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Progress Energy, Inc. (NYSE:PGN)

Q3 2010 Earnings Call

October 29, 2010 10:00 AM EST

Executives

Bob Drennan – VP of Investor Relations

Bill Johnson – Chairman, President, and CEO

Mark Mulhern – CFO

Analysts

Marc de Croisset – FBR Capital Markets

Presentation

Operator

Good day, and welcome to today’s Progress Energy third quarter 2010 earnings release. As a reminder, this call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Bob Drennan, Vice President of Investor Relations. Please go ahead, sir.

Bob Drennan

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

As a reminder, 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 Windows Media format, which will also be available from our website.

I direct your attention to our website, where we have included a set of slides which accompany our speakers’ 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, Form 10-K, and 10-Q and other SEC filings, as well as the risk factor discussion which is also found in our 10-K and 10-Q. And also as a note, we will be filing our 10-Q on or before November the 8th.

This morning, following opening comments from Bill and Mark, we will open the phone lines to address your questions.

So now I'll turn the call over to Bill Johnson.

Bill Johnson

Thanks Bob, good morning, everyone, and thanks for being on our call. We know there are a lot of calls going on this morning and we will get to see many of you at the EEI Conference next week, so let’s get right to it.

Slide three indicates I’ll provide a few highlights of the quarter, as well as speak to our Crystal River outage, and our balanced solution strategy. And Mark will provide more detail on the numbers.

So let’s start with ongoing earnings on slide four. I’m pleased to report that once again we achieved solid financial results, ongoing earnings of $361 million for the third quarter as compared to $342 million for the same quarter a year-ago. So on a per share basis, we’re up $0.01 from the third quarter 2009.

Through nine months of this year, our ongoing earnings were $756 million, compared to $704 million for the same period a year-ago. On a per share basis, we’re up $0.08.

The economy in our service areas is showing modest but steady recovery, and weather has been a significant factor this year. Record heat this summer followed a cold winter. In all, weather had a positive impact of $0.35 per share to the third quarter.

So based on this performance, we are further narrowing our ongoing earnings guidance range to $3 to $3.05 per share for 2010. This is the high end of the range we announced early this year.

Now given all the favorable weather, some of you might be wondering why we aren’t raising guidance. And the reason is we’ve had several negative offsets, which Mark will explain here in a minute. One offset I’ll mention is the higher O&M expense caused by extended nuclear plant outages at emerging work.

We’ve intensified our focused on improving the performance of our nuclear fleet to achieve the consistent level of excellence we know we can deliver and we know our customers and investors expect. And we’ll talk more about this in detail at the EEI Conference about our nuclear improvement plan and it is at high priority for us.

So now I can turn you to slide five, you’ll see an update on the outage at our Crystal River nuclear plant in Florida. We’ve kept you informed of our progress on this complex repair project over the last several calls. As most you know concrete delamination or cracking occurred in a section of the containment building last fall when we created an opening to replace the steam generators. We reached a major milestone earlier this week when we finished the concrete repair to the containment building.

Now once the concrete is cured we will begin a systematic process of retensioning or retightening the steel pendants and then circle the building, and then we will begin the plant startup process. Our plan is still to return this plan for service near the end of this quarter.

Slide five also shows the cost to the outage through the third quarter, for both the repair and replacement power costs. On a net basis through September, the total for repair cost was about $117 million and replacement power was about $237 million. Partially offsetting these expenditures are about $81 million in proceeds from NEIL, the mutual insurance company for the nuclear utilities. In addition, we have book receivables for an additional $124 million, expected to receive from NEIL.

Now we’re seeking regulatory recovery for amounts not covered by the insurance. The replacement power costs were already included in the 2011 cost recovery filings scheduled for next week. The Florida PSG will hold a separate proceeding next year.

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

Now, if I can turn you to slide six for few minutes on what we call our balanced solution strategy, a diverse portfolio to prepare for a new energy future. We’re moving forward here on three fronts, energy efficiency, alternative energy, and state-of-the-art power system. And you can see some of the projects here that we’re working on.

I’ll mention just a few recent developments. In the Carolinas, we’ve recently placed on line new solar arrays as part of our commercial PV program. This means we now have more than 11 megawatts of solar power under contract. We also signed another agreement to purchase the energy from a landfill gas facility, bringing that total to more than 14 megawatts. And, in Florida, we recently received approval for three new renewable energy programs.

We also continued to make good progress on modernizing our fleet, including building combined cycle natural gas plants to replace our small coal units in North Carolina. In this spring, we completed a large clean air project at our Crystal River 4 and 5 coal units in Florida. So I’m pleased with how we’re executing our balanced solution strategy and feel confident that we will deliver value to our customers and to our shareholders.

So, with that, I’ll ask Mark Mulhern to provide more detail on our financials.

Mark Mulhern

Thank you, Bill, and good morning. I know there is a rush of calls here in advance of EEI, so we appreciate you being on our call.

