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Executives

Robert F. (Bob) Drennan, Jr. - VP of IR, Progress Energy

William (Bill) D. Johnson - Chairman, President, and CEO

Peter M. Scott III - EVP and CFO

Jeffrey (Jeff) M. Stone - VP and Controller and Accounting

Analysts

Gordon Howald - Calyon Securities

Greg Gordon - Citigroup

Scott Engstrom - Glennhymn Capital Management

Michael Lapides - Goldman Sachs

Progress Energy, Inc. (PGN) Q1 FY08 Earnings Call May 8, 2008 10:00 AM ET

Operator

Good morning and welcome to Progress Energy's 2008 First Quarter Earnings Conference Call. Today's call is being recorded and all of your phone lines will be in the listen-only mode until we begin the question-and-answer session. For opening remarks and introductions I will now turn the conference call over to Bob Drennan of Progress Energy. Please go ahead sir.

Robert F. (Bob) Drennan, Jr. - Vice President of Investor Relations, Progress Energy

Thank you Daisy. Good morning and welcome to everyone. I know it's a busy morning this morning for the conference calls with some other companies. Joining me this morning are Bill Johnson, our Chairman and Chief Executive Officer and Peter Scott, our Chief Financial Officer and also other members of our management team. This call will be archived on our website for the next two weeks. We are currently being webcast from the Investor Relations page of progress-energy.com, we are also offering an audio replay of this call in MP3 format which will also be available from our website.

Also we 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 www.progress-energy.com/website. These pages will be referenced to from time to time during the prepared remarks and we are not going to be pushing the slide deck there, so basically what we do is we took the... on the prepared comments. Today we will be making forward-looking statements during this call as well as reviewing historical information. There are numerous factors that may cause future actual results to differ materially from these statements. We have outlined these in our earnings release, in the Forms 10-K, 10-Q and other SEC filings as well as the risk factor discussion which is also found on our Forms 10-K and 10-Q.

This morning following opening comments from Bill and Peter we will then open the phone lines to address your questions. Having said that, I will turn the podium over to Mr. Johnson.

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

Thanks Bob, good morning everyone. Thanks for joining us for our review of first quarter earning results and for your interest in Progress Energy. I will start this morning with some overall comments about our company in our first quarter, then we will update you on regulatory and legislative matters as well as our Levy County nuclear projects and Peter will review our first quarter financials and the outlook for 2008. I am pleased with the progress our company has made so far this year and the solid ground work we are laying for the future. We are sharply focused on what it takes us to be successful this year and over the long-term.

As we reported earlier this morning we did face some external challenges this quarter. Volatile and normal weather and lower than expected customer and usage growth in Florida affected our retail revenues in first quarter. Accordingly we expect lower revenue growth in Florida for the balance 2008. Thus far the economy in the Carolinas has been quite resilient but we are seeing some slight signs of softness there as well.

Now the long term economic outlook for our service territory remains very strong. According to recent U.S. census estimate of net population migration by individual state, North Carolina ranked second, Florida fourth, and South Carolina sixth. But the long-term outlook is very strong. But of course immediate challenges require immediate responses. For 2008 we have already begun taking targeted setup on both the revenue and cost sides of the earning equation that are designed to achieve our financial objectives this year.

We started to see some softening in Florida at the end of last year, it actually reflected lower than recent historical revenue growth expectations and projections for the year. During the quarter the actual revenue growth declined even more then we expected. We began taking steps at the beginning of this year to prepare to mitigate the impact of a softening economy. For example, we have successfully expanded and extended our wholesale business. We began seeing some of the positive impacts of these new contracts late in the first quarter. We also began a stringent cost management program enterprise wide and although we are not yet experiencing the same softness in the Carolina that we have seen in Florida, our cost management program extends into the Progress Energy Carolina segment as well as a precaution.

As part of our cost management program, we are rigorously prioritizing our spending. As I said earlier, our objective is to meet our financial commitments this year and into the future. Let me emphasize that we will continue to fund the high priority work including appropriate spending on our nuclear plants, keep things running smoothly, and to continue to deliver excellent customer service. As a result of these actions we are reaffirming our 2008 core ongoing earnings guidance of $3.05 per share to the range of $0.10 above or below that target. In a few minutes Peter will elaborate on the mitigation steps we are taking.

