Progress Energy Q2 2010 Earnings Call Transcript

Aug. 6.10 | About: Duke Energy (DUK)

Progress Energy (PGN) Q2 2010 Earnings Call August 6, 2010 10:00 AM ET

Executives

Megan Wisz - Financial Specialist

William Johnson - Chairman, President, and Chief Executive Officer

Mark Mulhern - Chief Financial Officer

Vincent Dolan - Chief Executive Officer and President, Progress Energy Florida

Jeffrey Stone – Controller

Lloyd Yates - President and Chief Executive Officer, Progress Energy Carolinas

Analysts

Greg Gordon – Morgan Stanley

Andrew Levy - Tudor, Pickering, Holt & Co.

Jonathan Arnold - Deutsche Bank

Paul Patterson - Glenrock Associates

Paul Ridzon - Key Bank

Marc de Croisset - FBR Capital Markets & Co.

Ashar Khan - Visium Asset Management

Michael Lapides - Goldman Sachs

Ted Hein - Catapult

Operator

Good morning and welcome to Progress Energy's second quarter 2010 earnings conference call. [Operator Instructions] For opening remarks and introductions, I would now like to turn the conference over to Megan Wisz of Progress Energy. Please go ahead.

Megan Wisz

Thank you Operator. Good morning, and welcome to everyone. Joining me this morning are Bill Johnson, Chairman, President, and Chief Executive Officer; Mark Mulhern, Chief Financial Officer; and other members of our senior management team. As a reminder, this call will be archived on our web site 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 Windows Media format, available from our web site. I direct your attention to our web site, where we have included a set of slides which accompany our speaker's prepared remarks this morning. These slides can be found at progress-energy.com/webcast.

Today, we will be making forward-looking statements as well as reviewing historical information. There are numerous factors that may cause future actual results to differ materially from these statements, and we outlined these in our earnings release, Forms 10-K, and 10-Q and other SEC filings, as well as the risk factor discussion also found in our Forms 10-K and 10-Q, which will be filed later today. This morning, following opening comments from Bill and Mark, we will open the phone lines to address your questions. Now I'll turn the call over to Bill Johnson.

William Johnson

Thanks Megan. Good morning everyone. We’re glad you’ve joined our call this morning. I suspect you’re all suffering from earnings call fatigue at this point in the cycle, so we’ll get right down to business here.

Slide 3 shows – I’ll provide a few highlights for the quarter as well as speak to our Florida rate settlement, our Crystal River outage, and the EPA’s recently proposed transport rule. Then Mark Mulhern will provide more detail on the numbers.

So let’s start with ongoing earnings on slide 4. We again achieved solid financial results, ongoing earnings of $181 million for the second quarter, which was the same as the second quarter a year ago. On a per-share basis, we’re down $0.01 quarter over quarter. For the first six months of this year, ongoing earnings were $395 million, compared to $363 million for the same period in 2009. On a per-share basis we’re up $0.07.

Clearly, weather is a significant part of this story. It was one of the hotter Junes on record. We also continued to see modest signs of economic recovery in the Carolinas and Florida, a little better than what was in our forecast. But unemployment remains high in our state. It’s above the national average in all three of the states that we serve, and this is going to take a little time to return to more normal levels.

Also, we aren’t seeing the higher percentage recovery in industrial sales that some areas and companies are seeing. But that’s primarily because our industrial sales didn’t fall quite as far during the recession. We are encouraged that our Florida residential customer growth turned positive in the second quarter. So primarily on favorable weather so far this year, we’re narrowing our ongoing earnings guidance range for 2010 to $2.95 to $3.05 per share, the top end of our previously announced range.

In addition to weather, we’ve got some flexibility in Florida because of our rate settlement, which I’ll discuss in a moment. Operationally, our workforce and system are meeting our customers’ needs very well during extended periods of extreme heat and high demand, as we did last quarter during some very cold weather. Our employees deserve a lot of credit for their focus and hard work, and I’ll take this opportunity to thank them publically.

Now one thing we are disappointed in is the O&M expense increase in the first half of the year. The increase was primarily because of longer and broader scope outages than we had planned at our Brunswick and Robinson nuclear plants.

You should not expect this to be a trend. In fact, aside from the nuclear outages this year, we’ve been very successful in keeping O&M expenses flat. We’ve increased management focus on our nuclear program with some organizational changes in the second quarter, and we’re taking aggressive steps to strengthen nuclear operations and outage execution while keeping safety the number one priority.

