Progress Energy, Inc. (PGN) Q4 FY07 Earnings Call February 14, 2008 10:00 AM ET
Executives
Robert F. (Bob) Drennan Jr. - VP, IR
William D. (Bill) Johnson - Chairman, CEO and President
Peter M. Scott III - CFO
Analysts
DanielEggers - Credit Suisse
Paul Patterson - Glenrock Associates
John Alley - Zimmer & Lucas
John Hanson - Praesidis
Steve Fleishman - Catapult Capital Management
Ashar khan - SAC Capital
Operator
Good morning and welcome to Progress Energy's 2007 Fourth Quarter and Year End Earnings Conference Call. This conference is being recorded. All of your phone lines will be in a listen-only mode until we begin the question-and-answer session. For opening remarks and introduction, I will now like to turn the conference over to Mr. Bob Drennan of Progress Energy. Please go ahead, sir.
Robert F. (Bob) Drennan Jr. - Vice President, Investor Relations
Thank you. Good morning and welcome to everyone. Joining me this morning are Bill Johnson, our Chairman and Chief Executive Officer; Peter Scott, our Chief Financial Officer and other members of our management team.
This call will be archived on our website for the next two weeks. We are currently being webcast on our Investor Relations page progress-energy.com. We are also offering an audio replay of this call in MP3 format, also available from our website.
Today, we'll be making forward-looking statements during the call as well as reviewing historical 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 Bill Johnson, Peter Scott will briefly review the quarter and year end full year results, which we disclosed in our earnings press release this morning. We will then open the phone lines to address your questions. Before I turn the call over to Bill, just a reminder that members of the Company's senior management team will be hosting an Analyst Meeting on Friday, February 29th in Florida, this meeting will be audio webcast from our corporate website and listeners will be able to print copies of the presentation material which we will be using during the meeting. Information about the webcast will be available on our website at progress-energy.com.
Now I'd like to turn the call over to Bill Johnson.
William D. (Bill) Johnson - Chairman, Chief Executive Officer and President
Thanks Bob. Good morning everyone. Thanks for being with us today. Before I turn it over to Peter, I have some brief comments this morning but I'll have lot more to say at out Analyst Conference later this month. I hope to see many of you there.
First, some quick comments on the past year. On the business side, we achieved our core business earnings target for the third year in a row. We have exited the synthetic fuels business and have about $825 million in credits for future use. Additionally, we received a good benefit from the oil hedge that significantly offset the lost phased out tax credits. We have almost completed the divestiture of our non-core businesses, which was our announced strategy, and we expect to finish that process in the near future.
We turned the corner into 2008 with earnings guidance consistent with our commitment on dividend payout and earnings growth. In 2007, we also saw some positive legislative and regulatory results. These included legislation in North Carolina that address renewables, conservation, efficiency and fuel and purchase power cost in a fair way for our customers and our shareholders. We saw legislation in South Carolina supportive of nuclear construction. And the Florida PSC adopted implementation rules on nuclear construction related to legislation passed in that state in 2006.
On the corporate side and the personnel side, we obviously suffered a blow when Bob McGehee died. The company has certainly responded well to this challenge and I am very proud of our employees for how they met this challenge.
Our company is clearly and firmly focused on what it takes for us to be successful, not just next year, but over the long term. And we look forward to talking with you more about this in two weeks at our Analyst Conference.
So, now I'll turn it over to Peter to review our financial result. Peter?
Peter M. Scott III - Chief Financial Officer
Thanks Bill, and good morning to all of you. I will cover three primary topics and then we will get to your questions. First, I will provide an overview of the fourth quarter results, then I will discuss or provide some perspective on the 2007 full year results and finally, we will discus the 2008 earnings target and primary year-over-year differences and then we will get to your questions.
So, from a fourth quarter perspective, on a Q4 2007 to Q4 2006 basis, the big drivers of the difference of $0.19 per share in core earnings are these. On the unfavorable side of the utility level, we had $0.17 higher O&M cost in the 07 quarter and $0.11 of regulatory accounting reversals that occurred in 06; that totals $0.28 a share.