Now turning to the regulatory and legislative arena, already this year both of our utilities have made excellent progress under regulatory and legislative fronts which will help us execute our balanced strategy for meeting demand growth and future carbon limitations. First let me talk about Progress Energy Carolina. As a follow up to last year's energy legislation in North Carolina which we supported, we recently received the final implementation rules from the Utility Commission. Last week we filed our initial energy efficiency and demand side management programs. This filing includes our proposed share savings model, under which we will recover cost and net loss revenue and our company and customers will spilt the benefit derived from these programs. One of the programs we've filed is an investment in the 60,000 mile distribution system that serves our customers in the Carolinas. This innovative program will provide us the capability for reducing and shifting peak electricity demand, and will also reduce the level of natural electricity loss over long distribution lines.

Now for the legislative and regulatory developments of Progress Energy, Florida. Florida legislature just ended its 2008 session last Friday, May 2nd. It has a comprehensive energy bill that is supportive of our balanced solution strategy including helpful provisions regarding transmission cost recovery and line [ph] which are very important issues for us in Florida. That legislation also provides for development of new RPS rules, carbon cap-and-trade rules both of which will require future legislative approval. The legislation also enables the public service commission to sent utilities with higher returns on equity when more than 20% of future load growth is met to efficiency and demand side management program.

We filed our Levy County nuclear need case with the Florida Public Service Commission on March 11th, more about that in a moment. And we filed last week for cost recovery associated with our Crystal River nuclear plant upgrade and the development costs associated with the Levy project.

I'll turn now to our potential nuclear expansion in Florida and North Carolina, which is a key part of our balanced strategy to meet both demand growth and future carbon regulation. We continue to take measured steps to keep our options open on these two nuclear projects. Here are the key 2008 regulatory milestones for the Levy County project in Florida. We will have a hearing on our need case during May 21st through 23rd before the Public Service Commission. We expect the Public Service Commission to order on the need case in early August. Then we will have nuclear cost recovery filings and hearings with the PSC sometime in September or later.

In April we signed a letter of intent with Westinghouse and The Shaw Group that authorizes the purchase of long lead time materials through the Levy County projects. But, we have not yet entered into a more binding engineering procurement and construction contract but negotiations are ongoing. As part of this process the company has set forth a strict set of guidelines that must all be met before we will proceed with this substantial project. First, we need a firm design with clear visibility to cost. Second, we need the completion of an APC contract that meets the needs of all participants. Third, we need to develop a credible financing plan with contingencies and we will make continuing legislative, regulatory, and public support for this project. We are also in advanced negotiations with potential joint owners that may have a positive impact from a political and cost perspective.

Now for our nuclear plans in the Carolinas, as you recall early this year we submitted a combined license application with the NRC for two possible new reactors at are existing Harris Nuclear Plant site near Riley, North Carolina. The NRC recently informed us, that it had documented our application and accepted it for review. That plant if we ultimately decide it's the correct path, will not be needed until several years after the projected Levy plant enter service.

One final issue I would like to touch on, the continuing work on climate legislation in the Congress. As you know the Lieberman Warner Bill is scheduled for senate debate in June, I won't hazard an opinion about how we will turn out, but we have been working to make our views known on the subject policy makers in Washington and in our states. And that view is pretty straight forward.

We need to be clear about what our objective in this legislation is. We need to have objectives and a plan that are achievable, but we need to have timetables and milestones that are consistent with the development of necessary technology. We need to have a carbon pricing and allocation methodology that has the least possible impact on consumers in the economy. In more concrete terms the climate change policy must be affordable for all our electricity consumers. We think that part of affordability is a mitigation mechanism that will be effective if cost becomes burdensome or technology doesn't involve in time. And we will continue our efforts on this important issue as it works through the Congress.