Next, let’s turn to slide five and we’ll talk about the Florida rate settlement. As many of you know, the Florida Public Service Commission, on June 1, unanimously approved a settlement agreement that will keep our Florida base rate stable through the end of 2012. This rate freeze does not apply to the cost-recovery clauses, which are reviewed annually.

The settlement provides us some flexibility to reduce depreciation expense and amortize certain regulator assets as long as we stay within our allowed ROE range. It provides regulatory certainty without impacting base rates, and allows time for the economy to improve over the next year or two. The settlement also substantially mitigates the depreciation reserve issue in future rate cases. So we’re pleased that the base rate issues are settled for now, and that regulatory risk is mitigated in the near term.

Now, with slide six, you can see an update on the outage at our Crystal River nuclear plant in Florida. As we’ve discussed before, we’re in the midst of an extensive, extremely complex repair to a section of the containment building outer wall. In the photo, the containment building is the large, cylindrical building.

The focus of this activity is to return the plant to safe, reliable service. We’ve completed a comprehensive root cause analysis that showed that the concrete delamination, as it’s called, occurred when we created an opening to replace the steam generators last fall. The repair process is now well underway. We’ve already made concrete pours on the lower part of the wall, and are preparing the upper part for similar repairs.

We’re pursuing a detailed repair plan designed to return the plant to service during the fourth quarter this year. Earlier, we had projected a third-quarter return, but the scope of the work has expanded as we’ve gotten further into it, and we are committing to getting this work done right. The actual return to service day, of course, will be determined by a number of factors including regulatory reviews, testing, and weather.

Slide six also shows the cost of the outage through June 30 for the repair and replacement power. In late June we received our first periodic payment from our insurance claim filed with NEIL, Nuclear Electric Insurance Limited, which is the mutual insurance company created by the nuclear utilities.

Through June, the total cost for the repairs was about $79 million, the net cost with insurance proceeds about $64 million. Net replacement power costs was about $139 million. We will seek regulatory recovery for amounts not covered by NEIL insurance, and we expect that the Public Service Commission will hold a separate proceeding on this outage sometime next year.

We have been very transparent with the Nuclear Regulatory Commission, our state regulators, the industry, and other stakeholders throughout this process, and we will continue to keep those groups well informed. Again, our focus is on returning this important plant to safe, reliable operation for many years to come.

If you’ll turn to slide seven, I’ll say a word about the transport rule the EPA proposed in July to replace the Clean Air Interstate Rule, or CARE. Transport rule is designed to reduce nitrogen oxide and sulfur dioxide emissions in 31 eastern states. The final rule is expected sometime next year.

Now we’ve already installed scrubbers and NOx reduction technology on our largest coal-fired units, and we’ve completed the Bartow plant oil-to-gas repowering in Florida. We’ve also initiated our coal-to-gas repowering program in North Carolina. The bar chart on the slide shows the SO2 reduction trend we’re already on, and we’re on a similar trend for NOx. Based on our current understanding, we believe we’re very well positioned to comply with the transport rule, especially given our significant investment in emissions controls and our fleet modernization projects.

Now, if you turn to slide eight, a few words about what we call our balanced solution strategy, a diverse portfolio of investments and initiatives to prepare for a new energy future, new customer needs, public policies, and technologies. We’re moving forward here on three fronts, energy efficiency, alternative energy and a state-of-the-art power system, and you can see some of the programs and projects we’re undertaking.

I’ll mention just a few recent developments here. One is last week’s announcement by EPRI, the Electric Power Research Institute, that it will hold its 2011 plug-in electric vehicle conference here in Raleigh next July. It will be the first time this national conference will be held outside of California, and it’s a further indication of the prominent role our community and our company are playing in this emerging field.

We also recently joined the SmartGrid Consumer Collaborative to accelerate our learning in this area. And we announced a partnership with the University of North Carolina at Chapel Hill to map and model North Carolina’s viable off-shore wind resources.

As part of fleet modernization, we received state approval in June to build a combined cycle natural gas plant in North Carolina to replace our Sutton coal fired units, and this spring we completed an extensive clean air project at our Crystal River 4 and 5 coal units in Florida.

So we’re making good progress in executing our balanced solution strategy and delivering value to our customers and shareholders. So with that I’ll ask Mark Mullhern, our CFO, to provide more details on the finances.

Mark Mulhern

Thank you Bill, and good morning. My topics are outlined on slide nine, and you will notice the slides follow a similar format to our prior quarterly calls. We have included several slides in the appendix that we will not review in detail today, but you may find helpful.