On the favorable side, two big drivers were $0.05 of wholesale margins and $0.05 of lower depreciation and amortization. At the corporate level, we had $0.04 lower interest income in 07 than 06 and increased our estimate for income taxes by $0.04, so, a total $0.08 down from Q4 '06. Everything else was a penny or two here there and they are listed in the release.
From both, your perspective and ours, the big question would be on O&M and then I'll have more to say about that in a moment. For full year 2007, let me make these key points. We achieved, as Bill said, our core ongoing earnings guidance for the third year in the row and the only reason we missed doing that five years in a row is the hurricane damage expense we incurred four years ago in 2004. We achieved these earnings despite the fact that in Florida, January 2007 was the fifth mildest month and December 2007, the mildest month on record for the past 32 years. Obviously, higher wholesale sales in the warm summer in the Carolinas and improved margins helped us overcome this hurdle.
In 2007, as Bill mentioned and I hope you don't mind me repeating, we successfully concluded the operation of our synthetic fuel business. And we either announced or completed the divestiture of all of our non-core businesses. We have approximately $825 million in tax credits on our balance sheet. For your modeling purposes; you can assume we will apply the delta between the AMT rate of 20% and the normal tax rate of 35% to the utilization of these credits.
In 2007, we had our credit ratings across the enterprise upgraded. Using the S&P metrics, we have a corporate credit rating of BBB plus and our two utilities are rated A minus. We ended the year with leverage at 53% and we have the financial strength we need as we begin an era of utility infrastructure investment, as we secure our energy future.
Now a brief comment on non-fuel O&M year-over-year growth. If you look on the draft statement of income, which is on page 9 at the end of the release, you will see that O&M increased from $1.58 billion in 2006 to $1.84 billion in 2007. This is an increase of about $260 million or 16% year-over-year.
Now, here are some things to consider within that variance of $260 million. $86 million are flow-through costs associated with storm cost recovery and environmental expenses that are recovered in costs. $76 million is associated with more plant outages or outages that were broader in scope and typical. Specifically, we had four refueling outages rather than the typical two or three. Also, one of the nuclear outages was a ten year in-service inspection. Plus, we had longer outages at the fossil plants where we installed scrubbers. We would not expect these costs to recur at this level in 2008.
We also added about $20 million of scrubber operating expense during the year. And we had $11 million of one-time legal settlements. When you take all this together, this would result in ongoing year-over-year increase at about 5% of O&M year-over-year. Our planned objective is to keep normal O&M expense growth at about 4% to 5% a year, not counting plant additions. And we are on track to achieve that in our planning.
Now, let's discuss the 2008 projection. We have provided point guidance of $3.05 per share. This guidance is consistence with our previously announced plan to achieve the dividend payout of about 80% in 2008 and to get to the low to mid 70% range by the end of the decade, all along continuing modest growth in the dividend. Key drivers of earnings growth for 2008 over 2007 are: $0.28 of increased investments, $0.21 the top-line revenue growth, $0.12 associated with the addition of Hines 4 to the rate base in Florida, $0.11 in regulatory recoveries in the Carolinas, $0.08 associated with the conclusion of the buyback of some Harris capacity.
Negative changes in 2008 compared to 2007 are $0.26 in interest costs associated primarily with new debt at the utilities to fund growth, $0.12 of additional Clean Smokestacks amortization, $0.10 of favorable tax developments we enjoyed last year that will not recur this year and $0.08 of numerous other small items.
From a revenue standpoint, we are expecting continuing softness in parts of our Florida service territory. However, even the most negatively impacted portion of our territory, the housing inventory, is about one year to eighteen months based on those sales level currently. We hope this has worked down to a normal level of about nine months by year-end and that we began to convert unoccupied homes in the full time energy consumers.
In our North Carolina service territory, we see softness in the industrial segment, due to the slowdown in the building materials industry. However, we enjoyed good strength in the commercial and residential sectors. In both the Carolinas and Florida, we have the potential for wholesale sales increases, which may offset the softness in some of these other sectors.
