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Progress Energy Inc. (NYSE:PGN)

Q4 2008 Earnings Call

February 12, 2009 10:00 am ET

Executives

Robert F. Drennan Jr. – Vice President of Investor Relations

William D. Johnson – Chairman and Chief Executive Officer

Mark F. Mulhern – Chief Financial Officer

Analysts

Jonathan Arnold - Merrill Lynch

Daniel Eggers - Credit Suisse

Steve Fleishman - Catapult Capital Management

Paul Patterson - Glenrock Associates

[Risa Heteki] – Decade Capital

Gordon Howald - Calyon Securities

[Andrew Levi – Incremental Capital]

Marc De Croisset - Macquarie Research Equities

Gary Lenhoff - Ironworks Capital

Michael Lapides - Goldman Sachs

Travis Miller - Morningstar Equity

Greg Gordon - Citigroup

[Raymond Long] – Goldman Sachs

Operator

Good morning and welcome to Progress Energy’s 2008 fourth quarter and year-end earnings conference call. (Operator Instructions) For opening remarks and introductions I now turn the conference call over to Bob Drennan of Progress Energy. Please go ahead sir.

Robert F. Drennan Jr.

Yes and good morning and welcome to everyone. Joining me this morning are Bill Johnson, Chairman and Chief Executive Officer; Mark Mulhern, Chief Financial Officer and other members of our management team.

This call will be archived on our website for the next two weeks. We are currently being webcast from our Investor Relations page at Progress-Energy.com. We are also offering an audio replay of this call in MP3 format which is also available from our website. Also I would direct your attention to our website where we have included a set of slides to accompany our speakers prepared remarks this morning. Those slides can be found at Progress-Energy.com/webcast.

Today we will be making forward-looking statements during this call as well as reviewing historical information. There are numerous factors that may cause future actual results to differ materially from these statements. We outlined these in our earnings release, Form 10-K, 10-Q and other SEC filings as well as discussions of our risk factors in Form 10-K or 10-Q.

This morning, following opening comments from Bill and Mark, we’ll then open the phone lines and address your questions. Now I’ll turn the call over to Bill Johnson.

William D. Johnson

Thanks Bob and good morning to everyone. Thanks for joining us on our fourth quarter call. We certainly appreciate your interest in Progress Energy. As you all know from our release this morning, in 2008 we once again met our earnings goal. We did what we said we’d do in a business environment that grew much worse as the year went on. And we also laid some important groundwork for 2009 and beyond.

These results didn’t just happen by chance. We achieved these results by being aggressive with managing the business; controlling what we can control; and making timely adjustments. That management discipline is what our customers and investors expect and frankly it’s what we expect of ourselves, especially in economic times like these. And these are difficult economic times. They’re difficult for customers, for companies, for regulators and investors.

We’re working hard to meet the needs of all these constituency groups. I’m really proud of the collaboration and responsiveness throughout the management team and the workforce here that helped produce these results.

Turn to Slide 4 of our slide deck. It shows the three main topics I’ll cover today. In addition to my comments on earnings, I’ll discuss a letter that we filed earlier today regarding our rates in Florida and also give you an update on the Levy nuclear project.

First a review of ongoing earnings if you turn to Slide 5 in fourth quarter of 2008 we achieved ongoing earnings of $0.47 a share compared to $0.40 a share in the fourth quarter of 2007, a year-over-year increase of $0.07. For full year 2008 we achieved ongoing earnings of $2.98 a share. On a weather adjusted basis that equates roughly to $3.05 which was the mid-point of our original guidance last year. The full year increase 2007 to 2008 $0.26 a share.

Slide 6 lists some of the ways we overcame the [stopped] retail growth in Houston to deliver on these 2008 financial goals. And Mark will go over the details of these in a moment, but there are several noteworthy factors underlying the 2008 number that I’d like to mention. We partially offset retail sales through early action to secure new and amended wholesale contracts in Florida. And during the year we stepped up our efforts to systematically squeeze O and M costs out of our operation while maintaining operational excellence.

Also we had constructive regulatory outcomes in our three jurisdictions. In North Carolina we received approval to end our clean smokestack amortization and place those expenditures into rate base. In South Carolina we were able to eliminate the accelerated depreciation of the Harris Nuclear Plant. And in Florida the Public Service Commission approved our nuclear cost recovery filing.

These and other proactive efforts in 2008 have positioned us well for 2009. And as we announced last month, our ongoing earnings guidance for this year is $2.95 to $3.15 per share. Mid-point represents essentially flat year-over-year growth when you account for weather. And we think that’s a reasonable and realistic outlook for 2009 given the challenging economy.

I will remind you on Slide 7 we’ve delivered on our EPS commitments each of the last three years and we fully intend to achieve our 2009 target as well. We expect to return to a long term annual growth rate of 4 to 5% in 2010. We’ll discuss the underlying details and assumptions at our upcoming Analyst Meeting in New York City on February the 27th.