On slide ten is the ongoing earnings detail for the quarter and year to date by segment. Overall, we reported $0.63 for second quarter 2010 compared to $0.64 in the second quarter of 2009. So a penny down for the quarter, but still $0.07 ahead for the first half of 2010.

The significant drivers were favorable weather, the impact of the repowered Bartow plant in Florida, and higher clause recoveries. These were offset by lower AFUDC equity, increased O&M, and interest expense. In the Carolinas, we were $0.06 ahead of last year for the quarter and $0.10 ahead of last year for the six months. In Florida we were actually $0.02 behind last year for the quarter, but still $0.05 ahead of last year for the first six months. Corporate and other numbers were $0.05 higher than last year for the quarter, and $0.08 higher than last year for the first six months.

Slide 11 is an earnings waterfall for the second quarter, which provides a more detailed look at the positives and negatives for the quarter, so favorable weather, the impact of the Bartow repowering and environmental clause recover for Crystal River 4 and 5 are the main positives.

For those of you keeping track, we amortized $10 million of the theoretical depreciation reserve in Florida in the second quarter as permitted in our recent rate settlement. This has the effect of reducing depreciation expense.

Offsets to the positive include higher interest expense due to increased debt outstanding at Florida and at the parent company; higher O&M expenses, primarily due to the higher nuclear outage costs in the Carolinas; increased pension expense in Florida, since we had deferred that last year per an accounting order; and then lower AFUDC due to the completion of the Bartow repowering last June and the scrubbers and SCRs at Crystal River 4 and 5 that were placed in service in December of 2009 and May of 2010. So as Bill mentioned, the higher nuclear O&M was not planned, but the remainder of the items are very consistent with our plan and this was a straightforward quarter.

Slide 12 provides transparency by customer class on actual and weather normalized retail sales at the two utilities. As with the rest of the southeast, weather has been positive. Retail sales increased 3.5% in the Carolinas and 2.4% in Florida year over year, which helped drive revenues and cash flows for the quarter.

Slide 13 has the same set of information but on a year to date basis, and the punch line here is on a weather normalized basis our actual sales are a little stronger at both utilities than what we have in our plan. In the Carolinas weather normalized sales are up 1.8% versus a positive 0.6% in our plan. And in Florida weather normalized sales are down only 0.06% versus a negative 2.2% in our plan.

Slide 14 provides some more detailed information on the industrial class, which again is mainly relevant for the Carolinas. Industrial sales for the second quarter in the Carolinas were up 4.4% over last year, and are up 2.7% year to date. The bars on the graph show an upward trend, albeit slight, from what we hope was a bottom in the second quarter of 2009.

And as Bill mentioned, our industrial recovery percentage year over year is not as large as some of our southeastern peers, but that’s primarily because our industrial sales didn’t fall quite as far during the recession. So we don’t have as much to recover to get back to 2007 levels.

Slide 15 illustrates the comments that Bill referred to earlier. The customer growth in Florida returned to positive territory in the second quarter of 2010 after seven quarters of negative customer growth. The Carolina numbers are moving sideways, but we still forecast in the 10,000 to 12,000 range for new customers in 2010. All the low usage lines are headed in the right direction, so overall our thesis of a slow, gradual economic recovery should improve this picture over time.

Slide 16 is our traditional adjusted O&M expense slide. In the first quarter this comparison showed a 1.4% increase quarter over quarter. The explanations in the box on the right of this slide account for the increase of $38 million or 4.5% up year over year. An extended outage at Robinson, and some challenges at Brunswick drove these variances. In addition, pension expense in Florida was deferred via an accounting order in 2009. That ended with the resolution of the base rate proceeding in 2010. So we are sharply focused on controlling O&M in the second half of the year, and expect this to be a lower percentage increase by year end.

Slide 17 is a good picture of the components of year to date earnings versus last year, and I think we’ve covered the majority of these items, but I’ll make a couple of points. Obviously, $0.20 of weather is positive. It did not all flow to the bottom line, primarily due to the higher than planned O&M costs. And as we had signaled, we did issue $405 million in new equity through our investor plus plan that resulted in $0.04 a share dilution in the first half of the year. So overall, we are in a good position for a strong second half of the year and we’ll be focused on making up some of the overrun in O&M costs before year end.

