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STEVE YOUNG, CFO and EVP of Duke Energy Corporation, joined Duke Power in 1980 as a Financial Assistant. After a series of promotions in 1998, Mr. Young was appointed Vice President of rates and regulatory affairs. He was named Senior Vice President and Chief Financial Officer for Duke Power in 2003. A native of Denver, Colorado, Mr. Young earned a Bachelor of Art in business administration from the University of North Carolina. He also completed the Advanced Management Program at the Wharton School of Business. Mr. Young is a member of the Edison Electric Institute Accounting Executive Advisory Committee and the Southeastern Electric Exchange Accounting and Finance Section.


(AZX611) TWST: Please tell us about yourself and your background in the industry.

Mr. Young: My background is entirely with Duke Energy. I started with Duke Energy in 1980; it’s the only job I’ve ever had. I got out of college and came right here. I’ve been working in finance and rates, and regulatory affairs, accounting positions, business unit CFOs, corporate CFOs, those types of positions for the 36 years I’ve been with the company.

TWST: Provide us with some company background, the history and the businesses.

Mr. Young: The utilities that Duke owns have been in business for over a century. I always point that out to people. We are deeply ingrained in our communities, in our states, in our neighborhoods, but let me give you a little history of some of the things that I’ve seen in my career. When I came in the 1980s, Duke and the industry were heavily focused on nuclear. The nuclear facilities were under construction. They were tremendous investments in new technologies, and the industry did a great job of getting those assets on line.

When I think about the late 1990s and the early 2000s, the industry had its first foray into restructuring, and there were attempts to deregulate portions of the generation industry. There really was no technological change associated with that time frame; these were legislative changes. Interestingly enough, for the most part the attempts to deregulate the industry at the retail level failed. The notable failure is in California in the early 2000s. The industry then moved on and kind of retrenched itself back in regulation, but some of the things that I’ve seen recently that are occurring are very interesting.

There are true technological changes that have occurred over the last five to 10 years that are changing the industry. I’ll mention a few of these. Shale gas, the ability to extract gas through fractionating techniques has really changed the industry, and that’s a new technology. It has lowered the cost of gas, not just on a periodic basis but on a long-term basis. It has allowed gas to become the fuel of choice over coal. It has helped spur environmental activism to displace coal because it hasn’t been a real cost impact of displacing coal, and we’ve seen the EPA and legislators and regulators work on carbon, and the shale gas technology has helped allow that.

The other technological change that we’ve seen recently is the lowering of cost of production of renewables, both wind and solar. I think we’ve seen a really dynamic change in the ability to produce energy in different ways over the past 10 years. That’s pretty exciting.

TWST: Explain to us the differences between the regulated and the commercial portfolio, as well as the international energy section of your business and how they work in synergy for you.

Mr. Young: We have three business segments. The regulated utilities segment is our largest segment, and that consists primarily of electric utilities that we own in the Midwest and in the Carolinas and in Florida. Those businesses provide basically fully integrated electricity services to customers, individual residences, businesses, factories. That business entails the generation of electricity and then the movement of the electricity over wires, transmission wires, distribution wires, ultimately into the home. Those businesses are typically regulated in the states that we’re in. By regulated, what we mean here is that state utilities commission set the rates that we charge customers because we are a monopoly service. We’ve been doing that for decades; we’re very experienced at that business. It does provide steady profitable earnings for us, and there’re a lot of good investments to make as our service areas are dynamic and growing, so that’s the regulated utilities business.

In our commercial portfolio, we’ve got some interesting businesses there. We have utility-scale renewables businesses. In that business we go out and we will develop, build and operate utility scale renewables assets. These are wind farms and solar farms. We will typically sell the output from these facilities to other utilities that are under a requirement to buy renewables power. We have a lot of wind farms in Texas, we have a lot of solar in the Carolinas and in California in this business segment, and that business has been growing by leaps and bounds over the past several years.

Also in our commercial portfolio we have investments in what we call midstream gas pipelines. These are traditional pipelines that move natural gas from the gas basins typically to towns and communities where it is taken by the local distribution carrier to homes and businesses. We own a piece of the Atlanta Coast pipeline and the Sabal Trail pipeline. Atlanta Coast pipeline will travel through West Virginia, Virginia and North Carolina. Sabal Trail will be in Florida. These pipelines are very good infrastructure type of assets. They’re regulated by the federal regulators, the Federal Energy Regulatory Commission. We have long-term contracts for the use of these assets, life of asset contracts, very steady rates of return and earnings streams on those assets. That’s our commercial portfolio; those are the main investments there.

In our international business, we have generation assets primarily in Latin America, and the assets are primarily hydro assets. The big investment areas are Brazil, Peru and Chile. These are good assets; they operate very well. They’re environmentally friendly obviously as well, being hydro assets. We have made the decision to exit the international business. Again, this is a good business with great employees. However, it is not consistent with our core strategy going forward.

