Progress Energy, Inc. Q2 2008 Earnings Call Transcript

Progress Energy, Inc. (PGN)

Q2 FY08 Earnings Call

August 7, 2008, 10:00AM

Executives

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

Mark F. Mulhern - Sr. VP, Finance

Analysts

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

Peter M. Scott III - EVP and CFO

Daniel Eggers - Credit Suisse

Jonathan Arnold - Merrill Lynch

Paul Patterson - Glenrock Associates

David Parker - Robert W. Baird & Co.

Vedula Murti - Duff Capital Advisors

Paul Freemont - Jefferies & Co.

Paul Ridzon - KeyBanc Capital Markets

Ashar Khan - SAP Capital

Presentation

Operator

Good morning, and welcome to Progress Energy's 2008 Second Quarter Earnings Conference Call. As a reminder, this 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 am pleased to turn the conference call over to Bob Drennan of Progress Energy. Please go ahead sir.

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

Thank you Jim. Good morning, and welcome to everyone. Joining me this morning are Bill Johnson, Chairman and Chief Executive Officer, Peter Scott, Chief Financial Officer Mark F. Mulhern, Senior Vice President, Finance 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 our 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 I'll 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/webcast.

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, Form 10-K, 10-Q and other SEC filings as well as the risk factor discussion which is also found in our Forms 10-K and 10-Q.

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

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

Thank you, Bob. Good morning everyone. Thanks for joining us for the call for a review of our second quarter earning result and where we stand at this point in the year. We certainly appreciate your interest in Progress Energy. We know that this is a busy time of the year, so will attempt to be efficient [ph] in our presentation this morning.

We are following along with the slides, slide 4 shows you the topics I'll cover this morning, starting with an earnings update, I will talk about recent court action on the EPA's clean air rule following with an update on the Levy County nuclear project.

Slide 5, starts with the earnings update. As noted in our release this morning, our second quarter ongoing earnings was $0.77 per share, compared to $0.56 for the same period last year.

We are obviously very pleased with this performance, especially in lighted the economic slowdowns that the nation is currently experiencing.

Positive year-over-year drivers were increased wholesale revenues, increased AFEDC equity on construction projects, additional revenues in Florida due to the completion of Hines unit 4 and favorable weather compared to last year's second quarter. The majority of these favorable drivers were associated with our Florida operations.

We are pleased to report that we are right on budget, through the first six months, on track to meet the 2008, ongoing earnings guidance that we announced earlier this year.

But today, we are reaffirming our 2008 ongoing guidance of $3.05 with a $0.10 range on either side of that number. I am very pleased with how well our leadership is collaborating and how hard our employees are working to ensure we meet our financial commitments.

In few minutes, Mark Mulhern will discuss the growth trends in our two service areas, as well as the financial results for the quarter. We are also hard at work evaluating and refining our plans for the next two years and beyond. We know how important it is to build on our successful track record of achieving our financial objective year-after-year. I feel very good about the quality and the depth of the analysis, discussion and planning, now under way.

I will turn now to the recent Court ruling on the CAIR rule, slide six. As you are aware, a Federal Court in July, vacated the EPA's Clean Air interstate rule, known as CAIR. This 2005 rule had set limits for a NOx and SO2 emissions from coal fired power plant.

Of course this is an issue many of us in our industry are closely monitoring. Just for Progress Energy, keep in mind that North Carolina has an earlier state law 2002 Clean Smokestack Act to address the same initiatives. We are well on our way to completing our emission control project in the Carolina. Those are covered by the state law.

In Florida we are nearly half way to our completing the modifications to Crystal River and its plant. We doing this work in Florida consistent with the plan we filed with the commission several years a go. And consistent with commission practice and policies, costs in these kinds of expenditures and projects are recoverable. We believe the cost associated with compiling with CAIR will be fairly consistent with the basic practices and principals of emissions on the Florida commission.

Just to give you a sense of where we are in this project, on Unit 5, the SCR and scrubber are going to be installed in 2009. Those were designed to meet the first stage of the CAIR rule which is a 2010 date. We are continuing on that schedule. Unit 4 and the same installation of equipment will occur in 2012 to meet the 2015 compliance stage for the second phase of CAIR.