So on slide 18, I want to just cover some items to be mindful of for the remainder of the year. First one, the economy. We still remain cautious regarding the pace of the economic recovery in our service territories. As Bill mentioned, with unemployment above the national average in all three states, we’re conservative in our outlook for retail sales for the remainder of 2010. On weather, our updated guidance assumed normal weather for the second half of the year. So while above-normal temperatures have been prevalent in the southeast, the third quarter is historically our most important one, so we will obviously know more after September.

On the theoretical depreciation reserve in Florida, as I said earlier we amortized $10 million of the theoretical depreciation reserve in the second quarter as permitted in our recent rate settlement. We are allowed to take up to $150 million in 2010. Due primarily to positive weather, we expect to record less than half that amount this year. We can carry unused amounts forward into 2011 and 2012. On O&M we covered O&M in detail on slide 16, so you know our objectives there. I would expect the percentage increase to moderate slightly by year end but point out that this is a three nuclear outage year with a significant fall outage at our Harris nuclear plant.

On financing costs, we have been conservative in getting the majority of our equity done early, and partially prefunding a large holding company maturity for 2011, so I don’t expect any surprises in this area for the remainder of the year. We plan to issue another $100 million of common equity to complete our stated objective of raising $500 million of new equity in 2010.

So before I turn it back to Bill for Q&A, we have narrowed our earnings guidance range to the $2.95 to $3.05 per share, which is the upper half of the original range, and we are comfortable making that commitment with the second half of the year in front of us. Thank you.

William Johnson

Thanks Mark. Before we move to your questions, I’ll wrap up with slide 19, which lists some of the key value drivers for Progress Energy. We have a very good system modernization strategy that results in system improvement, economic development in our states, and rate-based growth. We have strong future growth prospects given our service territories and our strategy, and we have financial flexibility and an attractive sustainable dividend. We believe these value drivers make Progress Energy an attractive place to invest, and now we will be glad to take your questions.

Question-and-Answer Session

Operator

[Operator instructions.] We’ll take our first question from Greg Gordon, Morgan Stanley.

Greg Gordon – Morgan Stanley

You say even on a weather normalized basis you are slightly ahead of – you’re ahead of plan on sales, and did you say that you’re going to try to make up for the O&M being above budget in the second half? Or do you think that that is an area where you’ll wind up being above budget towards the end of the year?

William Johnson

Well, just, where we are today, we’re going to work hard to try to make up as much of that as we can, but I don’t think it’s likely we will make up the entire amount, especially the overage in the – outages that have already occurred. So I do think we’ll be a little above O&M. Hopefully we will work it down between now and the end of the year, but I don’t think we’ll get back to the budget number.

Greg Gordon

Okay, great. And then weather has obviously been a tailwind as well. How’s the weather been in the – so far in the third quarter? Has it been about where it was last year?

Mark Mulhern

Yeah, Greg, it’s Mark. Obviously July was strong again, but we did have a good strong July in terms of weather, more in Carolina than in Florida. We’re off to a good start with respect to the weather for the third quarter.

Greg Gordon

And then to the extent that you don’t use the depreciation reserve, because of those factors, you’re generating cash earnings as opposed to non-cash earnings, that’s obviously a better position overall for the firm, correct?

William Johnson

Absolutely.

Greg Gordon

So all in all it looks like a pretty strong year. I’m just wondering why – I can understand why you would trim the bottom end of the range, I’m not so clear as to why you haven’t raised the top end of the range given all these factors.

William Johnson

Well, a couple reasons. First of all, we did move to the top half of the rang, which we think is a pretty positive mover. As you said, the major element here is weather, with some flexibility in Florida given the rate order. But we have proven, I think everybody’s proven, unable to predict the future weather, so we’re going to assume normal weather for the rest of the year, and we have a couple of other moving parts that tend to make us a little bit cautious.

One of them is the economy. Although we say there’s slight improvement, we consider this to be very fragile improvement. I know you saw the jobs numbers yesterday that were released and the impact they’re having this morning. Our three states that we serve continue to have higher than national average unemployment and it doesn’t look like it’s moving very fast down.

We also have another nuclear outage this year in the fall, at the Harris plant, and I don’t lack confidence in our ability to execute in that outage, but it’s a major outage. It has some major O&M dollars and I would feel a little better about knowing that was done and done well before we talked about guidance again. So those are the kind of things that are cutting against it.

Operator

We’ll take our next question from Andrew Levy with Tudor, Pickering and Holt.

Andrew Levy - Tudor, Pickering, Holt & Co.

