, commitment to community, financial requirements, customer service and reliability, and affiliate transactions. I believe that are agreement to work constructively with our states on these conditions is one reason why we were able to complete our merger in 11 months.

Next, I'd like to show you how these last 7 months have been a period of execution and positioning our Company for future growth. One, we closed the Cinergy merger and are realizing the benefits. Two, we completed the sale of the west and northeast unregulated plants and trading book. Three, we completed the joint venture for Crescent Resources. Four, we closed on the sale of commercial marketing and trading. Five, we repurchased 500 million of the $1 billion in Duke Energy stock authorized for buyback. Six, we announced numerous expansions on the DEGT system. Seven, we announced plans for plan expansions -- baseflow coal, IGCC, and nuclear, and we filed for cost recovery of our up-front nuclear development cost. Eight, we received FERC approval for our acquisition of the Rockingham plant in North Carolina.

Still to be completed is the gas spinoff.

Regarding the spinoff, let me close with a brief update on where we are. We remain on target to complete the spinoff effective January 1. This week, we announced the gas company's new name, Spectra Energy and its New York Stock Exchange ticker symbol, which is expected to be SE. We submitted our request for a private letter ruling to the IRS and we continue to expect a response this month.

While the state of Virginia has approved the spinoff, the only state approval necessary, we still need SEC approval. We filed our first amendment to the form 10 last month in response to questions from the SEC staff.

We proposed to the Board that each shareholder will receive one-half share of Spectra Energy for every share of Duke Energy held. If that is approved, and using 100 shares as an example, you would have 100 Duke shares with an $0.84 dividend and 50 Spectra shares with an $0.88 dividend.

After a favorable preliminary assessment of the spinoff, Moody's placed under review for possible upgrade the long and short-term debt issued by Duke Capital. And as we mentioned, we plan to start our road show in December.

I know our prepared remarks have taken a bit of time today. Also we were not able to set up all the 101s that were requested for EEI in Las Vegas next week. But we do want a chance to answer as many of your questions as possible. So next Monday afternoon, we will have a two-hour informal Q&A session. We call it Duke Unplugged, with Fred Fowler, Greg Ebel, David, and me instead of the standard company visitation tables. Hopefully this will give everyone a chance to come and get their questions answered.

So with the remaining time we have, let's go ahead and open up the lines for your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll hear first from Craig Shere of Calyon Securities. And Mr. Shere, your line is open, please go ahead.

Erin, we're not able to hear if Craig is speaking.

I apologize, we'll take our next question. Paul Patterson from Glenrock Associates. Please go ahead.

Good morning, guys, can you hear me?

Yes, very well. Good morning, Paul.

Good morning.

Listen, I wanted to touch base on a couple of things. First of all, the nuke. The nuke O&M, what's actually driving that? And also, in terms of -- there's some issue with respect to the North Carolina law or some people are suggesting that this getting paid -- getting in rates, the expense that's associated with looking at the building of nuke plants might require a change in law and that you guys might be trying to do something in that area? If you could just elaborate on that.

And then the buyback plan, it sounds like there are some pricing points that are associated with that? And if you could just elaborate a little bit on that, I think that would be really helpful.

Sure. First, with respect to our O&M related to our nuclear costs. We have higher NRC fees. We've also got higher costs associated with some of our outages this summer. So as a consequence of that, we saw a tick-up in those costs.

With respect to North Carolina, we filed to recover the project development costs. It's our judgment we have the ability -- or the commission has the authority and the ability to act on that request.

The broader question, Paul, with respect to construction work in progress or something similar to that, it may well take a legislative change in the state in order to achieve that. And we are prepared in the next session of the legislature, which starts in January, to pursue it.

Okay.

What was the third question, Paul?

The pricing point plan. The buy-back plan that you guys have announced?

Yes, we'll be putting in place a grid that will be effective -- effectively, January 2nd, but I don't think we'll put in the public domain what the pricing points will be on the grid.

Okay. Thanks a lot.

Thank you.

[OPERATOR INSTRUCTIONS] And we'll hear now from Scott Thomas of Lehman Brothers.

Good morning, folks. Can you hear me?

Good morning, Scott.

Just a couple of quick things. Can you tell me how much of the purchase accounting was recognized in this quarter?

David?

Yes, it's $17 million.

Just the 17 million there?

Right.

Okay. And in terms of the dedesignation of hedges, the mark to market there, how much of that was particularly in this quarter? Was that that whole amount?