And so what we are doing now is we are analyzing our options, we are conferring with our state regulators to how we should how should perceive... there may be some flexibility on that second phase, but we really do not know. We believe that our eventually Federal rules will be enacted that will replace CAIR, we believe this environment retrofit will be required eventually. So we are continuing to analyze this issue and assess the implication and confer with our state regulators

Next topic slide 7 is an update on the Levy County project, the nuclear project in Florida. As you probably know the state public service commission last month unanimously approved our leave petition for that plant and we expect an order from the commission in the next several days.

And this action really continues the strong legislative regulatory and public support we are receiving for [indiscernible]. We achieved another important milestone with the project when we filed our combined operating license with the NRC last week. With the FPSC's approval of the new case, we will now move forward with our petition to seek recovery of free construction cost associated with this process. PSP has docketed a hearing for September on 11 and 12 on our application.

Another critical part of the Levy projects engineering procurement and construction. We are currently in very close negotiations with Westinghouse and Shaw on this EPE [ph] agreement and we hope to wrap it shortly. You might have noticed that we are moving very slowly and deliberately on this project.

Our management team is going great lengths to ensure we get the best contract that we can. Last week, I and several other of our senior management team went to Tokyo to meet with the top management of Toshiba, the parent company of Westinghouse. We also met with the top executives in Japan Steel Work, a company that will make the major forgings for the reactor vessels, turbines and generators.

An excellent trip, we had a first hand look at Toshiba's engineering capability and their factories. In Japan they have maintain continuous construction of nuclear plants. They have built 51 plants since 1970 and our focus in this trip was to make sure our construction consortium here bring that expertise to the Levy project.

Slide 8 shows you the condition we have discussed several times before, about proceeding with the new nuclear plants. As we made clear before, having an EPC agreement that meets the needs of all participants and four necessary condition we have to have before we proceed with building a new plant. The other three are firm design with clear visibility to cost, credible financing plans with contingencies and continuing legislative regulatory and public support.

We are making progress in all these fronts, but we are taking a careful deliberate approach with this project, which we should with a project of this magnitude.

Now on slide 9, while we are making good progress on Levy, we are also moving forward with this two other parts of our balance strategy for meeting our customers long term energy needs. Best [ph] institute a market software company recently announced a one mega volt solid project to build on its headquarters campus here in [indiscernible] town.

We signed a ten year agreement to purchase the output of that solar plant. Additionally we have established a new department to provide greater focus on renewable, and alternative energy, through our efficiencies and demand side management program.

We also awaiting the regulatory approvals for a series of new efficiencies and demand side program we will proposed in [indiscernible].

We have previously reviewed with you our business model for ampere regulated electricity facility, based on sustained operational excellent and delivering customer satisfaction. We believe that these are vital to our long term success.

As we prepare for our future, I am proud of how well our employees are serving our customers, day in and day out. We reported last month, we once again achieved a favorable top quartile ranking in the annul JD Power satisfaction survey of residential customers. Operational excellence and customer satisfaction are the foundation of continued regulatory support.

So even with all the turbulence in the U.S. economy this year unless you have the right long term strategy and the right operational and financial progress. I am pleased with how effectively we are managing our business for both the short term and the long term. Just to remind you of our long term financial objectives are delivering annual EPS growth of 4% to 5% a year, continuing dividend growth, providing our shareholders with annual total shareholder and return of constant CE of 8% to 10%. With that I would like to ask Peter Scott to make a few comments. Then we will turn Mark Mulhern

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

Thanks Bill. I won't take much time but as this would be my last Progress Energy earnings call, I do want to mention a few things. First, I am delighted that Mark Mulhern will be my successor as CFO. I have always wanted Mark with a long list of his qualification for the job. You all know many of those. But I have worked closely with Mark for more than eight years and I know that he his ready now for this new role.

His experience, his ability to think strategically about the next quarter as well as the next decade and his overall leaderships are tremendous assets that will serve Progress Energy well.

Second, I want to let you, he collective and individual members of the financial community know that I really have enjoyed working with you, at least about 95% of the time. And I have developed a great respect for the diverse role that you all play in the financials and I wish each of you success in your respective processes. And finally I want to say that I know that Bill Johnson, Mark Mulhern, Tom Solomon [ph] and Bob Drennan will offer the highest quality of Investor Relations possible. Progress energy has come along way over the past eight years and I have believe that Bill and his team will work hard to deliver on the results that we have promised. Thank you for brief indulgence and now I will turn the call over to Mark.

