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Executives

Brian Kempsey - Progress Energy

Bill Johnson - Chairman, President and CEO

Mark Mulhern - SVP and CFO

Analysts

Michael Worm - BMO Capital Markets

Edward Heyn - Catapult Capital Management

Timothy Yee – Keybanc Capital Markets

Progress Energy, Inc. (PGN) Q2 2009 Earnings Call Transcript August 4, 2009 11:00 AM ET

Operator

Good morning everyone and welcome to the Progress Energy's 2009 second quarter earnings conference call. This call is being recorded. All of your phones will be in a listen-only mode, until we begin the question-and-answer session.

For opening remarks and introduction, I would like to turn the conference over to your host Mr. Brian Kempsey [ph] of Progress Energy. Please go ahead sir.

Brian Kempsey

Thank you, Darryl. 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.

As a reminder, this call will be archived on our Web site for the next two weeks. We are currently being web cast from our Investor Relations page at progress-energy.com. We are also offering an audio replay of this call in Windows media format also available from our Web site. Also I would like to direct your attention to our Web site where we have included a set of slides, which accompany our speakers’ prepared remarks this morning. Those slides can be found at www.progress-energy.com/webcast.

Today, we'll be making forward-looking statements during this call, as well as, reviewing historical financial information. There are numerous factors that may cause future actual results to differ materially from these statements and we outline these in our earnings release, form 10-K, 10-Q and other SEC filings, as well as the risk factor discussion also found in our forms 10-K and 10-Q.

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

Bill Johnson

Thank you Brian and good morning everyone. Thanks for joining us on our second quarter call. We appreciate your interest in Progress Energy and we know there are series of calls stacked up today so we will get right to it.

I can turn you to slide 4 this covers the topics I will discuss today and give the financial highlights for the quarter and then briefly discuss a few other key issues including Florida regulatory matters, recent significant legislation in North Carolina, the latest on the National Energy policy debate, and our progress in executing our balance solution strategy. Then Mark will provide more background on the financial results for the quarter.

So as you have heard throughout the sector the economic downturn continues and it has impacted everyone and you will see the impact on us in some of our usage numbers. But despite that, we are doing a very strong job of managing through this recession. I am very pleased with the strong focus and discipline and flexibility our employees have displayed in executing our plans and here is how we are approaching the current situation. We are controlling our cost aggressively with an eye towards sustainability of those reductions. We are managing our capital spending and preserving liquidity while making sure our capital projects are very tightly controlled, and we are of course utilizing regulatory and legislative options appropriately and we are focused on efficiency and effectiveness to a very high degree. So we are meeting the challenges so far by working on the things that we can control or influence.

On slide 5, you can see the highlights of our second quarter ongoing earnings, $0.64 a share compared with $0.76 in the second quarter a year ago. Now there are a couple of unusual items affecting this quarter. We had a $0.02 fuel disallowance in Florida and a $0.02 jury verdict in (inaudible) death case in South Carolina. The other primary earnings drivers year-over-year were lower retail growth and usage, increased interest expense and share dilutions partially offset by favorable AFUDC equity. Now despite the year-over-year decline for the quarter, we are pleased to report that we are very close to where we expected to be at this point of the year when we issued our original guidance. We are on track to meet the 2009 ongoing earnings targets we announced earlier this year. So we are reaffirming our 2009 ongoing earnings guidance range of $2.95 to $3.15 per share.

I know you are analyzing the quarter-over-quarter result and eyeing the year-end potentials. So for those of you who are handicapping our ability to achieve our earnings guidance to keep in mind several things; first, the rate relief in pension accounting order that will impact the second-half of 2009 and second the Harris depreciation we recorded in the second half of 2008 in Carolinas will nor recur in 2009. Mark will give you a little more detail on this in a little bit but we are very focused on delivering on our guidance.

We continue to see weakness in customer growth and usage in Florida and we are now seeing more softening in the Carolinas but we still expect to end the year with positive customer growth in the Carolinas an annual pick-up of 10,000, 15,000 new customers. There is some indication that the customer situation in Florida is stabilizing although there are not enough data yet to draw a firm conclusion on that. So the second half of the year obviously will be quite important especially because we have some significant capital projects in that part of the year and several significant regulatory procedures.