I would add that in 2007, North Carolina was the number two state behind Texas in annual net population migration into the state at 136,000 people. And Florida, at number four, having net positive migration of 123,000 people. This is solid evidence that the growth in our territories will continue.
That covers the primary topics for this morning. We will be providing at our analyst meeting in two weeks a more detailed review of earnings drivers of our business units as well as other financial analysis including capital expenditures and cash flow. We will be issuing our 10-K as plans now stand on February, the 28th. So thank you for your attention and we will now take your questions.
Question And Answer
Operator
[Operator Instructions]. Our first question comes from Dan Eggers with Credit Suisse.
DanielEggers - Credit Suisse
Hey, good morning.
William D. (Bill) Johnson - Chairman, Chief Executive Officer and President
Good morning Dan.
DanielEggers - Credit Suisse
First question, just on nuclear utilization. Are you guys having any issues or did you have any issues in 2007 with plant performance around some of the water issues we saw in the southeast?
William D. (Bill) Johnson - Chairman, Chief Executive Officer and President
No.
DanielEggers - Credit Suisse
No?
William D. (Bill) Johnson - Chairman, Chief Executive Officer and President
No.
DanielEggers - Credit Suisse
That's easy. Second question, can you give us an update on where the conservation programs are in the Carolinas, it seems like Duke is making a whole lot of progress on the Save-a-Watt program and kind of any increased or expanded opportunities there you're seeing?
Peter M. Scott III - Chief Financial Officer
As you know there was a senate bill that was passed in 2007 that covered renewables and conservation and load management and a few other things. We are in the process right now, working on the implementation rules with that... with the commission. And I suspect we'll have that completed frankly out in the next month or two months.
William D. (Bill) Johnson - Chairman, Chief Executive Officer and President
Yes.
Peter M. Scott III - Chief Financial Officer
Yes, so when we get that detail out, we'll be able to provide a little more color around the plans we've had and levels of investment and the programs that we'll be implementing.
DanielEggers - Credit Suisse
Okay. And just on the cost inflation side of the business, 4% to 5% forward growth expectations. Are you guys seeing rising CapEx obligation just on your daily distribution additions with higher commodity prices and is that showing up any kind of substantial changes in CapEx or investment needs?
Peter M. Scott III - Chief Financial Officer
It is. We are seeing, as everybody is seeing the commodity prices go up whether it's copper, conductor materials, construction materials, all those have had some fairly hefty increases. We're working hard on our supply chain management to try to overcome these increases with more economies in purchasing and we seem to be making pretty good progress on that. So we are... I don't want to say we are, we think that 4% to 5% is no brain or a lay down but we are working hard to make sure we maintain our cost to that level of growth.
DanielEggers - Credit Suisse
Okay. Thank you, guys.
Operator
Our next question comes from Paul Patterson with Glenrock Associates.
Peter M. Scott III - Chief Financial Officer
Hey Paul.
Paul Patterson - Glenrock Associates
I think... you guys moved pretty quickly on the 2008 drivers and I wasn't... I wasn't completely clear on what the impact you guys were expecting for O&M in 2008?
Peter M. Scott III - Chief Financial Officer
It's in that $0.08 of other; it's probably on the 4% to 5% level year-over-year, probably $0.02 or $0.03.
Paul Patterson - Glenrock Associates
Okay. And the 4% to 5% includes without credit increases is that right, as you were expecting?
Peter M. Scott III - Chief Financial Officer
If we had a new plant, like another power plant or something like that, we will certainly provide funding for that as we go through that process.
Paul Patterson - Glenrock Associates
Okay. And then there was a negative impact associated with taxes. And again I apologize, but you guys moved very quickly on that, I was a little slower I guess. What was that again that was going to be dragging earnings in 2008 because of the lack of tax benefits?
Peter M. Scott III - Chief Financial Officer
We had a... a couple of things happened during the year, one of which was associated with reserve that we had made, associated with the divestiture a number of years ago and that was what $0.08, I think... that was $0.08. So, that will happen again this year.
Paul Patterson - Glenrock Associates
Okay.