Mark F. Mulhern - Senior Vice President, Finance

Thank you, Peter. I will thank Peter first. I know Mark is leaving big shoes to fill in this quarter in particularly he is making it an extra tough, I mean going forward. I look forward to renewing my relationships with many of you and I am grateful for the opportunity. Today I will cover four general areas and then we will take your questions.

On slide 11the topics I will cover are outlined there basically, I am going to go over the quarter-to-quarter results in brief and then the year-to-date update, a little review of the economic situation in our service territories and then a brief discussion of our current position with the Clean Smokestacks amortization in North Carolina.

So lets start with the quarter, as Bill said and is detailed on page 3 of the release, our ongoing second quarter earnings is $0.77 in 2008 or $0.21 higher than the $0.56 of earnings we recorded in second quarter 2007. Basic breakdown between PEC, Progress Energy, Carolina and Progress Energy, Florida as in Progress Energy Carolina is $0.41 versus $0.34 or $0.07 increase year-over-year and at Progress Energy Florida $0.46 versus $0.27, a $0.19 increase in year-over-year.

Individual increases and decreases our detailed in our release and show up in the slide that we have provided So I won't go though each of those detailed items, but in general, Progress Energy flow's comparison an increase of $0.19 over last year, was against unusually weak second quarter 2007. That included a fuel disallowance charge and some unfavorable weather. So as we stated in the first quarter, we were able to redirect available on our sales from weaker retail demand to new or expanded wholesale contracts.

Recall the first quarter conference call, we did point you to the fact that we had probably mitigated some of the retail weakness through wholesale and that has actually come through. A stronger wholesale performance in Florida, revenues from the addition of Hines 4, Bill touched on in his opening comments and the AFUDC equity associated with several large construction projects are the earnings drivers in the quarter for Progress Energy Florida.

Shifting to Progress Energy Carolina, a $0.07 increase in earnings quarter-over-quarter primarily came from increased growth in usage, higher wholesale revenues, and lower purchase power cost. Carolina's customer growth has remained relatively strong despite a weak economy across the nation. On the cost management, we continue to be diligent in attempt to mitigate cost increases were possible. We have include schedule, we introduce last quarter at the top S 4, page S4 in the release, which shows the adjusted costs with the past two items removed. It's showing an increase of 2.9% year-over-year.

We are intensely focused on keeping our ongoing O&M growth in the 4% or less range. I will now shift to the year-to-date numbers for a minute after reviewing the quarter.

On a year-to-date basis on slide 15, there is some commentary on slide 15 about the year-to-date numbers. Update basically right on-target as Bill stated in his comment versus our internal budget. Just got that a little differently than we maybe originally plan. He talked about the wholesale sales in particular. But our 12 months trailing earning per share is $3 it's put us in a great position to meet our target for 2008, $3.05.

Obviously it's still early and a number of things must stay on track for us to meet our numbers. And typically the third quarter represents 40% of our annual earning. We have some ways to go, but right now we feel pretty positive about were we are. A wholesale success in Florida, our regulatory initiatives and continued vigilance in cost management, will set the stage for a strong finish to 2008 and set us up well going into 2009.

On slide 16, to give you some perspective on customer growth we have outlined for you the customer growth numbers and quarter-to-quarter basis for Progress Energy Carolina and Progress Energy, Florida.

As we mentioned in the first quarter Progress Energy Florida has experienced a slow down customer growth. The chart on slide 16 shows you that. At a recent report from our Wachovia economists noted that the second quarter was in the first down quarter in Florida since 1991.

The Florida economy actually shrank 1.6% during the second quarter. This same economy suggests that Florida will... projecting the Florida Economy to bottom out some in late 2008 or early 2009. This is fairly consistent with our views and we have incorporated this in to our financial plan.

Next item, I'll talk about is the Clean Smokestacks amortization program, as noted on page 2 of our release, last month that specifically on July 10, 2008 Progress Energy Carolina has filed a petition with the North Carolina utilities commission to question that the MCUC reconsider December 2007 order and terminate their requirements to PEC to amortize under the Clean Smokestacks compliance cost in excess of 559 million.

The company requested that the cost in excess of 559 million be placed in rate raise. We supported the petition; PEC indicated higher operating expenses from emerging work much of in the nuclear area and then declining revenues due to economic slow down and weather that would offset the benefits of rate case in the Clean Smokestacks compliance amortization. Our regulatory folks have worked will all the parties and gotten support for this request. This would eliminate the requirement to take 244 million of Smokestacks amortization by the end of 2009.