Yes, that was the entire swing I gave you of 120-some-odd million. Does that sound right, Steve? 120-some?

Yes.

Okay. And then --

-- 124 --

124?

Yes.

Okay. And then lastly, just -- in terms of the outages that you made mention of, big baseload plants, were those in this quarter? And would those have impacted the Franchised Electric side?

It did indeed. The outages were at Belews Creek and Aconi, and they not only affected us from a cost standpoint, but also from available power to sell either to our customers or -- as well as to make all system sales.

Can you isolate the effect of those two outages, just so we can -- since they were unexpected, I'm assuming we can take those out going forward?

We have not broken down the outages. We do know that the sales of bulk power marketing were down $40 million. But that's a combination of price and volume.

Got it. Okay. Thanks, folks.

Thanks, Scott.

Next we'll hear from Nathan Judge with Atlantic Equities.

Good morning. I just wanted to follow up on your 2007 objective of $2 per share. Could you just remind us what price for commodities you're using for that and where you're looking for now?

Well, at the time we put that number out as being -- it was in the low 60s when we created it. It was about 61 when we created the $2 per share.

Is that consistent with --

That was the old price, excuse me, Nate.

Is that consistent with what you're looking for now, or has that changed?

Greg or Fred, you want to --

Well, I don't think we've made public what we're looking at yet for '07.

I think we'll cover that --

Cover it in our road show, Nathan.

That's fine. Okay.

Just with regard to the purchase accounting. I know there's quite a bit of refinement. But could you just kind of walk through that $0.03 incremental change, how that's going to impact and where that's going to fall into? And specifically on the interest expense, I think you mentioned there was a $10 million impact. When will we see that, going forward?

First of all the interest expense is 10 million for the entire year. It declines next year to about 8 and about 6 in the next year. For total next year, you'd expect 90 million of purchase accounting.

And the big change that occurred in the $0.03 was all in the commercial power area this year.

Okay. Thank you very much.

Thank you, Nathan.

Now we'll go to Stephen Huang of Citadel Investment Group.

Hi, good morning, guys.

Good morning, Steve.

I wanted to just double check here, I guess, on some of the CapEx items, you guys talked about two new projects, more or less. Southeast Supply and MidCon. In the pipeline side you also have nuclear development costs. Are all of these reflected already in your CapEx forecast? Or some of them are still out?

They're all reflected in the numbers we gave that said we would be spending approaching 3.5 billion next year on the Power company side and that the pipelines would be spending 1.5 billion. So it's in those numbers.

Okay.

And you guys mentioned that the cash is all going to stay over at Power. But with these new projects, Fred, are you guys okay on your, I guess, capitalization without the cash as you've got all these new projects coming on?

Yes, we think we're okay. We are starting -- we are going to have a new financing vehicle that we're going to start up next year with an MLT in our gas transmission part of the business, as well.

Okay.

And -- it's Greg -- there will be starting cash and that's something that we'll work through with Duke towards the end.

Okay. So it's not like all of it's going over to Duke? Power, I mean?

No. That's correct.

Okay. And then, when we think of -- have you guys allocated what these new project budgets will be? Lebanon, Southeast, and MidCon?

No, we're not to the final stages. We're not to the stages of definition around the project to have totally defined amounts for them yet.

Okay.

But Stephen, that's some of the things we'll speak to during the road show in December.

The road show will give us a lot more clarity on that?

Should, yes.

Okay, great. Thank you.

Thank you, Stephen.

Now we'll hear from Ashar Khan with SAC.

Good morning.

Sorry I missed -- I was moving from one call to the other. Jim, you mentioned that synfuel is back on and then I probably did not hear this properly. You said the 2007, $2, that's not going to be able to achieved, including synfuels? Could you just repeat that? If I'm right, the $2 included synfuels when you gave it a year ago? And including synfuels is it not being achieved? Or could you just take us back to your comments regarding that?

Well, this is David. Let my make a comment or two.

When we gave the $2, we didn't give a lot of detail of what made it up, and that was an aspiration and so we intentionally didn't give a lot of detail. We are in fact running the synfuel plant and if oil prices stay where they are, that will be a positive contributor next year.

And Jim did explain why we were moving away from the $2. And that has to do with we've changed our portfolio and sold part of Crescent and sold the trading floor and have created a more conservative company.

Okay.

But we are very committed to our growth rate of 4-6% per year in the Power company and 5 to 7% in the Gas company, going forward.