I mentioned a moment ago O and M cost management as one of the keys to our success last year. On Slide 8, which is also included in your [inaudible], this slide compares O and M costs in 2007 and 2008. As you can see on both an adjusted and un-adjusted basis we were able to reduce costs year-over-year. Making these costs visible in this way is part of the effort we began last year to provide greater transparency on O and M cost [inaudible].

Before Mark says more about the detailed financials around our earnings, I want to speak to two important issues of Progress Energy Florida. First, rates in Florida and then the nuclear project, Levy nuclear project. Turn to Slide 9 and we’ll talk for a minute about the Florida rate filing. As you know the Florida legislature and governor have established a comprehensive set of policies for that state. These include reducing greenhouse gas emissions; diversifying fuel supplies; increasing renewable energy sources; and encouraging nuclear plant expansion; and also making the transmission and distribution systems more reliable and less susceptible to storm damage.

We’re committed to delivering reliable efficient service to our customers while also meeting this increasing range of energy policy requirements. We’ve invested more than $2 billion in Florida over just the last two years in working to fulfill these policies, and our price has to reflect the impact of those investments. So if you’ll turn to Slide 10. Earlier this morning we filed a letter with the Florida Public Service Commission proposing immediate price relief for our customers this year and initiating a proceeding to increase base rates in January, 2010.

As you might know we’re currently operating under a base rate settlement agreement that expires at the end of this year and we needed to file the test year letter now in order to have new rates in effect by the beginning of 2010. In the letter we also raised the possibility that we might seek a limited and/or interim rate base increase in 2009, which would be driven primarily by the Bartow Plant re-powering project which is scheduled for completion in June.

As for the immediate price relief, you know we’re quite aware that these are tough economic times for many of our Florida customers. We want to do all that we can to help them through this period while also meeting our policy objectives and the regulatory requirements, so we’re proposing to decrease 2009 customer bills by about 11% starting with the April billing cycle. This amounts to slightly more than $15 per month reduction for 1,000 kwh residential bill, similar savings for commercial and industrial customers.

This 2009 price change reflects our revised fuel forecast which is about $200 million and deferral of a portion of this year’s nuclear pre-construction costs per the Levy plant. So if our proposal to reduce rates this year is approved it will give us more time to work legislators to find alternative ways to encourage nuclear plant development in Florida, while minimizing the impact to customers to the extent possible.

As for the base rate proceeding we’ll be seeking additional annual revenues of about $475 to $550 million. That will be an increase of about 11% or $15 a month on 1,000 kwh residential bill. This should be the first significant base rate increase of Progress Energy Florida in decades. We’ve kept our base rate flat there for almost a quarter of a century. In fact our residential base rates have increased by only 1% since 1984 while our consumer price index has increased by more than 100%.

And even in today’s economic climate it’s imperative that we invest in our system to insure the necessary infrastructure improvements to achieve these and other energy policy requirements. On Slide 11 you can see the key drivers of the 2010 base rate request; steam generator replacement at Crystal River Nuclear; Bartow re-powering and the additional investments in transmission.

And on Slide 12 you’ll see a tentative schedule for the base rate proceeding. It starts with the test year letter we filed today. File the case itself on March the 20th. We expect the Public Service Commission hearing to be in September with the final order early December and new rates effective the first of January, 2010. So I know this test year letter that we filed this morning is a lot of rate information to digest in a short period of time. When we get to the Q&A section we’ll be glad to take your questions on this or after the call and we’ll also be ready to address it in more detail on our February 27th meeting in New York.

So now a few words about the Levy Nuclear Project if you would turn to Slide 13. We continue to make steady progress on our nuclear project in Levy County. As a reminder this is a two unit, 2,200 megawatt plant using Westinghouse AP1000 technology. In late December we signed the engineering procurement and construction contract with Westinghouse and Stone and Webster. The EPC contract price is $7.65 billion with more than half of that fixed or firm with agreed upon escalation factors. The contracts include various performance incentives, penalties, warranties, liquidated damage provisions and inherent guarantees.

The total estimated cost for the two unit plant is about $14 billion which includes financing costs, land and forecasted inflation. Associated transmission for the project will be about $3 billion. We’ve continued to receive strong political and regulatory support in Florida for this nuclear project. It’s rightly seen as an important investment in the state’s energy future, a major step to implement the policy directions set the by the governor and the legislature to reduce greenhouse gases and the reliance on fossil fuel.

Slide 14 shows the regulatory timeline for the Levy project. It shows the good progress we’re making in approvals. As you know we had a unanimous favorable ruling last year from the [PSU] regarding a certificate of need and cost recovery. Last month the staff of the Florida Department of Environmental Protection recommended our site certification application be approved. We expect the final site approvals by the governor and his cabinet later this year.

We submitted our combined operating license application to the NRC last summer. It was docketed in October and this meets the milestone for the production tax credits in the 2005 Federal Energy Bill. We’ll also talk more about the Levy project including joint ownership at our Analyst Meeting at the end of this month.

So now I’ll turn it over to Mark for his comments.