We anticipate a final ruling from the NPU in the next couple of month and if successful, it will help mitigate some of the rising costs that have impacted our business. Just to the matter of note, if you recall we continue to have the highest accelerated depreciation the highest nuclear accelerated depreciation program.

We anticipate at least the remaining minimum level of depreciation under that program by the end of 2009, which is approximately 90 million and there is a maximum. If you recall we had flexibility in that program to take a minimum and maximum. There is a maximum amount remaining under that program which totals $310 million.

So the take away on the amortization and depreciation changes for you, is that although they give us some additional flexibility, and basically restores to the flexibility that we had previously, before Clean Smokestacks when we had a minimum and maximum, amount we could take under the Harris Accelerated Nuclear depreciation program.

What the changes though is primarily help offset rising cost across all our businesses, do not resolved in significant bottom-line earnings. However, if approved, we would have greater confident in our ability to achieve our 4% to 5% earnings per share growth target, this year and next, in what has turned out to be a very challenging economic environment.

Last item I'll cover, is the major capital expenditures just to give you a quick update on that on slide 18 we have to summarize four uses of major capital expenditure projects and specifically that of the significant dollars are being spent in Florida as Bill talked about in his comments we've got the environmental upgrade to Crystal River 4 and 5 and then those $365 million 180 megawatt upgrade at Crystal River 3 nuclear plant, then the 690 million repowering of the Bartow plant, than the Crystal River 3 steam generator replacement, all of those projects are progress on schedule.

We recalled the first two at least have paused recovery related to them. And then the Carolina, the construction of two gas plants one a combined cycle, the other a combustion turbine is on track and as you know, AFUDC equity numbers contribute to our earnings so we are very focused on the budget and the schedule for all these projects. So far to-date we have been very good with respect to those items.

So in conclusion, we are pleased to be on track to deliver our earnings guidance for 2008. As I said before, the third quarter is typically our biggest contributor to earnings, we will have a lot clarity after Q3 and overall we very positive at this juncture.

Just on a personnel basis, I am very optimistic about our future prospect. I have been working closely with Bill and Peter and the rest of the senior management team over the last few years and we would expect a CEO, CFO transition with no major shifts in strategy.

Bill leaves me a very strong financial team, one which I know very well. You can expect same kind of candid and open communications, I think we've been given to you on the Investor Relations front over the last few years. Delivering on our financial commitments including finishing 2008 strong and laying the ground work for 2009 and 2010 is our primary focus.

Again the focus is to consistently deliver on the EPS growth targets, we've laid out, maintain solid credit quality, lower the dividend pay out ratio and prepare for a potential large new nuclear CapEx program in Levy County.

So just before I close and take question, our 10-Q will be filed on Friday, August 8 while you watching the opening ceremony of the Olympic we can get heavy reading done on our 10-Q. And with that, we will take questions.

Question And Answer

Operator

Thank you, gentlemen. [Operator Instructions]. Our first question this morning will come from the line of Dan Eggers at Credit Suisse.

Daniel Eggers - Credit Suisse

Good morning. Peter, first of all congratulation, you will be missed. We really enjoyed working with you. On to business; first question when we look it at the wholesale revenue contribution in the quarter, the numbers were quite strong. How much of that is going to continue, I understand you have signed some new contracts. Could we assume that, that a bit of a repetitive benefit.

Mark F. Mulhern - Senior Vice President, Finance

Dan, this is Mark as we sign new contracts. Again there are some contracts that we think take us to into '09. We have basically a similar amount of new revenue for '08 and that we think that's repeated in '09. So we do there is some carry over in to next year.

Daniel Eggers - Credit Suisse

So the tick up we saw on the wholesale side in the first quarter on a year-over-year basis we should assume that contribution similar size up in the third and fourth quarters and then carries on at a constant rate in 2009,is that the way to think about it?

Mark F. Mulhern - Senior Vice President, Finance

Yes, it may be perfect because obviously we contract the [indiscernible]. So that may not be straight line in the quarter-to-quarter basis. You can assume some more contribution in '09 from that, and the pick up in wholesale.

Daniel Eggers - Credit Suisse

We didn't get any of this help from the first quarter raise this should be it have little bit improvement even in '09 versus '08 because of the first quarter pick up.

