Duke Energy Ohio Expects Flat Migration in 2011

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February 18, 2011  

Duke Energy Ohio reported during an earnings call that electric migration levels in its territory have stabilized, and that it does not anticipate much incremental migration in 2011.

As of December 31, 2010, Duke Energy Ohio was supplying electric commodity to 35% of load, resulting in a gross switching rate of 65%.  This compares to a gross switching rate of 64% as of the end of September 2010.

Duke Energy Retail Sales was serving 39% of total load in the Duke Energy Ohio territory as of December 31, 2010, and 60% of the load that has migrated, essentially flat versus September 30, 2010.

Combining load served by Duke Energy Ohio and Duke Energy Retail Sales, the Duke affiliates are serving 74% of retail load in the Duke Energy Ohio territory, again flat versus September 30, 2010.  Load migrated to a non-affiliated competitive supplier as of December 31, 2010 was only 26%.

Duke does not expect any significant increase in migration levels in 2011.  Duke Energy CFO Lynn Good told investors that those commercial and industrial customers for whom it is economic to switch have already done so, and the load remaining with the utility is largely residential.  Good added that residential customers have proven to be more "sticky" than commercial and industrial customers, though there are five suppliers making competitive offers to residential customers, including Duke Energy Retail Sales.  Good noted that the Duke Energy Ohio has not seen significant governmental aggregation either.

For the year 2010, customer migration at Duke Energy Ohio negatively impacted earnings year-over-year by about $80 million.  The impact in the fourth quarter alone was $37 million.  Duke expects a 2011 negative impact from migration of $66-$80 million.

Duke said that it expects to soon file a request at PUCO for approval to transfer the Duke Energy Ohio coal generating assets to an affiliate, consistent with its plan under the proposed Market Rate Offer.

Duke Energy CEO James Rogers said that while the company's preference is to have Duke Energy Ohio's assets dedicated to the Ohio load and earning a "fair return" on that investment, such as a 10%-11% return on equity, PUCO has been clear that it will not permit such returns on generation dedicated to customers.  That is why Duke Energy Ohio filed the Market Rate Offer and intends to transfer the utility generating assets to an affiliate.

Removing the generation from the utility provides Duke with more flexibility, particularly as Rogers said his bias, at this time under current conditions, is to not be a merchant player in PJM, and to exit that business once the assets are removed from the utility.  However, Rogers said that any decision on the merchant generation business would not come until Duke has clear facts for the future period, including the regulatory framework for its utility, and market conditions in PJM.

Duke's Commercial Power unit reported adjusted EBIT of $398 million for the year 2010, versus $500 million in 2009, mainly due to the negative impacts from customer migration.

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