Mark F. Mulhern

Thank you Bill and good morning. I’ll cover a few financial highlights and then we will get to your questions. Let me start with Slide 16 which shows the component of earnings per share by each utility. For the fourth quarter Progress Energy Carolinas earnings per share were $0.06 higher than 2007 and Progress Energy Florida’s earnings per share was $0.02 higher than in 2007.

For the full year Progress Energy Florida contributed a $0.24 increase and Progress Energy Carolinas a $0.09 increase that were partially offset by higher corporate costs at $0.07. The significant earnings growth of Progress Energy Florida is what you would expect to see from a utility with $2.7 billion in capital expenditures over the last two years, the bulk of which was spent on an environmental upgrade and re-powering the Bartow plant from oil-fired to natural gas.

AFUDC equity was $0.21 per share higher in 2008 versus 2007. On a consolidated basis, ongoing earnings per share were up just under 10% over 2007, outstanding performance in a challenging economy. Two-thousand-eight was a very challenging year for all investors but Progress Energy’s total shareholder return of negative 12.9% was the fourth best among the 27 utilities we benchmark against.

On Slide 17 I’ve simply broken out selected line items from the income statement and balance sheet of our financial statements that follow Page 9 of our earnings release package. These highlights just amplify Bill’s earlier comments and specifically show how we were successful in 2008. The first item total revenues were essentially flat in 2008 versus 2007 but new wholesale revenues primarily in Florida helped offset retail weakness.

Proceeding down the income statement you can see the strong cost management via lower O and M costs in 2008. The constructive regulatory outcomes that Bill referred to earlier resulted in approximately $66 million of less depreciation and amortization in 2008 versus 2007. And finally, we had a $71 million increase in AFDUC equity year-over-year primarily reflecting again the environmental construction programs in Florida.

A few highlights from the balance sheet show that we increased long term debt in 2008 but invested those funds in the utility plant and construction work in progress. This is the model for a growing regulated electric utility. As you know, we improved our capital structure via our equity issuance in January of 2009 and are comfortable with our current financial profile. Our $525 million equity issuance lowered leverage by 1.5 points to about 55.6% on a pro forma basis for the year ended 12/31/2008.

On Slide 18 we have shown the changes in kilowatt hour sales for the quarter and full year of 2008. Obviously the fourth quarter’s numbers in commercial and industrial in particular were significantly worse than the full year decline due to the deepening recession. We know this has been a topic of interest on other companies’ calls and so we’ve been actively watching these issues.

During the fourth quarter we saw some of our industrial customers reduce production in order to decrease inventory, generate cash and lower expenses. We hope and believe this is temporary in nature and we have spoken with many of our key customers in the last two weeks for updates on their expectations for 2009. We have seen a dramatic decline in sales since December 15 and believe first quarter will be an important indicator of how long and deep this decline will be.

We know that 2009 will be a challenging year for our industrial customers; however we don’t see any major permanent plant closings and thus our industrial sales should trend with the economy and hopefully see some recovery in the second half of 2009 and into 2010.

Slide 19 summarizes the customer growth and low usage data we have provided on the last few earnings calls. Progress Energy Carolinas customer growth numbers have been very resilient and we actually added 24,000 net new customers in 2008. At Progress Energy Florida the fourth quarter was the second consecutive quarter of negative customer growth, a trend we expect will continue into 2009 though we do expect some of our success in wholesale to offset some of the weakness in retail in Florida.

Slide 20 is our capital expenditure status report which shows the progress made in 2008 on major projects and the cumulative capital spent to date on those projects. As you can see we have solid regulatory recovery mechanisms and a clear path to earnings growth from these projects.

And on Slide 21 we have provided a high level picture of the major drivers behind our 2009 EPS guidance range. As Bill has outlined, we filed our test year letter for new base rates in 2010 at Progress Energy Florida and have indicated that we will likely request interim and/or limited rate relief for 2009. Based on the early stage of these regulatory proceedings I cannot be too specific on all the components of our 2009 guidance. But let’s be clear. Regardless of the outcome of our request for interim rate relief in 2009, we have appropriately handicapped our prospects and considered that in establishing our 2009 earnings guidance of $2.95 to $3.15 per share.

Our solid track record of growing our earnings and meeting guidance over the last three years should give you confidence that our plan is well thought out and we have the necessary ingredients to continue that trend in 2009. The key drivers on Slide 21 should come as no surprise. We expect positive contributions from return to normal weather. We had about $0.07 of negative weather in 2008. Higher AFUDC from the increased capital expenditures; the open it access transmission tariff should provide additional revenues in 2009 versus 2008; and then a continuation of our success in new and wholesale contract extensions in Florida.

The main negatives in our forecast which you’re familiar with; the dilution from the share issuance that we completed in early January, higher interest expense, and higher pension costs. So that concludes my remarks and we look forward to seeing many of you in New York on February 27th and appreciate your interest in the company.

Now I will turn it over back to Bill for a summary and your questions.

William D. Johnson

Thanks Mark and before we take your questions I want to remind you of the value of the proposition we offer is on Slide 22 of the slide deck. We’re focused on the regulated electric utility business which we know well and which we do well. We have a history of successful execution and constructive regulatory environments. We have solid growth prospects. We have an attractive dividend yield and a very long track record of dividend growth. To us this all adds up to a compelling risk adjusted total return. So now we’d be glad to entertain your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Jonathan Arnold - Merrill Lynch.