Just a couple questions on Crystal River. I guess the first question is, and I don’t know if we have to go back to [unintelligible] on this, but I remember years ago there was an outage at Crystal River, a prolonged outage. Could you just explain to us how the commission, I know it’s a different commission, handled it at the time, and I have a couple of other questions related to it.

William Johnson

I think we’re going to turn to Vinnie Dolan for this, if he can answer this question I think that precedes most of the rest of us.

Vincent Dolan

Andrew, that outage resulted in a settlement agreement back in ’98. It was one of the first settlement agreements - that was the beginning of a string of settlement agreements where we agreed to absorb some of the cost in the short term in exchange for some favorable settlement terms that I think on balance balanced that out pretty equitably between the company and consumer groups. But I would also point out a pretty distinct difference in that outage. I think it was very different in terms of the circumstances that caused the outage. Back then the company made a judgment about how the commission would determine the outcome of that, but I think it’s very different than the facts around this outage. And those are the facts about how this root cause was unforeseen as part of the outage here at Crystal River 3. So I think the facts are very different about the two outcomes, but I would say that we settled that with the parties back in ’98 and I think it worked out well on both sides.

Andrew Levy

And I guess it was, like, you guys ate some of the replacement power and some of the O&M. I don’t remember the numbers, but that was kind of the bottom line.

Vincent Dolan

We did, but there was some consideration for the capital expenses that we adjusted and earned on over time, so it’s a little more complicated than that, but I would say there was some trading that again I would just say that it worked out well, I think, on both sides.

Andrew Levy

Now you outlined the numbers thus far as far as replacement power and on O&M, less the insurance, are there any estimates on – because you’re extending it now to the fourth quarter – what the total numbers may be?

William Johnson

I don’t think we’re in a position to give those estimates yet.

Andrew Levy

Okay. And is there a maximum amount of insurance that you can collect on this?

William Johnson

I’ll give you the general outline of this and Tom Sullivan will correct me if I’m wrong, but on the repair costs, there’s a deductible amount and then the rest of the repairs are covered, assuming they are covered by the insurance, which we believe they are and we’re already getting payments on. So a deductible on that. On the replacement power, there is a deductible period on the front end, of 12 weeks, and then it runs for a very long time. It’s not foreseeable to us that we would come to the end of the replacement power period under the insurance. So I think we’re covered on both of those.

Andrew Levy

And there’s no maximum dollar amount or anything like that?

Vincent Dolan

On the replacement power we have what adds up to about three years’ worth and a total of, I believe it’s $480 million maximum on just the replacement power side.

Mark Mulhern

And Andrew, this is Mark, just a little color to just the environment we’re in. And you know, with gas prices where they’ve been and some availability of generation in Florida we have been very active in managing this situation and I think in general think we have a pretty good handle on the replacement power costs for the rest of the year.

Andrew Levy

And how does the accounting work on this? Are you deferring the cost? So I guess the incremental cost relative to the nuclear costs are being deferred until the commission ends up ruling, are you guys settling, or whatever the case may be?

William Johnson

I’ll have Jeff Stone, our controller, answer that question.

Jeffrey Stone

Yes, as far as the replacement power costs, we are deferring all of those costs, like the rest of our fuel, on the balance sheet as a deferred fuel regulatory asset, which in order for it to get on the balance sheet we need to believe it’s probable of recovery.

Andrew Levy

And the O&M as well, or in capital costs? I don’t know if there are capital costs but I assume there are?

Jeffrey Stone

Yeah, we’ve also got, obviously, the capital costs over and above – the capital costs on the balance sheet, the amount over and above the deductible is actually a receivable on the balance sheet from the insurance company.

Operator

We’ll take our next question from Jonathan Arnold, Deutsche Bank.

Jonathan Arnold - Deutsche Bank

Quick question on weather. I think it’s up $0.20 for the first half versus 2009, but what’s the delta versus normal you’re carrying through the first half?

Mark Mulhern

Yeah, actually it’s higher than that. It’s $0.28, so we had $0.08 of positive weather for the first six months of last year, so delta to normal for us would be $0.28.

Jonathan Arnold

Okay, thank you. And then just on Crystal River, Bill you alluded to expanding the scope of work as an explanation for the return being a little later than you’d thought. Can you give us some insight into why it’s expanded?

William Johnson

Yes, the – as we took concrete off we discovered that there were some additional cracking higher up in the elevations that we had to excavate and repair. And that’s just time consuming and precise work. As I said, this is something you need to do right, and you need to take the time to do it right, so that’s really the scope change that we have encountered.

Jonathan Arnold

It’s just more of the same kind of work basically?