To explain further, our strategy going forward is to invest and own and operate regulated energy infrastructure assets and businesses. Our electric utilities in the Carolinas, the Midwest and Florida are good examples of that. Also the gas pipelines are good examples of that, and even our utility-scale renewables business where we have life-of-contract sales agreements to good credit-worthy third parties is like a regulated business. The international business, the generation assets down there sell into merchant or competitive markets, the pricing is a bit volatile in those markets. It’s not regulated; it’s not really consistent with where we’re headed strategically, so we made the decision to exit the international business.

TWST: Can you tell us how those work together?

Mr. Young: Certainly. Let me talk about our commercial business, which works very well with our regulated utilities business. The commercial business consists of utility-scale renewables. These are electric-generating assets; there is solar and wind, but they connect into the grid, they provide electricity. That’s our basic function of our regulated utilities, so there’s a lot of commonality there. It’s a diversity of assets: Our regulated utilities are heavy in nuclear, coal and gas, our commercial renewables business, it is obviously in the renewables area, so there’s a good diversity of assets, and that helps complement our regulated utilities.

The pipeline investments that we have in our commercial portfolio are integral as well. They deliver gas to customers; they also deliver gas to electric combustion turbine plants. So there’s a connection between gas pipelines and electric utilities and electric-generation facilities. A lot of common knowledge and a lot of common engineering and skill sets are involved in developing and building gas and electric and renewables assets, so it works very well.

The international assets part of our business is a bit different. They’re geographically different; they are in Latin America. All of our other assets, the pipelines, the utilities, the renewables are all in the United States, so we’ve got a bit of a difference there on the international side. As I said on the international side, they’re selling into merchant as opposed to regulated markets. It’s been a great business for us, the international business, as they have good earnings, throw off a lot of cash, but as we move forward strategically we think it’s time to exit that business.

TWST: Give us an overview of your financing structure and the benefits of this.

Mr. Young: The way we handle the financing structure, each of our utilities has its own capital structure. It is its own financing node, if you will, it can issue common debt or long-term debt on its own, so each of our utilities would typically have a capital structure that is around 50% equity, 50% debt, and that’s consistent with what our regulators expect, that’s consistent with what’s incorporated into rates; that financing structure is concerns our operating companies.

At the holding company level, we will issue common equity for the enterprise as a whole and we will issue holding company debt. The holding company debt issuances are used primarily to fund and grow our commercial portfolio business, our nonregulated businesses. All of our subsidiaries and operating companies will dividend up to the parent as circumstances warrant. We will typically then take that cash, and we have a policy, a targeted range of paying out 65% to 75% of our earnings in dividends to our shareholders. We think that makes sense given what we do in our businesses. Providing a stable and secure dividend is important to us. We have solid credit ratings at the holding company level and at all of our operating company levels. We’re in the capital markets a lot as we are capital-intensive. Building power plants and transmission and distribution lines, we need access to capital, so we pay attention and keep our credit rating solid and strong.

TWST: Can you talk about your first quarter earnings?

Mr. Young: Yes, we had adjusted earnings per share of $1.13 that was a solid first quarter for us. We have reaffirmed our earnings guidance range for the year between $4.15 and $4.70 per share. The first quarter had its challenges. We had winter storms in the Carolinas that we had to deal with. We also had somewhat mild winter weather. In our business we like the weather to be cold or hot, that’s when we sell more electricity, but we had relatively mild weather and winter storms. But we have done a good job of controlling our O&M costs to help offset some of those negatives there. We feel good about our first quarter start, and we look forward to rest of the year.

TWST: Your largest customer base is in North Carolina presently, are we going to see that change? Are you planning to expand your customer base in other states you serve? If so, how do you hope to achieve that?

Mr. Young: Yes, you are right, North Carolina has over 3 million customers. We have a total of about 7.5 million customers across all of our regulated jurisdictions, and we are very active in each of our jurisdictions. Again, we have businesses in Ohio, Northern Kentucky, Indiana and in St. Pete/Orlando area of Florida in addition to the Carolinas. We have people on the ground that are actively involved in economic development, working with state and local officials, legislatures, regulators, other businesses trying to put together packages to perspective businesses, to help attract customers and people to our jurisdictions. North Carolina is our largest, but we have efforts in every jurisdiction we serve to try to have a coordinated focus on economic development. It is very important for any utility to have a thriving economic growth in its service territories. We are experienced with that. We have been doing it for decades, and it’s an important part of our base work.

TWST: Can you tell us about the Site Readiness Program?

Mr. Young: Yes, this is part of our economic development efforts. This is an important program that we’ve been running for several years now. What we attempt to do is work with consultants and with other stakeholders on specific sites to get them prepared and ready so that when a perspective customer knocks on a state’s door, we can give them a list of perspective sites for their facilities. Of course, facility needs may vary in terms of access to an airport, access to highways, access to water supply, etc. So we work with our neighboring utilities and other stakeholders to find a variety of sites to meet a variety of needs.