Jonathan Arnold - Merrill Lynch

Just a quick question. I must apologize if I missed this but could you be a little more specific about what you’ve assumed in your guidance for sales growth year-over-year in the two territories?

William D. Johnson

I’ll ask Mark Mulhern to respond to that.

Mark F. Mulhern

Good morning Jonathan. You know in Florida we’ve got about a negative 1.5% down for the full year 2009 and Carolinas is just slightly positive, less than 1% positive. So net net we’re probably just slightly negative on the total company basis but expect again some contribution on the wholesale side from what we’ve done in the wholesale contract area in Florida. And the Carolinas have been relatively resilient here. We did have the new customer additions in 2008, the 24,000. I think we have a number like 14,000 new customers assumed in our ’09 numbers in Carolinas.

Jonathan Arnold - Merrill Lynch

Those numbers are weather adjusted. Is that correct?

Mark F. Mulhern

Yes they are.

Jonathan Arnold - Merrill Lynch

And as you look at the seasonal profile your comments on kind of a later in the year recovery, should we assume that you have low enough numbers in that in the first couple of quarters and then it accrues through the second half of the year?

Mark F. Mulhern

I think that’s fair. I think a lot of the large customers, especially industrial customers, are dealing with inventories so they’re trying to work the backlog and have curtailed production. And we obviously saw some holiday curtailments where people got longer suspended shutdowns than we have had traditionally. So I would expect the second half of the year would be better than the first.

Jonathan Arnold - Merrill Lynch

On this filing you’ve made today to the fuel filing and then the proposed deferral of part of the nuclear costs, how – I’m guessing that would be on a – you’d expect that to get addressed on a faster timeframe than the actual rate case itself. And is this effectively two filings? You have the fuel piece and then this other piece or is it all one thing? Could you just talk about the timeline for that regulatory angle.

Mark F. Mulhern

Yes. You know the fuel piece we have that for kind of [inaudible] treatment because we want to flow through the reductions in the April bills for customers. So in other words we would hope to get some response back on the request to allow us to flow through the savings to the customers starting in April and then if we are at the 2010 timeline is what Bill outlined.

In other words, the filing of the MFR’s that we need to do for our ’08 proceedings for 2010 would happen on that normal schedule. If we do decide to pursue interim or limited rate relief we would look for some expedited treatment. As Bill mentioned in the Bartow plant we think we’ll be in service here in June and so we may end up going in for interim relief on that issue as well. We look for expedited treatment to get that done by the middle of the year.

Operator

Your next question comes from Daniel Eggers - Credit Suisse.

Daniel Eggers - Credit Suisse

Yes, on the rate adjustment charge what is the underlying natural gas assumption you guys are using in your Florida rates with the reduction you just filed for today?

Robert F. Drennan Jr.

Well, let me characterize it this way. We have obviously hedged a fair amount of gas for 2009. We’ve probably hedged that at higher prices than are currently out there. I think to support the numbers you’ve seen we were using gas in the $5 range.

Daniel Eggers - Credit Suisse

You are embedding a $5 gas on your un-hedged piece? Is that the right way of thinking about that?

Robert F. Drennan Jr.

Yes, you should think about $5 on the un-hedge piece and the hedged numbers we haven’t disclosed and probably won’t disclose them now. I mean it’s a mix of all kinds of different points in time but yes that’s how you should think about it in terms of the $207 million fuel reduction.

Daniel Eggers - Credit Suisse

And remind me on the 780 per megawatt hour per thousand kilowatt hours and the nuclear recovery charge, what period of time or how much capital is that relief related to?

Robert F. Drennan Jr.

Yes, it’s got more than meets the eye on it. It is $385 million that consists of expenditures we’ve made on Levy in 2006, ’07, ’08 and the projected number of what we’re going to spend in ’09. That’s a combination of all those things in the $385. So as you know we started to recover those dollars starting January 1 in customer bills. And so that’s the components of how that was supposed to work and we were supposed to recover those in 2009.

Daniel Eggers - Credit Suisse

That was recovery of and not a return on capital. Is that correct?

Robert F. Drennan Jr.

That is correct.

Daniel Eggers - Credit Suisse

And so the assumption now would be you would like to put that in rate base. Would that be part of the filing you guys are going – your rate case you’re going to put that in rate base versus recovery up?

Mark F. Mulhern

We’ve agreed to effectively defer recovery on $200 million and we’re hoping for a couple things to happen. We know there will be some discussion about securitization on the floor of the legislature this year. If we were successful in that effort, we could potentially securitize some of the pre-construction costs but to your point we are just recovering those dollars, dollar for dollar. We’re not getting a return on those dollars. And that would be a mechanism that could be conducive to that and allow us to spread some of the rate impact to customers over a longer period of time. So that’s one angle.

If the securitization effort is not successful we would look to recover those costs at some future time and we just haven’t determined that yet.

