Fueling Up within the Game Changer Sasha Weintraub Duke Energy
The Game Changer is Happening Definition of game changer Completely changing the way something is done, thought about, or made Time Magazine The New Oil and Gas Boom (October 29, 2012) The U.S. will soon be a net exporter of energy. That could change everything. 2
Topics Duke Energy overview Construction projects Coal and natural gas projects Natural gas market changes Impacts to Duke Energy 3
DUKE ENERGY MERGER WITH PROGRESS ENERGY CREATING SCALE Diverse Regulated Service Territories Merger Benefits Creates largest U.S. utility 7 million customers, supported by substantial, diversified regulated earnings and cash flows Provides diversified generation and fuel sourcing in six regulated jurisdictions Well positioned for pending environmental regulations Supports dividends with principally regulated earnings base (~90% regulated) Delivers significant benefits to our customers through fuel and joint dispatch savings Creates meaningful non-fuel merger efficiencies over time Bolstered by a strong balance sheet and credit profile New Duke Energy Facts Market Capitalization (as of 9/25/2012) ~ $45B Total Assets (pro forma as of 6/30/2012) Over $100B U.S. Generation Capacity ~ 58GW 1 Regulated Electric Customers 7.1 million (1) Excludes approximately 4.3 GW of Duke Energy International assets 4
Stand-Alone Utility Load and Resources CTs $40- $60/MWh Hydro Pump Storage DEC Incremental $50 PEC Incremental $40 CTs $40 - $60/MWh Coal $35 - $50/MWh Coal $30 - $50/MWh CC $20 - $30/MWh Nuclear $5 - $7/MWh DEC System Load 16,000 MW PEC System Load 12,000 MW CCs $20 - $30/MWh Nuclear $5 - $7/MWh DEC Resource Stack PEC Resource Stack 5
Joint Dispatch of Resources DEC Incremental $50 CTs $40- $60/MWh $40 Hydro Pump Purchase Storage Coal $35 - $50/MWh CC $20 - $30/MWh Nuclear $5 - $7/MWh DEC System Load 16,000 MW Customer Savings $10 PEC Incremental $40 Sale PEC System Load 12,000 MW CTs $40 - $60/MWh Coal $30 - $50/MWh CCs $20 - $30/MWh Nuclear $5 - $7/MWh DEC Resource Stack PEC Resource Stack 6
Topics Duke Energy overview Construction projects Coal and natural gas projects Natural gas market changes Impacts to Duke Energy 7
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Status Of Major Construction Projects 1 (As of 6/30/2012) EDWARDSPORT CLIFFSIDE DAN RIVER CC LEE CC $25 (Wayne County) SUTTON CC Spent as of 6/30/2012 Estimated expenditures to complete project Jurisdiction $50 $3,275 $2,150 $135 $125 $575 $625 $250 $350 Duke Duke Duke Progress Progress Indiana Carolinas Carolinas Carolinas Carolinas Technology 618 MW IGCC 825 MW 620 MW 920 MW 625 MW Advanced Combined-Cycle Combined-Cycle Combined-Cycle Clean Coal Gas-Fired Gas-Fired Gas-Fired In-Service Target 1Q 2013 3Q 2012 4Q 2012 1Q 2013 4Q 2013 % Complete 99% Complete 98% Complete 90% Complete 85% Complete 35% Complete 1 $ in millions, project costs include direct capital and AFUDC 12
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Status Of Major Construction Projects 1 (As of 6/30/2012) EDWARDSPORT CLIFFSIDE DAN RIVER CC LEE CC $25 (Wayne County) SUTTON CC Spent as of 6/30/2012 Estimated expenditures to complete project Jurisdiction $50 $3,275 $2,150 $135 $125 $575 $625 $250 $350 Duke Duke Duke Progress Progress Indiana Carolinas Carolinas Carolinas Carolinas Technology 618 MW IGCC 825 MW 620 MW 920 MW 625 MW Advanced Combined-Cycle Combined-Cycle Combined-Cycle Clean Coal Gas-Fired Gas-Fired Gas-Fired In-Service Target 1Q 2013 3Q 2012 4Q 2012 1Q 2013 4Q 2013 % Complete 99% Complete 98% Complete 90% Complete 85% Complete 35% Complete 1 $ in millions, project costs include direct capital and AFUDC 17