William Johnson

Yes.

Operator

And our next question comes from Paul Patterson, Glenrock Associates.

Paul Patterson - Glenrock Associates

When we look at O&M going into 2011, how should we think about that due to your plan and catching up on some of it later in the year and what have you? How should we think about O&M in 2011?

William Johnson

Well, my objective here on O&M is to hold it as flattish – I’m not sure if that’s a word, but – as flattish as possible. And we’ve been doing a pretty good job of that, maybe in the 1% or flattish over the last couple years. I would love to see us do that a couple more years. You know, you can’t do that forever, but we are working hard as things Lean and efficiency and just doing our business better. And so I’m – it’s a little too early to say what the O&M numbers are going to be next year, but I would think we’re not going to increase it to the same levels that we’ll see this year. We just hope to get back to a little easier run rate next year.

Paul Patterson

And then in terms of equity, financing needs going forward, I guess in particular the equity outlook in terms of what you guys think might be raised next year?

Mark Mulhern

Yeah Paul this is Mark. We’ve been telling folks that at least in our plan that we had a target of about $300 million of new equity in 2011 that would be in our plan and we do that through the investor plus plans primarily and I think that’s a fair assumption to maintain here.

Paul Patterson

Okay, so there’s no change in that. And then just in general, when you’re looking at the economy, and I know that it’s different obviously in the Carolinas than in Florida, what kind of outlook – you know I know it’s a crystal ball question, but in terms of 2011 what do you – what are you thinking in terms of the regional economies that you’re encountering vis-à-vis the national economy? How should we think about that?

Mark Mulhern

Yeah, I mean, I think it’s obviously been challenging, especially in Florida. I think there are the inventory of homes and real estate issues there continue to be challenging. I think in the Carolinas even we’ve seen the industrials come back a bit but our commercial exposure, our commercial class in the Carolinas is still struggling a bit. But again, our thesis has always been that our territories will recover potentially a little faster than the rest of the nation. They’re still very attractive places to live, there’s still a lot of positive factors in both our economies in Florida and the Carolinas, so I would expect, again I think it’s going to be slow, but I think we should on a comparative basis be a little better than the rest of the country.

Paul Patterson

And then just finally the BP oil spill, do you think that had any impact in terms of tourism, or commercial sales at all in the Florida area, or is that – I mean I don’t know, it may be difficult to quantify, but any sense as to what the impact was or wasn’t?

William Johnson

It’s very difficult for us to see that in our business. We read the same things that you do in the paper, that tourism in the Florida coast is 25% down, and numbers like that. But we have not seen that in our results.

Operator

And our next question comes from Paul Ridzon, Key Bank

Paul Ridzon - Key Bank

Is there any recourse to the contractor at Crystal River? I mean shouldn’t their engineers have done a stress analysis of the concrete?

William Johnson

So you know I’m not going to give you a definitive answer to that question. I’ll tell you what it looks like. Obviously you have recourse to contractors if they didn’t do something right, didn’t act reasonably. I will say in this instance, this event is as complicated an event as anyone I think has seen in the civil industry. It took us several months with a number of supercomputers to figure out what actually happened, and so we may get to that point of asking that question at some point. At the moment we’re focused on getting it fixed, getting it fixed safely, and getting it back in service. I would just say this is an unforeseen complicated event that I don’t think anyone has ever had the experience we’ve had before.

Paul Ridzon

Is there any concern that the Florida regulator tells you to chase them and not the rate payer?

William Johnson

I wouldn’t say that’s a concern and obviously if we get that direction that would be something we’d consider very strongly. But as we said earlier we think we’re going to have a proceeding in Florida about this year, about this next year, and part of that proceeding is that we will explain what we’ve done to find remedies for this.

Paul Ridzon

And then, just, weather is $0.28 ahead of normal as the basis of guidance. We’ve had some better than expected growth, O&M’s a little high. But what are the other negatives here versus plan?

William Johnson

Well the economy, whether we will sustain any kind of increase in usage, what actually happens with the weather. You know, a couple of bad weeks, or a couple of cool weeks of weather in August/September can make a lot of difference in the numbers. The third quarter is exceptionally weather sensitive. Another nuclear outage in the fall. But we just think a good place to be is in the top half of that range for the moment until we get a little more clarity through the end of the third quarter.

Paul Ridzon

And then, given the tailwinds you’ve got, why book any of the amortization, and why not just keep some dry powder?