We remain focused on capital and O&M discipline in both utilities and our leadership team and employees have responded extremely well to the new progressive cost management. We are proving our strong execution capability quarter after quarter, year after year. Mark will provide more details on our second quarter results in a few minutes but first I will turn to a regulatory update for Florida, a jurisdiction that has a lot of activity this year.

So if you could turn to slide 6, you will see regulatory decisions that are earnings drivers for us at Progress Energy, Florida. You can see the $93 million in 2009 pretax earnings resulting from the PSC decisions in the last month or so. The vast majority of the earnings benefit from these orders will show up in the second half of the year, which supports our ability to reaffirm our 2009 earnings guidance. Also you can see on that slide the two major regulatory proceedings in Florida this fall with earnings implications for 2010. First the annual nuclear cost recovery case with hearings in early September and a PSC decision in October then our base rate case with evidentiary hearings beginning in late September and a PSC decision in November. These two cases plus the annual fuel proceeding this fall will determine our Florida retail rate starting in January of 2010.

Now, I would like to turn to North Carolina and a positive legislative development that happened at the end of July showed on slide 7. Two weeks ago the North Carolina General Assembly unanimously passed Senate Bill 1004 legislation that we support and the Governor signed it into law last week, this bill has three main parts. First, it facilitates compliance with the 2013 Clean Smokestacks emission requirements by enabling us to re-power a smaller older coal-powered plant with new natural gas generation instead of adding scrubbers to those older coal plants. Now we have not made a decision yet on this re-powering with this one-time streamline certification process for a new gas-fired plant gives us a promising gas for coal opportunity. Senate Bill 1004 also provides a healthful recovery mechanism if we choose to invest in large-scale renewable energy facilities in the next few years. It essentially allows utilities to recover return on and return of capital up to the fuel savings amount. The third provision changes North Carolina’s Dam Safety Act so that dams at utility coal-fired power plants will now be inspected by the state. We supported this provision as (inaudible) existing inspection projects.

Meanwhile at the Federal level congress continues its debate on climate and energy legislation. Slide 8 illustrates the challenging road ahead for passing of that legislation. As you know, the House very narrowly passed the (inaudible) Bill in late June, the two key provisions there, the national cap and trade program and the federal renewable electricity standard. So the focus now moves to the Senate and the senate begins a month-long recess after this week. The democratic leadership would like to have a Senate both this fall then as you follow the slides you have a Conference Committee that would have to reconcile the different House and Senate versions and those chambers will have to pass that compromised bill. So those of you who will remember your civics class would recall that the Senate works quite differently than the House. The committee structure, the committee make-up, the different jurisdictional lines in the Senate make the road to a difficult bill even more tortuous than it was in the House. So it could be a difficult process in the Senate for you to climb that bill this year.

On the other hand the administration wants to be in a strong position going into the international climate negotiations in Copenhagen this December and of course the economy and healthcare debates are complicated factors on the road to any final legislation. So if nothing else, we will have some interesting political theatre during the rest of the year. Our company and the industry have been actively engaged in this issue and we are working to strengthen the cost containment provisions in the (inaudible) bill especially on a price collar and the timing and rate of allocations favor, our position on this has been pretty clear and firm, we support getting the biggest reduction in greenhouse gas emissions at the least cost to families and business. So stay tuned for more on this as the year goes by.

Finally, what I want to touch on this morning is the steady progress we are making in executing our balanced solutions strategy to secure the energy future for our customers and our company. Slide 9 shows the familiar three-part graphic for this flexible balanced approach, which is built on three props, aggressive energy efficiency, innovative alternative renewable energy, and new and upgraded state-of-the-art plants. And slide 10 shows some of the steps we have taken in energy efficiency.

In the Carolinas, we have doubled our demand side management and energy efficiency goal last year and since then have introduced and obtained regulatory approval for eight new programs. In Florida, we recently filed our ten-year DSM plan, which provides for increasing energy efficiency by 50%. So we have long had a comprehensive effort in this regard in Florida. We have cost recovery mechanisms in place in all three of our jurisdictions and have incentive in both north and South Carolina jurisdictions under our shared benefits model.

Slide 11 indicates the progress we are making in renewable energy especially in biomass and solar. We now have purchased power agreements with five utility scale solar projects that have been announcing the Carolinas including a recent one here in Raleigh. In June we announced an expanded solar strategy we called SunSense, which includes a variety of residential and commercial solar PV and hot water (inaudible). Our goal is to add a 100-megawatts of new solar installations over the next decade.