Mark F. Mulhern - Senior Vice President, Finance

Yes, we had a very small amount in the first quarter. That's correct.

Daniel Eggers - Credit Suisse

Okay, from the regulatory perspectives, are these been held outside of the ROI calculation?

Mark F. Mulhern - Senior Vice President, Finance

They are.

Daniel Eggers - Credit Suisse

Okay. Turning to Florida, you kind of with this slowing economy, can you just share some thoughts on what you guys are seeing from a consumption trend prospective and kind of on weather adjusted basis, and any thoughts on kind of housing vacancy and that sort of things.

Mark F. Mulhern - Senior Vice President, Finance

Yes, we obviously has seeing a slowing, no question, in fact our growth in usage after the quarter, compare to 2007 was down about $6 million for PES. We did do the same kind of analysis that you... maybe we shared with you last quarter in terms of low usage customers and we actually had a littler better performance in the June, but we haven't seen that sustained in July. So as an example we have a fair amount of empty units with North Carolina being sold to those and set [ph] to the meter, even though the meters have [indiscernible] we will sail through that. We do think that, again, may be consistent with some of things you've heard from others and that economist I cited there that we think that '08 and the beginning of '09 are going to challenging in Florida, but ultimately they will comeback and we'll hopefully have some, ability to get a boost from those meters that are hooked up already.

Daniel Eggers - Credit Suisse

Okay. And I apologize for taking so much time, bit a last one, the Florida emergency fuel adjustment, saw some pretty big increases in the realized coal prices relative to where you were hedged. Any color you can you can provide, one, I guess, kind of on some of the delivery issues you are facing and thoughts based on where you are hedged and what you are seeing in the market as to what kind of increases we should read through into next year?

Mark F. Mulhern - Senior Vice President, Finance

Yes, fuel, as you know, in Florida in particular, we got a mid-course correction approved in July. So we filed for a mid-course correction and we will recover that 17 months. So we will recover that over rest of 2008 and then into 2009. We feel fairly good about that. We are pretty well hedged for '08 and '09, may be less so for '10 and '11. And we've seen normal issues with respect to delivery or staying on top of on top of that, we have put some folks in the field to make sure that we are getting the deliveries that we are expecting. No question, pricing pressure continues in coal.

Daniel Eggers - Credit Suisse

Okay, thank you.

Operator

Next we will hear from Jonathan Arnold with Merrill Lynch.

Jonathan Arnold - Merrill Lynch

Hi, good morning, guys.

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

Good morning.

Jonathan Arnold - Merrill Lynch

I wanted to just visit... I may have missed this, I apologize, on the Clean Smokestacks filing, could you give us a sense of is this loss of the amortization, or the amortization goes away, did you characterize that as offsetting some of the expense pressure or sales pressure or something that was... how did you gauge that versus the pressures you are seeing?

Mark F. Mulhern - Senior Vice President, Finance

Yes, one of the drivers, Jonathan, for that filing relates to the fact that we have higher cost across the business, in nuclear and in some of the delivery businesses, obviously, all the commodity prices and contractor expense are increasing across the board. The way that we've thought about this least is the amortization relief will potentially allow us to mitigate some of those cost increases. And the other piece to that is you will still take some Harris accelerated depreciation. Between absorbing some of the higher costs in Harris, we think we will basically offset that amortization we otherwise would have taken.

Jonathan Arnold - Merrill Lynch

And how does the rate... how about the timing for the rate basing and I guess, the earnings associated, would that be... would that have to wait for rate case approval or would it be just a separate issue?

Mark F. Mulhern - Senior Vice President, Finance

You recall, it is a... it would require rate case and rate base approval. If you recall, in the filings that we've made, our North Carolina Utilities Commission will obviously look at prudency of all those costs and determine whether they are eligible for rate base recovery at that time.

Jonathan Arnold - Merrill Lynch

Again, I am if you covered this, but did you make a comment about what kind of costs you are seeing in that program, particularly given the, I guess, any recent updates following the CAIR rule change?

Mark F. Mulhern - Senior Vice President, Finance

Well, in North Carolina, which is where the smokestacks issue applies, we are pretty close to being finished with our scrubber work and all the retrofits we put on our coal facilities. And those costs are... haven't changed from what our public disclosures have been about.

Jonathan Arnold - Merrill Lynch

Thanks a lot.

Mark F. Mulhern - Senior Vice President, Finance

Welcome.