I am going to cover the topics that are outlined on slide seven. So I’ll get right to it on slide eight. It shows the third quarter and the year-to-date earnings on each of the utilities. Two utilities were pretty consistent with 2009’s third quarter with PEC slightly ahead. At PEF, we amortized $50 million of the cost of removal portion of the theoretical depreciation reserve in the third quarter. And on a year-to-date basis, both utilities are solidly ahead of 2009 with some offsets in the corporate and other segment.

Slide nine is our ongoing EPS waterfall charts to the quarter to clearly show you the positives and the negatives. Weather continue to be a positive driver for the third quarter, growth in usage, clauses and other margin coupled with the cost of removal reserve in Florida, accounted for the rest of the positive variances.

The negatives include share dilution and interest expense that is consistent with what we have previously outlined. Two items that I’ll spend more time on in a minute are the variances in O&M of $0.12 and an income taxes of $0.05.

So slide 10 is that same waterfall chart but on a year-to-date basis. And you can see the significant positive of $0.35 of weather. We also had $0.18 of positive variances in the retail growth in usage and the clauses and other margin category. So as I said on the previous slide, most of the negative items are consistent with what we have signaled with the exception of the O&M and the income tax items.

Year-to-date we have achieved an $0.08 increase in ongoing earnings per share or about 3% ahead of last year, solid results in a challenging economic environment.

Those detail on the income tax item from the waterfall chart which is a negative $0.09 that relates to several items. The first, we had a $0.05 benefit in 2009 from a nuclear decommissioning trust pour over where we shifted funds to a qualified trust to take advantage of a tax law change.

Second item, there was a $0.02 negative item related to the payments of employee benefits from the trust. Contributions made in prior years had resulted in a build up of cash in the trust, and to help with liquidity, we withdrew the excess cash from that trust which resulted in a negative income statement hit. And, finally, there was $0.02 of other miscellaneous tax items that make up that $0.09.

So then let’s shift to slide 11 which provides more granularity on the O&M variance and I’ll focus on the year-to-date column on that slide, where you can see nuclear O&M is $0.09 or $42 million higher than last year. This is primarily a result of unplanned outages at our Robinson Nuclear Plant.

The next four drivers totaling $0.11 relate to prior year items that reduced O&M in 2009 and did not repeat in 2010. So the largest item is tension expense, for which we had an accounting order authorizing deferral at PEF prior to resolution of the base rate case.

The cumulative impact of all these items is a $0.22 negative driver year-to-date and this increase should not be viewed as a trend. Half of it, $0.11 was related to prior year benefits that were forecast not to repeat in 2010, and the $0.09 of nuclear outage costs should be nonrecurring. So as you can see on slide 11, when adjusted for the items I have discussed, the balance of our O&M has increased less than 1%.

We are quite confident about our cost management efforts due to the systematic effort underway to identify efficiencies and continuously improve our business. Bill will speak more about this in his remarks at EEI on Tuesday morning.

Slide 12 provides the retail sales detail we have previously disclosed. Weather has driven the 6.4% and 4% overall retail sales increases at PEC and PEF respectively. Our weather adjusted growth in usage numbers continue to track better than the assumptions we have in our plans and we’ve continued to see positive retail sales in the Carolinas’ industrial segment with solid quarterly gains in textiles, paper, and primary and fabricated mills.

Slide 13 summarizes our recent successful nuclear cost recovery case in Florida. The approval to continue to recover preconstruction and licensing cost related to our Levy project and our CR3 upgrade is consistent with the continued legislative support from new nuclear investment that exists in Florida.

Slide 14 is an update of the new revolving credit agreements that were put in placed in October. We’re quite pleased with our diverse bank group and maintaining the total $2 billion of credit capacity for the company.

On slide 15, as Bill noted, we have narrowed our guidance for 2010 to the $3 and $3.05 a share. In 2009, we are in $0.50 a share in the fourth quarter. So $0.44 of ongoing earnings in the fourth quarter of 2010 would get us to the top end of our range.

I would point out two items for you to consider for the remainder of 2010. First one, we are in the midst of a planned refueling outage with our Harris Nuclear Plant, so we did not have a corresponding refueling outage in the fourth quarter of 2009.

The second item is the cost of removal in Florida at PEF, we have amortized $60 million to date, but have the ability to go up to a $150 million in 2010, provided we do not exceed an ROE of 11.5%, that’s the provision under our rate settlement in Florida.

So with regard to 2011, we’ll provide guidance early next year after we have reviewed our plans with the Board in December. But there are a few items for you to consider when trying to project our 2011 earnings. The first is obviously we assume normal weather, but the significant positive weather variance from 2010 can be partially offset by the cost of removal flexibility we have in Florida.

We can take up to $250 million of cost of removal in 2011. There is one last planned nuclear outage at PEC in 2011 and 2010. The return to service of Crystal River 3 in Florida will result in a significant increase in rate base at PEF. And the further progress on the Carolina coal-to-gas fleet modernization should drive higher AFUDC income at PEC. And with respect to O&M levels, we continue to make progress on our cost control efforts and do not expect the repeat of the higher nuclear outage costs we had in 2010.