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Status Of Major Construction Projects 1 (As of 6/30/2012) EDWARDSPORT CLIFFSIDE DAN RIVER CC LEE CC $25 (Wayne County) SUTTON CC Spent as of 6/30/2012 Estimated expenditures to complete project Jurisdiction $50 $3,275 $2,150 $135 $125 $575 $625 $250 $350 Duke Duke Duke Progress Progress Indiana Carolinas Carolinas Carolinas Carolinas Technology 618 MW IGCC 825 MW 620 MW 920 MW 625 MW Advanced Combined-Cycle Combined-Cycle Combined-Cycle Clean Coal Gas-Fired Gas-Fired Gas-Fired In-Service Target 1Q 2013 3Q 2012 4Q 2012 1Q 2013 4Q 2013 % Complete 99% Complete 98% Complete 90% Complete 85% Complete 35% Complete 1 $ in millions, project costs include direct capital and AFUDC 21
DEC, PEC & PEF Natural Gas Demand (excluding Midwest) BCF 550 500 450 400 350 300 250 200 150 100 50 0 PEC PEC Richmond Wayne CTs CT's (1 4) (1 4) PEC Richmond CT & CC PEF Hines 2 2X1 CC PEF Hines 3 2X1 CC PEF Hines 4 2X1 CC PEF Bartow Repower 4X1 CC PEC Wayne CT (#5) 201 PEF Suwannee 100%Gas PEC Richmond 2X1 CC 200 7 10 58 69 DEC Buck 2X1 CC 205 49 99 DEC Dan River 2X1 CC PEC Lee 3X1 CC 201 69 PEF Anclote 100%Gas PEC Sutton 2X1 CC 214 69 138 157 440 PEC DEC PEF Significant growth in natural gas demand due to CC additions, tolling arrangement and gas conversions. 22
Topics Duke Energy overview Construction projects Coal and natural gas projects Natural gas market changes Impacts to Duke Energy 23
2006 Future of U.S. Natural Gas Supply Shifting Overseas 28 26 Alaskan Production. Domestic Supply on cubic feet) Annual U.S (Trillio 24 22 20 LNG Imports Net Pipeline Imports 18 Base Domestic Production Unconventional Production 16 2005 2010 2020 2030 24
Natural Gas from Shale Basins 25
U.S. Natural Gas Production Shale Gas Becomes the Future of U.S. Natural Gas Supply 28 26. Domestic Supply on cubic feet) Annual U.S (Trillio 24 22 20 Net Pipeline Imports Shale Gas 18 16 2005 2010 2015 2020 2025 2030 26
Natural Gas Market Developments Forecasted Supply Growth by Basin Marcellus (US) Utica Ohio (US) Shale was ~1% of US production in 2002. Fayetteville (US) Woodfords d (US) Eagle Ford (US) Haynesville (US) Barnett (US) Horn River (Canada) Montney (Canada) US Shale growth of ~17 Bcf/d from 2002 to 2011. Shale was ~25% of US production in 2011. Shift to higher margin liquids basins such as Eagle Ford, Utica, Marcellus given lower gas prices. Shale Gas production has grown rapidly and has changed the natural gas supply picture. Source: Wood Mackenzie (El Paso 2012 Atlanta LDC Forum Presentation) 27
Gas Supply Trends Production Efficiency and Gas Rig Count 1,600 1,400 July 2008: Total Rig Count (1,394) NYMEX Henry Hub ~$13/MMBtu Feb 2012: Gross Production 72.3 Bcf/day 75 70 1,200 Natural Gas Rigwe ell Count 1,000 800 600 400 200 Hurricane Ike (56 Bcf/day) Feb. 2012: Total Gas Rig Count (595) 65 60 55 50 Gro oss Production (Bc cf/day) 0 Hurricanes Katrina, Rita (49 Bcf/day) 45 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Horizontal Rigs Directional Rigs Vertical Rigs Lower 48 States Production Total production has increased while the rigwell count has decreased. The percentage of horizontal rigs of total grew from ~10% in Jan 2005 to ~68% in February 2012 Source: Smith International, EIA 914 Production Report Note: Rig count data includes only gas rigs actively drilling. 28
Change in Long-Term Natural Gas Prices Natural Gas Future Prices Over Time $14 $12 July 2008 $10 ($/mmbtu) $8 January 2009 Natural Gas Price $6 $4 January 2010 January 2011 January 2012 September 2012 $2 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 July 2008 January 2009 January 2010 January 2011 January 2012 September 2012 29
Gas Pipeline Infrastructure Developments in the Northern Market The Ultimate Game Changer Emerging Marcellus Production Growth Marcellus growth is projected to result in non-traditional pipeline flows. Source: Bentek Energy 30