Operator

Our next question will come from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

Hi guys. Can you hear me?

Mark F. Mulhern - Senior Vice President, Finance

Yes.

Paul Patterson - Glenrock Associates

The $1.34 [ph] that was in your budget, it looks like, I mean, that if I read the release right, that about $0.04 is... you would have done $0.04 better if you had normal weather, is that right?

Unidentified Company Representative

I am looking, just to see.

Paul Patterson - Glenrock Associates

Year-to-date I think it looks to me like, I think on S3 that... weather was a negative $0.04 year-to-date?

Mark F. Mulhern - Senior Vice President, Finance

That's correct. Sorry, correct.

Paul Patterson - Glenrock Associates

Okay. So if you had normal weather, you would beat your budget, is that right?

Mark F. Mulhern - Senior Vice President, Finance

Right.

Paul Patterson - Glenrock Associates

Okay. And than on the on your outlook with the CapEx that you were mentioning and this NCUC filling, what do think beyond that you guys might have go in for the general kind of rate case kind of thing. When might that kind of thing show up? Any idea about how far it might be until you have to go in for rate case?

Mark F. Mulhern - Senior Vice President, Finance

Yes, I mean, just in terms of the two jurisdictions and break [ph], I think you know this, but we have a rate settlement in Florida that goes though the end of '09 and has a potential six month extension into the mid part of 2010.

Paul Patterson - Glenrock Associates

Right.

Mark F. Mulhern - Senior Vice President, Finance

So, right now our plan would be to obviously prepare for rate case issue in '09, but may have some opportunity for some settlement discussions as well. So that's how we think about Progress Energy Florida. In the Carolinas, we don't see a rate case given where we are at least in the near term. So I don't see any pressures to have any rate reviews in North Carolina.

Paul Patterson - Glenrock Associates

Okay, great. Thanks a lot.

Operator

Dave Parker with Robert W. Baird, your line is open.

David Parker - Robert W. Baird & Co.

Good morning. And to echo on Dan's comments, Peter, you will be missed and I am glad that Mark hopefully has a solid job here after successfully selling every he was President of. So, I appreciate that. Maybe, Bill, if we could follow-on on your comments on the environmental upgrades at Crystal River 4 and 5, I know you said you are watching things carefully, but is there an opportunity in Florida with a fairly aggressive position released by the Governor for renewables and CO2 reduction et cetera to may be have state law passed that would give a little more certainty on that investment or I mean, and maybe if so, what's the timing of getting a little more clarity on the upgrade there?

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

Yes, suggesting you have made or at least the possibility of something we're discussing right now internally, it's too early to say when it just requires state legislation. We are, say, highly confident that something that looks like CAIR will return. The process with the EPA for rule making is a multi-year process. So, you think about two to three of getting a federal rule out. And may be some pressure for the state legislation on the act, we have really not come to any conclusion about that yet.

In terms of the clarity, I think certainly it's not before the presidential election federal level what the signaling would be about the future of this program. I think we are at least six months or so away from any kind of clarity on that feds will do. I think we will have clarity with state regulators before that and what they would like us to do. Any more precise than that answer would be even greater speculation there.

David Parker - Robert W. Baird & Co.

Okay, great. Another question just again focusing on Florida with some of the work force reductions, did you book incurring additional items just for severance costs or items like that?

Mark F. Mulhern - Senior Vice President, Finance

David, we have not that yet. We are, as you may have seen a little bit in the press, that we are taking some actions. That chart that we showed about customers growth, we had a energy delivery business, in particular that was staffed to hand on and deal with customer growth and we are obviously not seeing that. So, we are taking some actions in staffing area, but those will happen in the second half of 2008.

David Parker - Robert W. Baird & Co.

Alright, great, thank you very much. Congratulation on a good quarter.

Operator

[Operator Instructions] We will hear from Vedula Murti at Duff Capital Advisors.

Vedula Murti - Duff Capital Advisors

Good morning.

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

Good morning.

Vedula Murti - Duff Capital Advisors

And, Peter, best wishes.

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

Thanks, Vedula.

Vedula Murti - Duff Capital Advisors

I have two questions or two topics I would like to discuss. First one is with regards to Levy. You are beginning to commission order here shortly, but you simply remind us whether there was any benchmark cost estimates in terms either another solid field coal facility or a natural gas plant with a estimated natural gas price or was it more public policy in terms of more nuclear in the state and jobs, things of that nature? What the benchmarks were that led the commission to unanimously be in favor of Levy? And my second question is obviously with the CapEx program starting to ramp up significantly, can you talk about the next time potential equity will be needed... need be issued?