In closing we will continue to keep a close eye on the economic trends. Despite the softer economy in some areas, I am confident about our utility business model and our underlying fundamentals. We have every reason to believe that Florida and the Carolinas will remain attractive areas for more people and more businesses in the years ahead. And we are having success in working collaboratively with public officials to make sure we are prepared to serve them. And I am extremely product how are employees are finding ways to generate additional revenue as well as boost efficiency and productivity. They are highly committed to our success and their financial discipline and innovative thinking will enable us to execute our strategy in today's economic climate. We continue to offer a strong value proposition with a superior risk adjusted return. The company has very low exposure to commodity risk given our favorable fuel riders within our rate structure.

Additionally our constructive relationship with our regulators provides for low regulatory risk. We remain committed to growing our dividend at a reasonable rate while maintaining our balance sheet and credit metrics. Our long-term earnings growth is supported by sales and rate based grows within our service territories. In summary Progress Energy presents a clear business model with a successful execution history and strong prospects. And now I'll turn the call over to Peter to review our financial results.

Peter M. Scott III - Executive Vice President and Chief Financial Officer

Thank you, Bill. I will cover four primary topics and then we will get to your questions. Topics I will cover are a review of quarter-over-quarter results and discussion of our first quarter compared to our plan for the first quarter, additional background on the economic situation of service territories, and a review of steps we have taken that give us the confidence to reaffirm our 2008 earnings guidance.

We will go to slide 15 and topic number one, the first quarter results of 2008 versus the results from 2007. As shown our ongoing first quarter earnings in 2008 were $0.02 per share lower then the earnings in the first quarter of 2007. When you look through all of the earnings per share variances there are number there with $0.02 to $0.03 better than 2007 and a slightly higher number that were $0.02 to $0.03 worse. Going to slide 16, the variances that are noteworthy and have the most relevance to our earnings power going forward are these, on the positive side and totaling $0.17 per share, we were $0.03 better in the Carolinas on retail margins due to growth and usage, $0.03 better in Florida on wholesale margins, $0.05 better in AFUDC equity in both utilities related to our CapEx program, $0.03 better in Florida due to the Hansford [ph] addition to the rate base, and $0.04 better than the Carolinas due to the recovery of reagents and changes in purchase power recoveries and cost.

On the negative side, it was about $0.09 per share, we were $0.02 lower in Florida on retail growth and usage, $0.03 lower wholesale margins in the Carolinas from short-term opportunity sales. This entire amortization to the Carolinas due to Clean Smokestacks and through entire interest cost. For these key variances, the net quarter-over-quarter pickup was $0.08 per share. The other variances were things like taxes and weather that will vary from quarter-to-quarter or do not really signal long-term economic strength one way or the other.

We have as promised included a new schedule to provide clarity on ongoing O&M expenses and that schedules to the top of pages 3 in our press release and page 17 of this morning slide deck. Let me emphasize that we continue to focus on keeping ongoing O&M growth at about 4%. We are clearly on target for that this year.

Now, lets go to slide 18 and topic number 2, the quarter verses our own plans and how we feel about the start of 2008. Our chief concern about the first quarter is margin. The key negative variances relative to our plan are these. First, milder weather in both the Carolinas and Florida that resulted in lower than projected earnings of $0.06 per share. That is a big number and of course more closer to us. However, weather is one of those things that tends to revert to the mean of our term. I should emphasize though that we are not counting on weather to make up loss ground to achieve our target earnings for 2008. We are projecting normal weather for the balance of the year.

Second negative is lower than projected retail margin in Florida caused by lower growth and usage. This result was $0.03 per share lower than our projection. We lowered our projection to sales growth for 2007 and at the start 2008 we further lowered our expectations for 2008 based on observed trends primarily in usage. The drawing on page 19 shows data that puts this situation in Florida into perspective. The charge goes in town series, the number of residential customers that use less then 200 kilowatt hours per month which we use as a surrogate measure for unoccupied homes. You can see that for the first three months of the calendar year, for the years 2005 through 2008, that the number of accounts with low consumption has increased significantly which in turn reduces our average customer usage. We should see eventually some upside as vacant homes become occupied which will translate in to an up tick in usage.