Trends in Natural Gas Forward Basis Relationships to NYMEX 2013 Average Est. Basis Dec. 31, 2007 5/30/2012 Difference FGT Zone 3 $0.244 $0.100 ($0.144) Transco Zone 4 $0.145 $0.015 ($0.130) Transco Zone 6NNY $1.065 $0.319 ($0.746) Transco Zone 5 $0.697 $0.283 ($0.413) Zone 5 Zone 6 210 195 Washington, DC VA NYC Charlotte Zone 4 Atlanta Zone 1 Zone 2 Houston Zone 3 85 FGT Zone 3 Due to supply and infrastructure developments basis prices have declined. 31
Estimated Impacts of Fuel Price Changes to Dispatch Costs $120 Coal Natural Gas Generation Cos sts ($/MWH) $100 $80 $60 $40 Significant Real-Time Coal Displacement by Natural Gas $20 $- Jan 2009 Sept 2012 Coal Units $35 $35 Combined Cycle $47 $22 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 32
Topics Duke Energy overview Construction projects Coal and natural gas projects Natural gas market changes Impacts to Duke Energy 33
Duke Energy Carolinas Retire 18 coal units at 5 sites Build 3 power plants (~1 1,690 MW) (~2,050 MW) Progress Energy Carolinas Retire 12 coal units at 5 sites (~1,675 MW) Build 3 natural-gas combined-cycle plants (~2,150 MW) Duke Energy Midwest Retire 11 coal units at 4 sites (~ 1,260 MW) Build 1 power plant and purchase 1 power plant (~1,005 MW) Progress Energy Florida Retire 19 units at 8 sites (~2,710 MW) Build or convert 3 natural-gas power plants (~2,150 MW) 34
Progress Energy Carolinas Fleet in Transition Energy Generated by Fuel Type 2005 2010 2015 4% 9% 49% 46% 51% 41% 24% 26% 50% Coal Natural Gas Nuclear Coal energy Coal energy Coal energy from scrubbed units from scrubbed units from scrubbed units 0% 72% 100% SO 2 213,000 SO 2 82,000 SO 2 8,000 NO x 54,000 NO x 28,000 NO x 7,000 CO 2 34,000,000 CO 2 35,500,000 CO 2 20,500,000 35
Duke Energy Regulated Fleet Generation by Fuel Type 3% 5% 2005 2010 2015 1% 3% 1% 0% 1% 11% 28% 36% 55% 35% 50% 35% 36% Coal Natural Gas Oil Hd Hydro Nuclear SO 1,040,000 SO 275,000 2, 2 SO 2 91,000 NO x 225,000 NO x 98,000 NO x 46,000 CO 2 150,000,000 CO 2 140,000,000 CO 2 105,500,000 36
DE Indiana Coal Position (as of 1/20/2012) Historical Burn Projected Burn Historical and Projected Coal Burns 18 Tons Coal Bu urn in million 16 14 12 10 8 16.08 15.46 15.53 15.89 16.45 16.60 16.13 16.99 16.36 13.55 14.44 12.92 40% YoY Decline 12.82 12.76 9.22 7.79 6 DE Indiana coal burn peaked at 16,987,004 tons in 2007 Projected to fall from 12,923,348 tons in 2011 to 7,793,000 tons in 2012 37
Physical Natural Gas Versus Physical Coal Natural Gas Standard Product Standard Contracts Indexed Pricing Liquid Market Transportation contracts are fixed costs and are excluded in dispatch costs Secondary markets for pipeline capacity Coal Few Standard Products Deal Specific Contracts Fixed Price Contracts Illiquid Market Transportation contracts are variable costs and are included in dispatch costs 38
DE Indiana Coal Position (as of 1/20/2012) Tons Coal Bu urn in million 18 16 14 12 10 8 6 16.08 15.46 15.53 Historical and Projected Coal Burns 15.89 16.45 16.60 16.13 16.99 16.36 13.55 14.44 Historical Burn Projected Burn 40% YoY Decline 12.92 12.82 12.76 9.22 7.79 DE Indiana coal burn peaked at 16,987,004 tons in 2007 Projected to fall from 12,923,348 tons in 2011 to 7,793,000 tons in 2012 39
How Can We Operate Within This Game Changer How do changing g fuel markets change procurement activities Coal volumes are down and future coal burn projections volatile How should we buy coal? More spot purchases? Call options or put options? Volume options in contracts? Options for different regions? How should transportation contracts be structured? Fixed? Variable? How should contracts be priced? Fixed? Index? How can escalators be hedged? Do minimum volumes and liquidated damages make the wedge bigger? 40
The Game Changer is Happening IHS CERA (September 5, 2012) Unconventional gas is changing gthe energy world. This energy revolution is just beginning, with the full implications still difficult to discern. 41
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