Okay. But David is there, there's no -- I guess there's nothing, a new number compared to the $2 that you can share with us. I guess that would be shared at the road show, you said?

That's correct.

Okay. Okay. Thank you.

Thank you, Ashar.

Moving on, we'll hear from Paul Fremont of Jefferies.

Good morning, Paul.

Good morning.

Just a follow-up to Ashar's question. If we put all of this together, the movement off of the $2 number is Crescent. The sale of the trading floor, I would assume lower commodity price expectations for oil. Is there anything else that we should be sort of sensitive to in the change in that $2 number? For instance, like additional costs of running two companies versus running one company?

I think you hit on the big things and the reality is we'll be coming out with separate road shows where we'll be doing a Spectra Energy Company and a Duke Energy Company. And we'll be doing both of those in December. And that's where you'll get the detail you're after. But your thought process sounds reasonable to me.

Thank you.

Thank you, Paul.

Next we'll hear from Vedula Murti Tribeca Global Management.

Good morning.

Good morning, Vedula.

I think my questions have pretty much been asked, but can you give us specific dates of your road show when you will be filling in more specifically the 2000 view?

Vedula, our thoughts are we do it in early December, but we haven't really firmed up the date yet, because we await the SEC approval, which we expect toward the end of this month and the first of next month.

All right. Thank you very much.

Thank you.

And next we'll hear from Craig Shere with Calyon Securities

Hi. I apologize. I've been on and off quite a bit. So if you covered this, my apologies again.

No problem. Welcome.

Thank you.

I guess, Fred, this is mostly for you. I know Jim's thinking more about industry consolidation, Fred, you've talked about value creation through an MLP and also I think there's already one Canadian income trust and the possibility of another's been floated.

I want to touch specifically on that, with the potential change in Canadian tax law. Does that have any impact on some of your potential decision makings and value creation?

And for the creation of an MLP with FERC regulated pipes, are you having to give a small bone to the shippers to make sure that you're not in the courts arguing about whether your tariffs should be cut because of taxes?

Yes, let me take the MLP question and then I will let Greg talk to you about the Canadian income trust because he's been on top of that since the announcement.

You know, yes, you have to be careful on which assets you do put into [inaudible] limited partnership. So, one, you wouldn't choose an asset that you had that regulatory vulnerability on. The other thing that you want to make sure that you do, you want to move something over that has a high tax basis in -- that you have a high tax basis so you don't have a bunch of tax leakage, as well. We do have assets that fit that profile.

Yes, I think the other point, I guess, Craig, even -- on the MLPs or the income funds, is that we plan to seed these with relatively small amounts and use them as competitive financing vehicles.

That's the real driver for us, from forming the MLP as well as the investment income trust, is basically, we were competing with those people on projects. And in order to be able to compete with them, we had to have that lower cost of capital.

Right. Well, I mean, I'm trying to understand when you say things that don't have that regulatory hurdle. Do you have natural gas pipes that are not FERC regulated?

They're FERC regulated, but if you threw us at a rate case, they would probably lose more than they would gain by getting the impact of the MLP.

I see what you're saying. Because of the competitive -- okay.

And you're right, there has been a change in the tax law on the Canadian front. The first point is that the income fund is not particularly material to us from an income perspective. So they're going to put put their results for the quarter next week, but still very small. But again, we've set that up from a competitive perspective on a -- using financing vehicles from a tax-efficient perspective.

Now, if the federal government in Canada is leveling the playing field, then we've got the benefit of Spectra itself, which obviously has great assets and an excellent balance sheet by which it can finance its growth on the same basis it would today.

I don't know how much you all are going to let me preempt your road show here, but can you give a sense for the proportion of Spectra assets that are under-earning what otherwise would be in a rate case? I mean, that could be good candidates for MLP?

I think you're right. We'll wait until the road show and we can talk about that.

Okay.

Good call.

Thanks a lot.

Thank you.

There appear to be no further questions at this time. [OPERATOR INSTRUCTIONS] And we have no further questions.

I'd like to turn the conference back over to Ms. Julie Dill for any closing or additional remarks.

Thank you, Erin. And thanks, everyone, for joining us today.

As always, the IR team here is happy to take your follow-up questions. If you would normally call John [Arnsdorff], just be aware that he is off getting his daughter married. So we'll -- the rest of the team will be happy to help you out.

So thanks again for joining us, and we'll talk to you next quarter.

Once again, that does conclude our conference today. Thank you for your participation.