Peter M. Scott III - Chief Financial Officer
We would like to have it happen again, but we don't see that happening again.
Paul Patterson - Glenrock Associates
Okay. So those unusual tax items that will pretty much be normalized out in 2008?
Peter M. Scott III - Chief Financial Officer
That's right.
Paul Patterson - Glenrock Associates
Okay. And then the ROE at the utility in Florida, what was that for 2007?
Peter M. Scott III - Chief Financial Officer
We've... our latest filed ROEs for all the utilities and this just goes back to the third quarter in 07 those are the latest filings. In North Carolina we were at 10.21% and South Carolina 8.3% and in Florida 10.16%. And I guess the Florida one was back in November of 07.
Paul Patterson - Glenrock Associates
Right. And you guys weren't expecting any regulatory activity right in the Carolinas as I recall, but in Florida the settlement I guess could theoretically end, either the end of 09 or the middle 2010 correct?
Peter M. Scott III - Chief Financial Officer
That's correct.
Paul Patterson - Glenrock Associates
What time do you think you guys will be going in and talking? Would it be next year that you guys be looking at negotiating with the Florida Commission at that time?
Peter M. Scott III - Chief Financial Officer
Yeah, that's right. We will be preparing to do something in 09 to start having... to prepare our case and start having settlement discussions.
Paul Patterson - Glenrock Associates
Okay, great. Thanks a lot.
Operator
Our next question from John Alley with Zimmer & Lucas.
John Alley - Zimmer & Lucas
Good morning guys.
Peter M. Scott III - Chief Financial Officer
Hey John.
John Alley - Zimmer & Lucas
Quick question on the amortizations. The environmental... the Clean Smokestacks in North Carolina what was that this quarter and what's last for the next two years, do you guys have to finish the reminder?
Peter M. Scott III - Chief Financial Officer
Yes. The... from the standpoint of the next year, the agreement that we reached with the commission back in December, allowed us to take up to those, I think it was $569 million through last year and we are required to take the full $813 million between next year and the year after next. So that's why we have $122 million in our projection next year, which is one half of that remaining amount.
John Alley - Zimmer & Lucas
Okay. And the... what's the depreciation associated with extraordinary cost recovery program for... if you are generating assets. Just talk a little more about that, if that's an ongoing item and is that the new-new stuff or is that kind of, is it the Harris plant?
Peter M. Scott III - Chief Financial Officer
I think you may be referring to the Harris plant. While we were implementing the Clean Smokestacks amortization, we suspended the accelerated amortization of the Harris plant.
John Alley - Zimmer & Lucas
Okay.
Peter M. Scott III - Chief Financial Officer
And since we reached the limit of what we could take last... lastly year on the clean air, we decided to take some additional Harris amortization in 2007.
John Alley - Zimmer & Lucas
Okay, great. And how much more is left on that?
Peter M. Scott III - Chief Financial Officer
We probably have a minimum of anywhere to $90 million to $200 million as a range.
John Alley - Zimmer & Lucas
Okay. Is there a time limit when you can take that or its discussion early going to --?
Peter M. Scott III - Chief Financial Officer
The legislation or the legislation agreement, we have with the commission number of years ago basically put an '09 limit on that, but we will be entering into some discussions with the commission early this year to talk about some extensions to that.
John Alley - Zimmer & Lucas
Okay, great. Thank you.
Operator
Our next question comes from John Hanson with Praesidis.
John Hanson - Praesidis
Good morning.
Peter M. Scott III - Chief Financial Officer
Good morning.
John Hanson - Praesidis
Just a follow-up on Dan's question about the hydro. You said you didn't have an much effect in '07, but as we look at 2008, I guess there is a VACAR study that indicates that you might have to have as many as 1000 megawatts imported in certain scenarios. How is 2008 shaping up in your line?
Peter M. Scott III - Chief Financial Officer
Bill, you want to address that.