Meanwhile on slide 12, we are continuing to execute on our major capital projects as part of the third element of the balanced solution. A significant unusually successful development in Florida was the June completion of the Bartow Plant, which we would power from oil to natural gas. This turned out to be excellent timing given the current fuel market. We also recently completed the Wayne County combustion turbine and broke ground on the new Richmond County combined cycle plant both in North Carolina.

We scheduled an extended outage at our Crystal River energy complex in Florida this fall during which we will replace the steam generators at the unit 3 nuclear plant and tie in the scrubber at the unit 5 coal plant. This is a major undertaking at this site and we are applying a rigorous project management discipline. We have actually beefed up our project management capabilities considerably in the last couple of years in preparation for a large sustained capital firm. The Bartow and Wayne county projects I mentioned are evidence of our execution success. We completed both these projects on schedule and under budget.

Speaking of capital projects, I will close with a quick update of our leading nuclear project in Florida on slide 13. As you recall in May, we announced a schedule shift of at least 20 months because the NRC determined it would not authorize the excavation and foundation work before issuing the combined operating license. We still expect to receive that license in late 2011 or early 2012. We expect to receive the state site certification next week and as I mentioned the annual nuclear cost recovery proceeding of FPSC will be this fall. We are still working with our vendors on the revised project schedule and hope to provide more clarity on that later this year. Now from the national perspective one thing is already clear is that the expanded use of nuclear energy must be an important part of the US plan to address global climate challenges.

With that I will turn it over to Mark Mulhern our CFO.

Mark Mulhern

Thank you Bill and good morning. I will cover the topics outlined on slide 15 and then we will get to your questions. So I will start with slide 16, which summarizes the quarter and year-to-date comparisons for the two utilities.

Despite the decline year-over-year in the quarter on a year-to-date basis we are $0.03 behind 2008 and Bill mentioned the two unusual items that cost us $0.04 in this quarter. So overall very close to where we expected to be half way through the year. The next slide 17 summarizes the key quarterly variances. I would note that the favorable AFUDC and margin variances are offsetting the share dilution and interest expense negative. Weaker retail and wholesale segments really drove the unfavorable variance to the second quarter of 2008. The recently approved rate release in Florida, lower regulatory amortizations at product centres in Carolinas and continuing O&M performance should be a help to the second half of 2009.

On slide 18, we summarized some selective key variances from the year-to-date six-month income statement. There are a couple of items that are not intuitive so we thought a little explanation would help. Revenues are up 10% over 2008 mainly due to fuel recoveries and the impacts of early nuclear cost recoveries. Both these items are primarily pass-through items and do not materially impact operating income. Depreciation and amortization is up mainly due to nuclear cost recovery. The latest works is nuclear costs are capitalized when incurred and then amortized off the balance sheet as we recover in revenues through customer bills. The other two noteworthy items are AFUDC equity, which is up due to the construction program and interest expense related to financing the CapEx plan. The final item shows ongoing earnings up $17 million over 2008 and corresponds to $1.30 per share of year-to-date ongoing earnings. So while many of the companies have posted lower revenues ours has actually increased contributing to the increase in ongoing earnings.

So on slide 19 and 21 we actually tried to correlate the year-to-date kilowatt hour sales and the revenue variances to the gross margin in these utility. So on 19 we show Progress Energy Carolinas and at PEC kilowatt hour sales year to date are down 2% driven primarily by industrials but revenues were up 6.6% and that includes fuel and is not adjusted for weather. The actual gross margin increase from 2008 was $2 million with weather helping to offset negatives in growth and usage and wholesale. One thing to mention in the wholesale segment of PEC that was shown under recent developments in our earnings release you will see we sited 20-year wholesale contract extension with the city of Fayetteville that goes through mid 2032. This contract coupled with the NCEMC contract we signed in January that begins in 2013 with a 20-year term solidifies our wholesale business in the Carolinas over the long term.

Shifting to slide 20 industrial revenues and the PEC giving some more detail on that, we included five years of data this year to show the seasonality of this segment and the prospects frankly for improved comparisons going forward. Industrial sales reflect the challenges of the economic downturn and this segment represents approximately 20% of PEC’s revenues compared to 25% ten years ago. And as you can see on the slides textiles as a component of industrial sales has declined from 22% of that component to 14% while chemicals has actually increased from 20% to 28%. So textiles continues to shrink and textile manufacturing will not likely return to the US.