Daniel Eggers - Credit Suisse

And then can you talk a little bit about, you know, I guess there’s been a bit of some uproar on this [UFSU] in Florida for the nuclear plant or some people making some noise. I just kind of outlined your thoughts and kind of share with us where you guys are as far as annual rate increases are concerned during the construction cycle for Levy.

William D. Johnson

This is Bill. The legislature and the governor a couple of years ago looked at this question in depth and what’s the best thing to do in Florida. And the clear answer they came to was nuclear expansion as one element of a balanced solution for moving forward. And so the policy support remains pretty strong down there. Mark talked about the legislature looking for ways to continue on that policy but bring some effort to mitigate the costs in the short term or some way to make it easier for the customers, especially in this downturn.

So I don’t think there is at least in our view that’s still the policy. It still has strong regulatory support, political support, and what we see the legislature doing is finding ways to continue with that policy and other ways to help mitigate the cost impact to customers.

Daniel Eggers - Credit Suisse

Yes, Bill, if we saw a wave of [populars] in Florida and they decided that they wanted to re-send the CWHIP element of nuclear development does that change your view on development of Levy?

William D. Johnson

That’s an excellent question that I probably don’t want to answer before the legislature concludes its work. I would say given the size of the projects and the size of the companies, traditional rate making methodology makes it very difficult to proceed on projects like this. That’s why the policy that was developed in Florida was developed. So I think I would have to react to your question if it changed but not before it changed.

Daniel Eggers - Credit Suisse

Do you have a year-end rate base number for Florida?

Mark F. Mulhern

Dan, I’ll tell you I don’t have that right in front of me but I’ll have [Bryan Kinsey] call you and give it to you.

Operator

Your next question comes from Steve Fleishman - Catapult Capital Management.

Steve Fleishman - Catapult Capital Management

Just a question on the Florida rate proposals that you made, the way it would seem the rates would kind of fluctuate – you go down 11% in ’09 and then up again 11% in ‘010. Is there any way to potentially smooth that out and kind of try and work on some kind of comprehensive rate plan that encompasses all this stuff?

William D. Johnson

Steve good morning. There a couple of options here. Mark talked about the potential for going in for interim relief. It’s obviously the interim relief that has an effect on what you asked for next year. Our other plan here is you know we had to file the test year and the MFR’s to get the process going, but we intend to talk to everybody in Florida who’s interested in this about ways to do this that serves everybody’s needs. So we’re really just at the beginning of that process but there’ll be a lot of discussion about that during the course of the year.

Operator

Your next question comes from Paul Patterson - Glenrock Associates.

Paul Patterson - Glenrock Associates

The Bartow plant is going to increase. How much is that supposed to be?

William D. Johnson

Bartow plant I think if you go back to let’s see, I’m just flipping the slides for a minute on the capital slide we had on Slide 20, Paul, where we have the Bartow re-powering. The total project cost is $690 million. We’ve spent $653 of that through the end of ’08 so you as you can see we’ve just a very little bit to spend and again we expect that to go in service in June of ’09.

Paul Patterson - Glenrock Associates

But you guys were talking about maybe an interim increase for that?

Mark F. Mulhern

Possible.

Paul Patterson - Glenrock Associates

And I just was wondering how much might the interim increase be that you would be asking for that.

William D. Johnson

We haven’t determined that number yet.

Paul Patterson - Glenrock Associates

The ROE that you guys had in Florida and the Carolinas for 2008, do you have a regulatory ROE that you guys earned there that you could share with us?

Mark F. Mulhern

Florida the number’s 9.6%. I have 9.56. And then the Carolinas is about 10.8%.

Paul Patterson - Glenrock Associates

And what’s your projection for 2009 for Florida’s ROE? Do you have an idea about that?

Mark F. Mulhern

It’s lower than the 9.5. I don’t know exactly how low. Depends on a few assumptions.

Paul Patterson - Glenrock Associates

And then I guess circling back with Steve and some of the previous questions there in terms of on the one hand you guys are just sort of looking to decrease rates but then you’re going to be going in asking for a rate increase. I guess sort of is the thought process that the consumer will be more amenable to it because the economy will be doing better?

I mean in other words I mean sort of – the logic I guess other than the fact that sort of it’s a tough economic time I’m not really clear as to the purpose of sort of decreasing and then go back very shortly and say hey we want to increase them, particularly when you also might just ask for an interim rate increase for the Bartow one. I mean I’m sorry to be so slow but I’m just sort of like you know, it seems like a [feast off] if you know what I mean.

William D. Johnson

Let me explain the thinking behind this. We have to do something with our base rates by the end of the year because our settlement expires. And so we have to do something to set new rates for January 1. In the interim we are able to reduce fuel because of fuel projections and good management of that process and we’re also able to defer some of that nuclear pre-construction costs especially to let the legislature think about you know what are the ways there are to do that.

So we really didn’t engage in thinking that next year is going to be easier for customers. We really said, “Here are some things that we can do in the short term to make it easier now.” The facts are that we have invested several billion dollars in Florida and we have to have prices that reflect that and maintain our ability to track capital and reward investors. But really this is just thinking in bits and what you can do now and what you have to do later and as we said in response to Steve’s questions, “There’s a way to blend all of this together and serve everybody’s needs and we will be having that discussion over the next several months.”