William D. (Bill) Johnson - Chairman, Chief Executive Officer and President
Obviously, we did not have any impacts in 2007. You know most of these generating facilities have their own management-made lakes and have plenty of water supply so far. We did have about three inches of rain yesterday here so your question is not as acute as it would have been two days ago. We have contingency plans in place; we are doing water conservation at all of our facilities including our office buildings and our plants. That's about the best we can tell you. We are keeping a close eye on this, we think we are going to be okay this year and really don't see any significant problems, but we are praying for rain on a daily basis.
John Hanson - Praesidis
Okay, great. Thanks.
Operator
Our next question comes from Steve Fleishman with Catapult Capital Management.
Steve Fleishman - Catapult Capital Management
Yes, thank you. Peter, can you hear me?
Peter M. Scott III - Chief Financial Officer
I can answer you, thanks.
Steve Fleishman - Catapult Capital Management
Okay, sorry. I apologize to ask you to do this, but you went so fast through all the 08 factors. Could you just do all of them again please?
Peter M. Scott III - Chief Financial Officer
Sure. Yes, if you look at the key drivers, 08 over '07, on the positive side we have $0.28 associated with increased investment, AFUDC. $0.21 of top line revenue growth, $0.12 associated with the addition of Hines 4 to the rate base in Florida. $0.11 related to regulatory recoveries in PEC, this is mostly purchase power and the cost of some the consumable materials and the scrubbers, and then $0.08 associated with the conclusion of a buyback of some of the Harris capacity.
Then on the negative side, we'll have about $0.26 higher interest cost in 08 over 07 primarily because of new debt utilities to fund growth. $0.12 of additional Clean Smokestacks amortization and then we won't get the $0.10 of favorable tax benefit that we had in 2007 and then there is about $0.08 worth of other dogs and cats, O&M and everything like that that gets us to the overall $3.05.
Steve Fleishman - Catapult Capital Management
Okay. And my other question would be on... I think you have talked about a long-term growth rate of 4% to 5% or something like that. Could you just update? Is that... should we think about that being off this 2008 base?
Peter M. Scott III - Chief Financial Officer
That's right.
Steve Fleishman - Catapult Capital Management
Okay.
Peter M. Scott III - Chief Financial Officer
Yes, in terms of our long-term financial objectives, what we've said is that we want to provide 4% to 5% earnings per share growth. We want to get our dividend payout ratio down into the mid to low 70s by the end of this decade and that still while continuing some modest growth in dividend and then maintain good solid credit metrics.
Steve Fleishman - Catapult Capital Management
Okay. Thank you.
Operator
[Operator Instructions]. Our next question comes from Ashar Khan with SAC Capital.
Ashar khan - SAC Capital
Peter, could you just tell us what... I have the CapEx numbers from last year. What is the 08 or could you share the 08, 09 CapEx numbers with us?
Peter M. Scott III - Chief Financial Officer
Well, we will and we would do that in great detail in two weeks. There is an awful lot going on with all the recoveries and kind of outline Steve's last comment rather than covering those on the phone that make it difficult to see. We'll be publishing all that in two weeks with a great deal of granularity and detail. I can tell you that last year our CapEx was about $2 billion, not counting what we spent for nuclear fuel.
Ashar khan - SAC Capital
Okay, okay. And then, could you just give us a little bit of an update on what's happening on the nuclear applications, please?
Peter M. Scott III - Chief Financial Officer
We will in the next few weeks be submitting our color related to the Carolinas in some time later this year, this half year will file the collar related to Florida. We would expect to, as we've said file the needs case in Florida related to a nuclear plant addition sometime this quarter.
Ashar khan - SAC Capital
Okay. Thank you, sir.
Operator
[Operator Instructions]. It appears we have no further questions in the queue at this time.
Peter M. Scott III - Chief Financial Officer
Okay. Well thank you all for joining. Bill, you want to say good bye to everybody.
William D. (Bill) Johnson - Chairman, Chief Executive Officer and President
Well, I hope to see many of you in a couple of weeks at our Analyst Conference when Peter will deliver all those things he promised today. Thanks for being with us today.
Peter M. Scott III - Chief Financial Officer
Okay, thank you.
Operator
That does conclude today's conference call. You may now disconnect.
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