We are experiencing some softness in construction related manufacturing that has been significantly impacted and this includes the sale of building products, brick and steel production, construction aggregates, stone and gravel are similarly affected. Sales to the chemical segment now our largest segment actually showed a slight increase. So with the exception of textile clothing, most of our industrial base has followed production, reduced shifts, deferred expenditures but have not closed their facility. They are basically conquered [ph] down to ride the storm out.

So overall despite the challenges in the industrial the Carolinas continued to be a favorable location for people and businesses to relocate for lower cost, good weather, quality of life. So we are optimistic that this trend will improve going forward. On slide 21, the Progress Energy Florida picture on kilowatt-hour sales, which are down year to date 9.1% driven primarily by wholesale kilowatt-hour sales but revenues were actually up 14% again that includes fuel and is not adjusted for weather. The actual gross margin increase from 2008 was $31 million wholesale weather and revenues from new investment offsetting the negative growth and usage.

Slide 22, we included the customary customer growth data that we included in the last few calls that show at least a flattening of Progress Energy, Florida versus a steady decline. In the Carolinas the numbers declined in the quarter but Bill said we still anticipate net new customers of say 10,000 to 15,000 in 2009. The low usage accounts graph reflects the slowing down of the decline and at least it has not gotten worse.

So on slide 23, we have a great story to tell on cost management. Our adjusted numbers show a year-over-year decline of 3%. In 2009, we had two significant nuclear outages in the first half of the year and have one more left in the second half of 2009. When you take into account the adjustments for the outages and the pass-through clauses, this demonstrates our strong performance on cost management and we are focused on retaining this under run in the second half of 2009.

On slide 24, we just included some data around the projects still discussed provide numbers around the state-of-the-art generation projects, the keys here have been on schedule and on cost management which were both positive for the first half of 2009. Then just on slide 25, a brief update on liquidity, no real news here, we continued in a strong liquidity position after the capital was raised in the first quarter and had our credit ratings just affirmed by Moody’s and S&P in the second quarter of 2009 and you may have seen this in the press, Moody’s had a methodology change that also resulted in the upgrade of our senior secured ratings at both PEF and PEC that were raised to A1 from A2 and that announcement was made yesterday.

So my final slide 26 before turning it back to Bill gives you more detail on our outlook. After six months, we are squarely on plan to achieve our guidance and there are two important reminders about the second half of 2008 to consider. The first is weather. Last year weather was $0.3 below normal in the second half of the year and our plants assumed normal weather. Second item relates to regulatory amortizations. In the last two quarters of 2008 we expensed $37 million at Progress Energy Carolinas for Harris accelerated new business depreciation that will not recur in 2009. The next item to consider is there are two mitigating items for the second half of 2009 and the first is rate release in Florida. So we will record $70 million of additional revenues in the second half of 2009 related to interim and limited rate release granted at PEF. The last item is O&M expenses.

If you recall, we told you in our original guidance that we anticipated a 2% to 3% increase in O&M 2009 versus 2008 and in the first six months we discussed our adjusted numbers are down 3% year over year. We are very focused on preserving at (inaudible) to the second half of the year and this will be an integral part of offsetting the bottom line impact of lower retail sales growth at utilities. So we obviously cannot predict how the economy will grow through the end of the year but given the factors we described, we believe we can execute our plan and deliver on our earnings guidance for the fifth straight year.

So now I will turn it back over to Bill. Thank you.

Bill Johnson

Thank you Mark. Before we open the line for your questions, I want to underscore just a few points on slide 27.

As Mark said, we are having very good success in managing our O&M cost and executing on our major capital projects. Knowing that we engaged in belt tightening of our expenses eliminating discretionary spending and we intend to sustain those reductions but we are also doing this in a more systematic and disciplined way process of weaning out our entire company. Several weeks ago we named one of our senior executives to head this effort throughout the company and make this discipline part of our ongoing business protocol. To prepare for the future, we are following through on our balance solutions strategy. The major variables for us for the remainder of the year are weather and its impact on usage, the economy and its impact on usage, and our ability to manage our expenses consistent with the usage in revenues that occur. So based on what we know and where we are, we are on track to deliver on our 2009 ongoing earnings guidance and with that we will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator instructions) We will take our first question from Michael Worm with BMO brokerage. Please go ahead.