Paul Patterson - Glenrock Associates

Could you refresh my memory as to the legislative calendar when they go out of – how long does it last in Florida?

William D. Johnson

We will send that to you Paul. I think it’s a 60 day session but they also have a lot of committees that meet in advance and we will get that to you.

Paul Patterson - Glenrock Associates

And then the securitization you mentioned the ability to maybe secure some of this nuclear expense. Is there anything else that you guys are thinking of securitizing as well? Or is it just for nuclear stuff that you’re looking at right now as part of the – as one part of what you might be secured on?

Mark F. Mulhern

At this point, Paul, we’re really focused on just the pre-construction costs for the nuclear. And again we don’t necessarily get a return on that capital just a return of so it seems to fit into securitization prospect nicely. We haven’t really contemplated anything else.

Paul Patterson - Glenrock Associates

Are you contemplating any return on the $200 million of deferred nuclear?

Mark F. Mulhern

With the way the current set up would be in terms of our request is that we would agree to this deferral and we would earn AFDUC deferral until we collected it.

Paul Patterson - Glenrock Associates

And that AFDUC rate would be both debt and equity?

Mark F. Mulhern

Yes.

Operator

Your next question comes from [Risa Heteki] – Decade Capital.

Risa Heteki – Decade Capital

Could you talk a little bit more about load growth in the Carolinas and I guess what’s different there versus some of the other southern states that some of your other companies down there that are experiencing negative load growth?

William D. Johnson

We will tell you what we think about this. The Carolinas have never had the housing booms, the great increase in real estate prices nor the downside of that cycle. It’s always been a much more steady state. The economies are different. You know there’s actually a lot more industrial and commercial in the Carolinas. Florida is more tourists and things like that. So that should tell you the differences we see. When you look at the cycle over time the Carolinas have usually been just a more steady state than most of the other states in the southeast.

Risa Heteki – Decade Capital

In your 2009 guidance is there some benefit imbedded in there from the interim rates?

Mark F. Mulhern

The way I characterized it in my remarks is we have a probability around success with respect to interim rate relief. We built that into that. But some we’re not sharing obviously because we’re in the very early stages of these regulatory processes.

Risa Heteki – Decade Capital

And just the Harris amortization is there any of that in 2009 or is that over with?

Mark F. Mulhern

We finished the minimum number that we needed to take for Harris in 2008 so we don’t have any requirements. We could go up further. There’s a maximum associated with that program that we could take additional if we needed to but right now there’s not any anticipation to take additional Harris depreciation above and beyond the normal in 2009.

Operator

Your next question comes from Gordon Howald - Calyon Securities.

Gordon Howald - Calyon Securities

I want to make sure I get this correct here then your 2009 guidance then includes the deferral of the Levy recoveries and I guess it includes the possibility of interim rate relief in 2009. That would make sense. Is that correct?

Mark F. Mulhern

That’s correct.

Gordon Howald - Calyon Securities

And then a question just for Mark you know that your 2009 outlook includes incremental payments for pension under-funding. Could you give us any details on this? You know, how much that incremental would be in ’09 versus ’08?

Mark F. Mulhern

Sure. Our pension like everybody else is still moving around a little bit, finishing up all the final actuarial assumptions but here’s what we think right now. We made a contribution in 2008 to the plan of about $33 million. We think that number’s going to be in the $200 to $250 range in 2009. So it’s that degree of significance. That’s just the nature of the beast, you know. We had our assets were down I think 32% for the year on terms of investment performance in the plan so you know we’ll go ahead and incorporate that. That’s all in our plans in terms of the funding requirement in terms of what we anticipated for 2009.

Gordon Howald - Calyon Securities

And then where would that flow through on the financial statements? On the interest statement?

Mark F. Mulhern

Well, on the financial statement just remember what you contribute and what goes through the P&L are two different things. On the pension cost for the P&L I think the numbers are in the $60 to $70 million range of what’s going to hit O and M expense in 2009 related to pension.

Gordon Howald - Calyon Securities

That’s been baked into your outlook as well?

Mark F. Mulhern

It has.

Operator

Your next question comes from [Andrew Levi – Incremental Capital].

Andrew Levi – Incremental Capital

Just regarding your meeting on the 27th are you going to be updating guidance at that point or this is your guidance for the next quarter?

Mark F. Mulhern

I don’t expect to do anything different to guidance until we issue – you know we issued this guidance the first week of January when we did our equity offering and our debt deals. I don’t expect anything different in terms of guidance at the 27th meeting.

Operator

Your next question comes from Marc De Croisset - Macquarie Research Equities.

Marc De Croisset - Macquarie Research Equities

When I look at the revenue request that you’re making in Florida I’m guessing that a large component of the increase is from the rate base and the projects that are under construction and earning AFUDC. Is that a fair statement and if so is it fair to say that a large portion of the revenue request might be earnings neutral?