Mark Mulhern

Paul, it’s Mark. You know, we started down the road since we had the settlement, that we thought it was appropriate to start to take some of the theoretical depreciation reserve into the income statement in the quarter. That’s obviously subject to change if that becomes an issue for us in the second half of the year, if weather’s so strong that we are, obviously, pushing against the ROE cap. We can reconsider that but we thought it was a smart thing to start to take some of it. If you’ll recall we had $0.10 in our original guidance around regulatory progress, so we just started here. We’ve got $0.02 in the quarter, so that was really the decision that was made.

Paul Ridzon

Is it – can you – could you in the third or fourth quarter reverse what you’ve taken?

Mark Mulhern

I think we could.

Operator

And our next question comes from Marc de Croisset, FBR Capital Markets.

Marc de Croisset - FBR Capital Markets & Co.

Actually your answer to the last question would be great to expand on. You said you could actually reverse your depreciation reserve. I was unaware that you could do that within the span of the year.

Mark Mulhern

I don’t think there’s anything that prohibits us from doing that.

Marc de Croisset

A question on demand if I may. On the – I understand you have a residential lighting program that distributes CFL through local retailers. Do you have any sense for the adoption rate of those CFLs? Are they flying off the shelves? What is your sense with respect to the pace of adoption?

William Johnson

Our sense is that it’s a pretty high pace of adoption, especially since there’s an economic incentive to purchase them because they’re a little cheaper price. I’m thinking we can probably get you some more detail if you talk to Mr. Drennan and his folks afterward, but just a visceral, we may have an answer here. Lloyd Yates?

Lloyd Yates

So the adoption going well. In fact, two weeks ago we just went past 1 million CFLs issues as part of that program.

Marc de Croisset

And that’s a million for over what period?

Lloyd Yates

It’s been about a year.

Marc de Croisset

About a year. A follow up question on the Carolina utilities. There’s a big dependence on Central Ap coal there and there’s been, my understanding, some attempt to diversify a little bit the fuel mix. Can you describe what you’re doing on the procurement side there?

Mark Mulhern

Mark, with the completion of the scrubber activity that we’ve done in our larger coal units we have been able to mix in some higher sulfur coal, but our Carolina source is still primarily Central Ap, but we may have small segments of it that come from other places, but it’s really Central Ap mostly there. At Florida we’ve got a little Illinois basin coming in but, again, we’re pretty much concentrated on Central Ap coal in Carolina.

Operator

[Operator instructions.] We’ll now go next to Ashar Khan, Visium Asset Management.

Ashar Khan - Visium Asset Management

Mark, I just wanted to check in. What is now your financing needs until we get new rate cases in in 2013? What should we look at as financing needs to model in our assumptions for the next two years?

Mark Mulhern

Yeah, Ashar, you should – you can – and I think in the appendix we show at least the near-term maturities that we have to refinance, but you should think about it from a thesis of the capital program will be funded at the utilities. So if there’s additional capital that needs to get raised to fund the capital plan it will be through secured financing at each of the utilities. So I would expect, just in general terms, without giving you real specifics on dollars, the Carolina program where we’re doing our coal-to-gas repowering, where we’re building new combined cycles, I think you’ll see some new debt issuance at Progress Energy Carolina over that next 3-4 year period as we get through the construction of those larger combined cycles. There will be less need in Florida just because of less concentration of new cap ex there. So that’s how I would think about it.

Ashar Khan

And then just on equity requirements. They were around 500 or so every year. Is that a good number to use?

Mark Mulhern

Probably a little high, and we really have only talked about next year, so that’s kind of how I would confine my comments to that, at least for the moment.

Operator

And we’ll take our next question from Michael Lapides at Goldman Sachs

Michael Lapides - Goldman Sachs

A lot of moving parts or moving people at the Florida commission and underway for a couple of months now. Just curious in terms of how does the changes on the actual commission impact your views about timing a filing a follow on case?

William Johnson

So there are two new commissioners that either have been or are about to be sworn in, and we haven’t seen them in action yet. But we hope that they will do what commissioners are supposed to do, which is follow the law, look at the facts, and balance the interests of all the stakeholders. Our Florida stipulation goes through the end of 2012, and so you should think about us filing some time that would get us rates around the beginning of 2013.

Michael Lapides

Okay, so January/February 2012 filing, kind of go with maybe as late as March and go from there.

William Johnson

Yeah, so whatever the – there’s a regulatory clock that runs once you make the filing, and we would target something, assuming that the world continues as we know it, to get us at the beginning of 2013 with new rates.