Let me emphasize one point as Bill did, we believed the long term macroeconomic fundamentals in Florida are strong and we expect to return to normal growth pattern over the next few years. To summarize though we are adopting a conservative view of retail sales growth in Florida and as Bill said we have turned our attention to steps we can about net income growth in Florida that is consistent with our enterprise financial objectives.

The one other negative margin issue relative to our 2008 plan concerns the Carolinas utilities short-term wholesale sales. For perspective in the Carolina's we have two types of wholesale businesses. The first is our long-term contracts with new lease and co-ops within our service territory. The second is short-term sales we make into other wholesale markets whenever our available energy clears the market. It was the second type, the short-term opportunistic sales that was lower than our projections by about $0.02 per share. The two factors that explain this variance are market conditions and outages at one of our plants.

Similar to our normal weather assumptions our forecast for short-term wholesale business in the Carolinas includes only what we had originally forecast for the remaining three quarters. On the positive side for the first quarter, most of the other elements of our plan were either on target or slightly better then plan. In this positive category are included O&M spending, interest cost, depreciation, and AFUDC equity. So, the story so far in 2008 is one of lower than projected margin. Moving to slide 20, the next topic to cover is what steps we are taking to meet our earnings projections for 2008 and as Bill said in the years that follow. The most significant step we have taken is to increase our long-term wholesale contracts in Florida. Specifically we have added or amended long-term contracts that would give us additional margins in 2008 and 2009 that will help to offset the lower than forecast retail margin. The impact of these contracts began late in the first quarter. These contracts will offset about 70% of our expected retail margin shortfalls.

We are also looking at other options including expense management, depreciation, and regulatory amortization to provide assurance that we can achieve the $3.05 per share target for the year. We have already identified cost savings that will cover the balance of the margin shortfall.

And now for the final topic, major CapEx project status that we saw on slide 21. Major CapEx projects that have significant earnings implications are on track. In Florida, the $1.4 billion environmental upgrade at Crystal River 4 and 5, a $364 million 180 megawatt upgrade at the Crystal River 3 nuclear plant and the $683 million repowering of the Bartow plan are progressing on schedule. And the first two projects I should mention do have clause related recoveries. In the Carolinas the construction of two gas plants, one at combined cycle and the other combustion turbine are on track and we are nearing the completion of our environmental modifications at our coal plant.

In conclusion we expect the 2008 earnings forecast for the company to achieved, but we will do so with the combination of the different sales mix and with cost management. And as Bill said we are all very proud of the way our management team employees have responded to the economic challenges we faced particularly in Florida and now we'll take a few moments and give you time to prepare your questions and get to those. Thank you very much.

Question And Answer

Operator

[Operator Instructions]. Our first question today comes from Gordon Howald with Calyon Securities.

Gordon Howald - Calyon Securities

Hi, good morning.

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

Good morning Gordon. Gordon we can't hear you.

Gordon Howald - Calyon Securities

Cost reduction, additional whole sale contracts.

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

I am sorry.

Operator

I am sorry Mr. Gordon, Mr. Howald's line disconnected, he was having difficulties with his phone. We will move on, we will go to Greg Gordon with Citigroup.

Greg Gordon - Citigroup

Thanks Good morning gentlemen.

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

Hi, Greg.

Greg Gordon - Citigroup

How much of your flexibility do you offset the softness in the areas you mentioned comes from your ability to manipulate the amortization, the Smokestack amortization in the Carolinas or is that not one of the areas you are looking at?

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

Well, we take exception to you manipulate --

Greg Gordon - Citigroup

Well I apologize.

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

But the earnings assumption we had this year, we are still keeping the same amortization number in our budget that we had at the start of the year. So this is really all about wholesale margins and some O&M cost mitigation.

Greg Gordon - Citigroup

Okay, thank you.

Operator

We go to Edward Hines [ph] from Catapult.