Mark F. Mulhern

I agree with the first portion of what you said. In other words, yes, there’s no question the rate request will be based on a number of those capital projects we have listed on Slide 20 there. You know, the Crystal River activity and the Bartow re-powering. Those type of things. In terms of earning neutralities you’re right there is some piece of AFUDC that kind of flips the cash. In other words you start to recover the cash earn on that versus the AFUDC return. We don’t know exactly how much that is at this point. But I think it’s too early to make a judgment about that.

Operator

Your next question comes from Gary Lenhoff - Ironworks Capital.

Gary Lenhoff - Ironworks Capital

Mark can you just tell us what do you expect total CapEx to be in 2009 and if you can give us an estimate for 2010 as well?

Mark F. Mulhern

Yes. I think what you’ll see in the 10-K is a little bit of a range. I think it’s $2.5 million to $2.7 or $2.8 million for ’09 and a similar range for ‘010.

Gary Lenhoff - Ironworks Capital

And just a couple of other questions relating to the pension. At year-end should we expect to see the under-funding to be in the ballpark of $750 to $800 million? Is that about right?

Mark F. Mulhern

I think it’s lower than that. I think it’s more in the $6 range.

Gary Lenhoff - Ironworks Capital

And pension expense you said would be $60 to $70 million or you’re using $60 to $70 million in ’09. Can you tell us what it was in ’08?

Mark F. Mulhern

Thirteen million dollars. I’m sorry, $10 million.

Gary Lenhoff - Ironworks Capital

And have you made any changes to your 9% return assumption or your discount rate?

Mark F. Mulhern

Our return assumption we’ve gone to 8.75 versus 9 for 2009 so prospectively going forward we dropped a quarter of a point from 9% to 8.75 on the return assumption. I’m not sure on the discount rate. We haven’t disclosed that number yet. We’re still working with the actuaries on the final number.

Operator

Your next question comes from Michael Lapides - Goldman Sachs.

Michael Lapides - Goldman Sachs

Two items, one on the nuclear cost recovery any of the deferral or securitization. At this early stage of the process meaning of developing new nuclear are you worried at all about kind of the precedent you’re setting for the concept of deferring significant capital spending?

William D. Johnson

We’re not worried about that particularly, Michael. You know, our view to this is there’s a policy here we’re trying to meet and everybody has an interest in it, the company, the regulators, the policy makers, customers and we are just trying to be helpful in finding a way to mitigate the impact of this. So it’s not a sign of concern. It’s not a sign of our lack of interest in the project.

It’s just really about effective public policy and what the best way to do this is. You know going forward no matter what the energy policy turns out to be there’s a huge capital wave ahead of us and finding ways to do this effectively with the lowest customer impact is going to be important. So that’s how we look at it.

Michael Lapides - Goldman Sachs

Understood. I was just thinking more along the lines of let’s say we get four or five years down the road and you know there’s been a couple of billion dollars or more that’s already invested at that stage, you file to get cost recovery and interveners come back and say, “Hey, wait a second. Back in ’09, ‘010 you know the company was willing to defer it and granted it was a smaller amount but hey guys there’s a precedent here.”

William D. Johnson

You know there’s already a precedent in the utility space on securitization in Florida. It’s been used before and I think everybody understands the proposition that we need to be able to raise capital or earn a return on it and we need to be the people that do these kind of projects. So I understand the question. I’m not too concerned about the impact of this on a going forward basis.

Michael Lapides - Goldman Sachs

And I apologize, I may not be as familiar on the precedent there on securitization. Was that for base load generation or just storms? Because I thought it was just storm recovery.

William D. Johnson

Yes.

Michael Lapides - Goldman Sachs

One last nuclear related question. A lot of the contracting of long lead time items you and some of the other companies do and the AP1000 started down that path. Just curious in terms of the movement we’ve seen in prices for things like steel which are some of the major components of a plant and any kind of thoughts on whether you can revisit long lead type item contract pricing based on the fact that steel costs are down 40 or 50% right now.

Mark F. Mulhern

Michael, it’s Mark. You know we have signed an EPC contract that I think you know some of the components of that. They’re outlined on the slide that Bill went over that had these basically a fixed and firm bucket of prices tied to indexes. We do think those indexes will reflect some of the lower cost of commodities in some of these things. So we do think that the escalation numbers will be lower than certainly they were six months ago. But in terms of real savings, in terms of long lead time equipment, no we haven’t seen that yet is the way I would characterize it.

Operator

Your next question comes from Travis Miller - Morningstar Equity.

Travis Miller - Morningstar Equity

A quick question on the Florida rate case, what test year will you be using?

Mark F. Mulhern

It’ll be 2010 is the test year we’ve asked for.

Travis Miller - Morningstar Equity

On a calendar year basis?

Mark F. Mulhern

Yes.

Travis Miller - Morningstar Equity

And then a quick clarification on the fuel adjustment that you have filed for the true up, correct me if I’m wrong, would just be essentially a true up to the hedged costs you have in right now and projected openly that you’ve given us earlier, right? There’s not a subsidy or anything in that number, right?