Michael Worm - BMO Capital Markets

Good morning everyone.

Bill Johnson

Good morning Michael.

Michael Worm - BMO Capital Markets

Just a quick question for you, I believe at one point you were talking about on a longer term basis that earning growth would be in the 4% to 5% range although obviously in the near term it will be a bit lower because of the economy’s impact. Is that 4% to 5% range still a good target range?

Mark Mulhern

Yes Michael, it is still a target that we have. We do emphasize it as the long-term target and it is based on the economy returning somewhat close to normal and not having the kind of growth and usage patterns we had over the last decade or so and maybe not as robust as we had over the last year or so but at the moment that is still the target on the longer term assuming some return to normalcy in the economics.

Michael Worm - BMO Capital Markets

Right, thank you.

Operator

(Operator instructions) We will take our question with Edward Heyn [ph] with Catapult Capital Management.

Edward Heyn - Catapult Capital Management

Good morning.

Bill Johnson

Good morning.

Edward Heyn - Catapult Capital Management

Hi (inaudible) I wanted to see if you could give a little more clarification on this Senate Bill 1004, can you talk a little bit about how that may change your CapEx needs in Carolina going forward, it sounds like maybe the scrubbers band will be offset with actually building the gas plants there and kind of the dynamics there?

Bill Johnson

Yes, that is essentially right especially in the early years, say, over the next five years it is a capital substitution kind of plan. The timing maybe a little different, the amounts maybe a little different but basically what he is talking about it instead of putting scrubbers on old, small and somewhat inefficient coal plants you replace that with gas and what this builds out is it allows a truncated certification process so we could build a gas plant in time to avoid building a scrubber and still meet the emission climate. But in the short term, I do not think it changes the capital profile much.

Edward Heyn - Catapult Capital Management

Okay and is Richmond County going to be what fills in that gas plant or is there going to be an incremental plan on top of that?

Bill Johnson

No, it is not. Richmond is already underway, this will be an incremental plan on top of that. We want to emphasize that this is a one-time opportunity really to harmonize the opportunity to build the new plant with the existing Clean Smokestacks part. So this is a one-time shot.

Edward Heyn - Catapult Capital Management

Okay and what would be the timeframe of that spend, is that post 2011 or --

Bill Johnson

For the most part, so we have not decided to do it yet. We would take advantage of this procedure during this year, start spending some money next year if we decide to proceed it but the bulk of it I think is in the 2011 and 2012.

Edward Heyn - Catapult Capital Management

Okay, great, thank you very much.

Operator

(Operator instructions) We will take the next question with Timothy Yee [ph] with Keybanc. Please go ahead.

Timothy Yee – Keybanc Capital Markets

Just on the second half limited rate recoveries affair, when was the forecast made for that and how confident are you that you guys should be able to recover the $70 million in the second half of ’09?

Mark Mulhern

We received approval from the commission for that interim and limited rate release so that is pretty much certain in terms of that recovery. Those dollars started flowing through customer bills on July 01, so that will be collected between July and December and if you will recall, we never really had this in our forecast when we gave guidance at the beginning of the year. We had kind of a price folder [ph] or rate release because we knew we had applied for some of these rate release and some accounting orders but we were not quite sure how much of that we would get. So we had a price folder in our original guidance that we actually probably exceeded with respect to the dollar we have been able to secure.

Timothy Yee – Keybanc Capital Markets

Okay thanks.

Operator

(Operator instructions) We have no further questions, I would like to turn it back over to Mr Bill Johnson for any additional or closing remarks.

Bill Johnson

Yes thanks for being on the call. We have a flexible balanced strategy, we are continuing to (inaudible) in the execution track record and we thank you for your interest. So even the few questions we got reflected an outstanding comprehensive presentation in fact you were busy today and there are a number of calls, so do not hesitate to call our Investor Relations folks Bob Drennan or Brian Kempsey if you have any questions after the call. Thanks for your participation.

Operator

Once again ladies and gentlemen, this will conclude today’s conference. We thank you for your participation. You may now disconnect.

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Source: Progress Energy, Inc. Q2 2009 Earnings Call Transcript
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