Unidentified Analyst

Good morning. Just had a quick question on the... looking at the volume sales in Florida, it looks like residential and industrial were down 3.5% and commercial was actually up a little bit. I guess first, could you give us some color, I think the weather was pretty comparable, is negative 3.5% growth what we should we thinking about for residential and then also on the commercial what was the benefit there versus the weakness in other places.

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

For this year we are in essence expecting Florida to be basically flat year-over-year. That's kind of what the current trend is and we are just going to be conservative and assume that we don't get any retail sales growth in the aggregate. Weather will have an impact on those numbers as we look at them but that is kind of where we are looking at for this year.

Unidentified Analyst

Okay, so an expectation we should model and think about flat growth this year and how should we think... how are you guys thinking about 2009, is there some sort of recovery?

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

We haven't done any sort of reforecast yet or new plan but that we have got the wholesale contracts that give us roughly the same margin in 2009 that we have in 2008.

Greg Gordon - Citigroup

Okay, great. Thanks for help, thanks for the color.

Operator

[Operator Instructions]. We'll go next to Scott Engstrom with Glennhymn Capital Management.

Scott Engstrom - Glennhymn Capital Management

Good morning.

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

Good morning Scott.

Scott Engstrom - Glennhymn Capital Management

Peter, just a question on the increased long-term wholesale contracts in Florida, just wondering kind of why wouldn't that have been in the plan initially, was there... whether it's kind of a new opportunity, so that we have do availability of your plans, market conditions, what happened sort of between the planning stages in the first quarter here when these opportunities came live?

Peter M. Scott III - Executive Vice President and Chief Financial Officer

On a long-term basis we are seeing the cancellation of coal plants in Florida, but from our situation it was really as we began to take a look at our available resources in light of expectation for lower retail margin that we were able to make these contracts.

Scott Engstrom - Glennhymn Capital Management

Okay, so you had essentially a higher internal reserve margin that freed up capacity?

Peter M. Scott III - Executive Vice President and Chief Financial Officer

Yes, in essence driven by the fact that we are not having the growth that we expect it to have.

Scott Engstrom - Glennhymn Capital Management

Okay, thanks a lot.

Operator

And we'll go back now to Gordon Howald with Calyon Securities.

Gordon Howald - Calyon Securities

Hi, I apologize for that. I must have gotten disconnected, can you maybe just comment..... can you just maybe just quickly comment on how much of your 2008 EPS guidance is being supported by cost reductions versus securing additional revenue?

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

Right, about 70% of the margin shortfall we are expecting in Florida is being covered by the wholesale contracts. So 25% or so just from some O&M reductions.

Gordon Howald - Calyon Securities

Perfect, that's good. That's the only question I had, thank you so much.

Operator

We'll go next to Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs

Hey, guys got a question for you. We are in May and you probably made your compliance filings in both the Carolinas and Florida for 2007, can you talk about what the endeavor rate basis were at both subsidiaries and what the actual return on rate base equity was for 2007?

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

Yes, Jeff Stone, our Controller can help with that.

Jeffrey (Jeff) M. Stone - Vice President and Controller and Accounting

Yes, it was around the RRV we most recently filed was around 10% in North Carolina and Florida. I don't have the specific rate base numbers themselves here handy but you call RRV around 10%.

Michael Lapides - Goldman Sachs

Okay, would love to follow-up with you guys.

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

Michael, you can call Investor Relations and get the rate base numbers later today.

Michael Lapides - Goldman Sachs

Great, thanks guys.

Operator

[Operator Instructions]. Having no questions in queue at this time I'll turn it back to management for closing remarks.

Peter M. Scott III - Executive Vice President and Chief Financial Officer

Bill do you want to sign us off.

William (Bill) D. Johnson - Chairman, President, and Chief Executive Officer

Oh, again thank you for being on the call, thank you for your interest in the company. As you can see from today's call we do have a plan to achieve our 2008 objectives through a combination of wholesale growth and cost management, and that's where we are. So thank you for being here.

Operator

Ladies and gentlemen thank you for your participation. This does conclude today's conference. And you may now disconnect your phone lines.

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Source: Progress Energy, Inc. Q1 2008 Earnings Call Transcript
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