It’s been very effective. Since 2005, 20 site readiness properties have won industrial projects, and these are typically large projects. We had 187 sites over the same time period evaluated, and so there is a lot of work to get a site ready for this type of effort, and it will help us land new customers.

TWST: Can you give us any news on your proposed acquisition of Piedmont Natural Gas?

Mr. Young: Yes, we are very excited about the acquisition of Piedmont. That’s another step in our overall strategy. I mentioned regulated utilities, midstream pipelines and our commercial utilities-scale renewables business, but getting a local gas distribution company is also part of the regulated energy infrastructure push that we are undertaking. Piedmont serves customers primarily in the Carolinas and Nashville, Tennessee area, a great footprint. There is lots of growth there. They have terrific customer service, safety, reliability records, they are one of the premier LDC franchise. They are headquartered in Charlotte.

We know them well, we worked with them on a number of economic development projects over the decades. So we are very well-acquainted with them, and the acquisition is going well. We have one state left that needs to approve the acquisition, North Carolina Utilities Commission has that role of approval. Hearings are set for July this summer, and we have already entered into settlement agreements with virtually all of the major intervening parties that typically have an interest in these types of transactions. We feel good about the ability to get this approved and close the deal by year end of 2016.

TWST: You currently own wind and solar generation assets that total more than 2,400 megawatts in your commercial business. What are your plans in the next couple of years to expand on this?

Mr. Young: That’s right, that business is again our winds farms, solar farms, and we have been very excited about that. It’s grown over the past five to seven years tremendously as we have and put these projects together, and it will continue to be an important part of the commercial portfolios as we go forward. We’ll continue to look for projects that meet our hurdle rates that makes sense for us as we advance, and we’ll continue to operate the over 2,000 megawatts that we have online. We like the business and we do think that renewables are going to have a significant place in the overall energy chain as we move forward.

I mentioned earlier in the discussion about the technology changes in wind and solar. They’ve been quite impressive in terms of bringing down the production costs and the construction costs, and I think it is going to be an important technology to help us meet environmental requirements and carbon-reduction requirements. We will certainly continue to operate these assets and look for opportunities. We have invested quite a bit over the past few years. This is what you would call discretionary capital if you will. So we’ll keep an eye on what opportunities arise as we go forward, but it’s definitely a business that we are interested in.

TWST: How does the regulatory environment look to you right now? You mentioned that you are trying to stay ahead of the curve, but can you tell us a bit more about that?

Mr. Young: It’s very important for us to have constructive regulatory environments for our utilities. As I said, we are headed toward regulated energy infrastructure, and so the regulation is obviously an important part of that. We have good constructive relationships with our state commissions, again we are doing business in six states in the Midwest and Southeast, and we have good relations with the Federal Energy Regulatory Commission.

But basically as we look forward, there will need to be new regulatory constructs put in place as we change the investments that we make in conjunction with the changes that are going on in the industry. For example, we’ll be building more renewables assets; these are typically smaller, shorter construction-period types of assets, solar farms, wind farms. We’ll be doing a lot of investments in the grid, smart meters, smart substations, storm-hardened polls, transformers and wires, those types of investments.

These are different than the investments that governed our industry a generation ago. When I first came to work, we were building huge nuclear power plants or large coal plants. Now we are making more incremental investments along the grid and on the fringes of the generation sector. With that we’ll need some different regulatory constructs in place to help us recover those investments. We’ve got good regulatory mechanisms in the Midwest and Indiana and Ohio where we can automatically push investments through trackers and riders in a very efficient fashion on an annual basis, or sometimes even more frequently than annually, and that helps us recover our costs quicker.

In Florida, we also have some good investment recovery mechanisms in place for a new generation we are putting on the ground in that state. In the Carolinas, we utilized base rate case as our recovery mechanisms, and we are making plans over the next several years to have some rate cases to help us recover some investments we are making in the Carolinas. We are building gas turbines in the Carolinas to replace some of our coal plants that we have recently announced we will retire. We are also looking to recover renewables that we’ve been investing in in the Carolinas, particularly solar renewables in our regulated business in the Carolinas. We’ll use traditional rate case mechanisms to recover those costs.

TWST: Is there anything else that we didn’t touch on that you think it’s important to mention or you would like the investment community to know?

Mr. Young: I always conclude with the dividend. Our investors look to us to provide a steady growing dividend, and we have been paying a dividend for 90 consecutive years. We hope to continue to do that, and we certainly we believe that we will. Right now our dividend yield is about 4.3% over 4%. Our dividend growth rate in 2015 was increased to about 4% annually. The dividend is very critical to our investors and very critical to us. We think we have a good strategy going forward in regulated energy infrastructure, and there is a lot of good growth opportunities in renewables, in the grid, in replacing retired coal units, and in gas platform in pipelines and in local gas distribution facilities that are so necessary for our customers. We think we’ll have good investments to make that we can convert into earnings and dividends ultimately.