Michael Lapides

Got it. And what about next timing in the Carolinas?

William Johnson

So we have a significant coal-to-gas repowering program here, with a couple of big combined cycles, and just guessing, but we think we probably will need to be in or have rates effective sometime in the 2013 time frame. So 2012 to 2013, somewhere in that area we’ll be filing.

Michael Lapides

Got it. Last thing with the significant cap ex spin in the Carolinas, the repowering efforts, any reason you didn’t push to get either forward test years, a tracker, or some other item that can help reduce lag on that and increase cash earnings versus non-cash earnings mix?

William Johnson

There is a process going on here in North Carolina with a commission looking at the future of energy in our state here, and all of those things you just described are being discussed, or will be discussed, by that commission, and I would expect in the next year or two there would be a legislative reform of the way the utility regulation works. So that’s really being discussed and when it’s ripe it’ll be announced.

Michael Lapides

Okay, but for legislative reasons, meaning can you not ask for forward test years or trackers due to some state law at this point, so you need a legislative fix to get that?

William Johnson

Yes, you need a legislative change to – you might be able to get a tracker here or there on something but in general what you’re describing requires a statutory change.

Operator

And we’ll go next to Ted Hein with Catapult

Ted Hein - Catapult

Just to follow up on what you were just talking with Michael about, so is your expectation that you could potentially see some change in the legislative structure that would allow you to file a forward test year?

William Johnson

Well, if there is a consensus in the state that this is a good idea, and we adopt the state energy policy, and those kind of things, it’s possible. It’s hard to predict what will happen in any legislature, including the one here. But I will say this is a topic of significant discussion. There’s an official commission who’s thinking about this and really they’re not – maybe they’re half way through their work – so there’s a little time here to go, but I think that you will see something over the next year or two where we try to modernize our utility regulation.

Ted Hein

Interesting and is the legislature a full time legislature? Or when would it come in session and address this?

William Johnson

Well sometimes it seems like it’s a full time legislature, but it’s not. It’s a citizen legislature. They come in January of next year and they have a long session. In North Carolina they have a long session followed by a short session the next year, and so you have to pay attention to what’s happening in the long session if you want to preserve it for the short session. How’s that?

Ted Hein

Okay. And then Mark, just a kind of nit-picky question on the quarter. There was a $0.03 tax item at the parent, a negative hit. Was that something that was a benefit in ’09 that didn’t recur, or is there just a little flavor around that?

Mark Mulhern

Yeah, I’m going to let Jeff Stone, our controller, just give you a little bit of the info on that one.

Jeff Stone

There were a number of items in taxes, probably the one that stands out the most is section 199 production deductions that we get and we take those at the utilities. But the net result of that when following the consolidated return is you get some negativity on the corporate side and while it doesn’t really stand out quite well on the tables, because you see a benefit under the utility lines, the benefits are there in the utilities and then you’re just seeing the negativity stick out on the corporate side.

Ted Hein

Gotcha. So on a net net basis, so it was actually a help for you but it just kind of the way the buckets are laid out it looks weird.

Jeff Stone

On net net basis we took a little bit larger deduction than we did last year for that.

Ted Hein

Gotcha. And then just finally, you were talking with Mark a little bit earlier about Central Ap coal, and I just wanted to know if there was any color you guys to give. If you look at the over the counter markets, like the NYMEX strip has really been ripping over the last couple of months up into over $80 a ton. Are those real prices, are you guys contracting at – are there physical volumes being contracted at those prices? Or is that – it doesn’t seem like power prices or gas prices are moving in the same direction. I just wanted to know if there’s any reason why that was happening and if physical volumes are actually changing hands at those prices.

Mark Mulhern

Well Ted, our portfolio, we’re actually over-hedged for the next 12 months. In other words we’ve got a full hedging complement for our coal so we’re not very much in the spot market at all. So I would say that at least from the - generally the utilities the way they’re contracted, spot activity would be relatively light. And I can’t comment exactly what all the drivers are around some of those issues but I would expect that because of the heat and demand, I’m sure these coal plants have been running fairly well and so there may have been a need to make up some volume in the spot markets in some of the utilities.

Operator

And with no other questions remaining, Mr. Johnson I’d like to turn the conference back over to you for any additional or closing remarks.

William Johnson

Thank you. In summary, we’re off to a pretty good start for the year. We’re going to keep a close eye on O&M for the rest of the year, and work our plan, work hard, and hope to have a very good call at the end of the next quarter. So we appreciate your interest and your participation in the call. Thanks.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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