Mark F. Mulhern

No. I mean the way you describe it is correct.

Travis Miller - Morningstar Equity

Okay. So this eliminates any kind of [reg] gas or liability creation?

Mark F. Mulhern

Correct.

Operator

Your next question comes from Greg Gordon – Citigroup.

Greg Gordon – Citigroup

The $200 million you’re now deferring in terms of nuclear cost collection, you would have not earned any return on that but now that you are offering to defer it you would earn AFUDC on that amount until it was [recorded]. Is that correct?

Mark F. Mulhern

The proposal that we have on the table, correct.

Greg Gordon – Citigroup

And so when I think about that $200 million in cash flow that you’ve agreed to not collect, and I think about the large amount of cash you’re putting into the pension this year, those two items were understood and contemplated when you put together your financing plan? And another way of putting it is you sized your equity and debt offering knowing that these changes to your cash flow were going to be in place in ’09?

William D. Johnson

A couple of things to think about there, the first one being that you know we may or may not be successful in the interim rate relief so we’re thinking that we could potentially have some offset to the cash impact of recurring nuclear from that. And the other place to look is we do have the ability obviously to manage our capital expenditures including nuclear, including the rest of the capital expenditure program. So we have that factored that in. We think it’s a reasonable assumption to make relative to our ability to finance the business in 2009.

Greg Gordon – Citigroup

So in other words you saw the possibility of your cash flow being lower by almost $500 million and that was one of the factors in contemplating this idea of your equity offering? Or did these changes to your cash flow sort of come about after you did the offering?

Mark F. Mulhern

I think we knew the pension number was going to be high. We may not have exactly had our finger on this $200 million of nuclear deferral when we actually did the offering. But certainly we had some ability in our financing plan to deal with that issue.

Greg Gordon – Citigroup

So really it will come on the CapEx side if you have to modify your cash management approach during the year it would come from the capital side not from changes in your financing plan?

Mark F. Mulhern

Accurate.

Operator

Your next question comes from [Raymond Long] – Goldman Sachs.

Raymond Long – Goldman Sachs

I know you did some in debt and equity also earlier in the year. Can you talk a little about whether there are external funding needs you have and how much room is a follow-on to Greg’s question of how much flexibility you would have on the CapEx budget if you needed to ratchet that down some?

Mark F. Mulhern

You saw the couple of deals we did in the first quarter the first month of the year. We kind of got our equity out of the way. The Carolina deal that we did we did $600 million but $400 of that was in maturities so think about that maybe as an incremental, too. So we have some debt needs that we will finish later in the year. That could be in the $750 million range and it could be – a number of that could be for holding companies as well as the utility so that’s probably the number you should think about at least in your head.

On kind of the CapEx side with $2.5 to $2.8 billion I think is the range that you’ll see in the K. There’s some flexibility in that and all through the line items on the utility side. And then there’s some flexibility in timing of nuclear. As Bill referred to earlier we’ve got some uncertainties around how nuclear – at least the timeframe on nuclear happens with respect to the NRC schedule and some of those things that are, you know, we just don’t have a firm handle on yet. So the timing of expenditures in nuclear could move around a little bit.

Greg Gordon – Citigroup

I know you trust the pension cost contribution. Is there anything that we need to think about in terms of de-commissioning trust funding? In terms of any contribution needs there?

Mark F. Mulhern

Not of any significance. We’re actually over-funded in Florida in the de-commissioning trust on Crystal River. In the Carolinas we’ve got a regular contribution but it’s nothing out of the ordinary.

Greg Gordon – Citigroup

You’ve commented holding company debt, can you elaborate more on that? Is that debt you’re thinking or convert or something like that or?

Mark F. Mulhern

Yes. I wouldn’t tell you exactly what we’re going to do but I would expect it to be just a regular debt.

Operator

Your next question comes from Marc De Croisset - Macquarie Research Equities.

Marc De Croisset - Macquarie Research Equities

A quick clarification on the cost escalator imbedded in your assumptions for nuclear, can that number actually go negative for substantive costs? In other words, can raw materials for example costs for those raw materials go below their initially budgeted base line? Is that conceivable?

William D. Johnson

Yes. That’s conceivable. I mean there’s an assumption in there about a starting point for the commodity and an escalation tied to an index and since it’s cost-based if the cost is lower, yes.

Operator

It appears we have no more questions in the queue. I’d like to turn the call back over to you, Mr. Johnson for any closing remarks or any additional comments.

William D. Johnson

Thank you and thanks to all of your for joining us on the call. I feel good about our company’s focus, discipline and flexibility in managing through these difficult times for both our customers and the economy. We’re doing all we can to hold down rising costs to our customers while maintaining reliable service and implementing federal and state energy policies and also continuing to deliver on our commitment to investors. So we appreciate your interest in our company. We look forward to seeing many of you on the 27th in New York. Thanks for your participation today.

Operator

This concludes today’s Progress Energy conference call. Thank you for joining us and have a wonderful day.

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Source: Progress Energy Inc. Q4 2008 Earnings Call Transcript
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