So finally as we have said, we assume $300 million of new equity in 2011 and no new holding company debt in 2011. So these items should be considered when you are trying to form an early view of 2011 might look for us from an earnings perspective.

With that, I will look forward to seeing many of you at EEI next year. And now, I’ll turn it back over to Bill for Q&A.

Bill Johnson

Thanks Mark. Before we take your questions, I’ll end with slide 16, which lists some of the key value drivers for Progress Energy.

First is our companywide focus on continuous improvement. We’re committed to doing our work, safer, better, faster, cheaper here everyday. And we’ve implemented a structure and a discipline around this so that we can improve everyday. We also have a system modernization strategy that results in environmental compliance in major grid upgrades as well as growth in rate base and economic development.

Our service territories and strategies provides strong future growth prospects, and we have financial flexibility and an attractive sustainable dividend. These value drivers make Progress Energy a good place to invest. A company you can count on for the long term.

And, now, we’ll be glad to take your questions.

Question-and-Answer Session

Operator

All right, thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). And it looks like we’ll take our first question from Marc de Croisset with FBR Capital Markets.

Marc de Croisset – FBR Capital Markets

Good morning, everyone.

Bill Johnson

Good morning, Marc.

Mark Mulhern

Hi Marc.

Marc de Croisset – FBR Capital Markets

I – I’m trying to put two and two together here and I see year-to-date – and I mean I appreciate your attempt to try and bring clarity to this issue – but year-to-date I see a $0.35 benefit from weather. And as I look at 2011, on a weather normalized basis, I take $0.35 out, right? And so, I’m left wondering what is it about 2011 in the drivers that you’ve provided that can offset that within the context of course of having guidance that’s generally unchanged?

Mark Mulhern

Yes, Marc, this is Mark Mulhern. I tried to give you a little bit of clue on some things to think about for 2011. Obviously, we’re not today giving guidance around 2011. But I think one thing that – people just need to keep in mind is that the flexibility under the PEF rate settlement and the fact that we have the cost removal flexibility to get to that a 11.5% in ROE in Florida, so I think that should help us with respect to when you strip out the impact of weather from ’10, the PEF in particular I think we have good flexibility there.

In the Carolinas it’s a little less clear obviously in terms of having flexibility there. But I do think that there are some items and we talked about it, maybe the higher AFUDC from some of the construction and some of those things I think can help us there. So that’s what we tried to just give you some pointers around.

Marc de Croisset – FBR Capital Markets

Okay. So guys, the depreciation could be a factor in Florida. As I looked though at Florida for a sec there was a $0.14 weather benefit year-to-date and maybe another $0.12 in depreciation reserve again year-to-date.

Mark Mulhern

Right.

Marc de Croisset – FBR Capital Markets

And that’s an awful lot of positive stuff there. Is there – what is happening to the underlying business in Florida. And it sounds like things were going pretty well with the return of customer growth. Can you give us a little more color if you could?

Mark Mulhern

Yes. I mean, I think if you look at that slide 12 that we have provided on the retail sales in Florida, you can see on a weather adjusted basis that it continues to be a little challenging from a top line perspective in Florida.

But you’re right, I think we have seen – I think it’s in our appendix we’ve showed you some of the customer growth numbers improving gradually overtime, I think it’s going to be a slow process in Florida in terms of getting back to some reasonable level which is, on that slide 12 what you see is a little bit better than our forecast.

So we had 2.2% down, retail sales were about a 1.5% on a weather adjusted basis down, we expect that to get a little better next year. So I think gradually things will improve there. But – and you’re right, we did have some – we did have some positive things happen, but I do think we’ve got this flexibility of this settlement that we can offset some of that.

Marc de Croisset – FBR Capital Markets

Right. Thank you for that color Mark. And if I may, are you disclosing at this point the trailing ROEs in Florida and the Carolinas or is that something we could expect to come in the future?

Mark Mulhern

I certainly can, Mark. The last filed ones we have in Florida are August numbers and that was an 11% ROE number. Weather adjusted, that number is just over 9% on a weather adjusted basis in Florida. In the Carolinas, that number is – it is a June number, so I only have the June number for that, and that June number was just over – well almost – just shade under 13%, but weather adjusted about 11.7%, 11.8% on a weather adjusted basis.

Marc de Croisset – FBR Capital Markets

Did the regulators view the ROEs earned on a weather adjusted basis, is there a differentiation there?

Mark Mulhern

We file both, so that they see those numbers.

Marc de Croisset – FBR Capital Markets

Wonderful Mark. Thank you very much. I look forward to seeing you guys at EEI.

Mark Mulhern

Thanks Marc.

Bill Johnson

Thanks Marc.

Operator

(Operator Instructions). And with no further questions in the queue, I would like to turn the call back over to Bill Johnson for any additional or closing remarks.

Bill Johnson

Thanks and thanks again to all of you for being on the call. We’ve achieved good financial performance through three quarters and we continue to lay a strong foundation for the future. So thanks for your interest in Progress Energy. We look forward to seeing many of you next week at the EEI Conference. Thank you.

Operator

And that does conclude today’s conference. Thank you for your participation.

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