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

I will take the first part of that question and leave the hard part for Mark, second part. We made a very extensive filling months ago in Florida in the need case that has a number of scenario as it compares various types of technology, coal, oil, and nuclear, gas. So, we have listed all the technologies, we also made a range of assumptions about fuel prices, particularly gas price, and what the future carbon cost looks like.

We also made as part of that filing a pretty strong policy argument why nuclear in Florida particularly makes sense. So we haven't seen the commission order yet, but I suspect especially from the recommendation the staff made that it will include the discussion that this is the most economic way to proceed given assumptions about fuel costs and carbon costs. And it's also the right policy decision for Florida. So, we touched all the bases in the filling, in the hearing, and in the evidence. I think the decision is based probably both of those.

Mark F. Mulhern - Senior Vice President, Finance

To do on your second quarter on the large CapEx program and need for equity, we, as you now, have utilized our DRIP plan to issue equity over last couple of years, and anticipate continuing that process. So we will issue and have issued some equity through the DRIP program in 2008. We will finish that program in '08 for us and in '09 and beyond I anticipate we will have some equity issuance just to maintain a reasonable capital structure and better quality we talked about. I don't expect anything beyond the DRIP.

Vedula Murti - Duff Capital Advisors

So, you are not expecting anything beyond the DRIP until what... about what timeframe?

Mark F. Mulhern - Senior Vice President, Finance

Well, I think it depends. We obviously haven't gone out in the future and talked about those expectations. But it's definitely beyond '09.

Vedula Murti - Duff Capital Advisors

Okay, thank you very much.

Mark F. Mulhern - Senior Vice President, Finance

Welcome

Operator

Paul Freemont at Jefferies, your line is open.

Paul Freemont - Jefferies & Co.

Thank you and congratulations on a very strong quarter. Given where you came in, I guess, I am trying to figure out why you might not have ruled out at least the lower end of your guidance range, is there given sort continuing nature of the wholesale benefit and some of the other items that seem to be offsetting sort of the weaker Florida economy, can you sort of give us an idea of what could still cause you to come in at the lower end of your range?

Mark F. Mulhern - Senior Vice President, Finance

Well, I would say two things to that. I guess the first one being just in terms of where we are in the year. If you remember what we said and what you seen historically from us, is about 40% of our earnings come in the third quarter. So I think at this point in time, it may be too early to make that call relative to the bottom end of the range. And the second point I would make is we still have not gotten approval on this Clean Smokestacks filling. So, I think before assume that that gets done, I think it would be... may be presumptuous to think that we've got an easy road to get to the range. So, that's how I would think about it in that context.

Paul Freemont - Jefferies & Co.

Great, thank you very much.

Mark F. Mulhern - Senior Vice President, Finance

Welcome.

Operator

Our next question will come from the line of Gordon Howald at Calyon Securities.

Unidentified Analyst

How are you doing? This is Shar Parez [ph]. It appears that customer growth is continuing to slow in Carolinas. Do you foresee continued weakness there or starting to bottom out?

Mark F. Mulhern - Senior Vice President, Finance

Sorry, did you mean Florida?

Unidentified Analyst

No, Carolinas.

Mark F. Mulhern - Senior Vice President, Finance

Carolinas, I think on the chart we included in the slides, we see a slight decline. In other words, quarter-over-quarter, if you look at the second quarter of '07, I think we had 28000 new customers in '07, and we are showing 25,000 in '08. So we've had a slight decline in the Carolinas. And it's been pretty resilient in terms of holding up to the... compare to the national economy.

Unidentified Analyst

Okay. So you think the resiliency will continue? Would you think what your seeing in --

Mark F. Mulhern - Senior Vice President, Finance

What's happened here, if you go around downtown Raleigh, as an example, there is a lot of construction projects that we're in under way and in progress, that are getting finished. And I think the only hesitation we have is maybe the credit that will be available to fund that next wave of projects, and continue to sustain the growth we have seen,. But Carolina has been pretty consistent across the broad, if you look at that chart.

Unidentified Analyst

Okay, thank you.

Mark F. Mulhern - Senior Vice President, Finance

Welcome.

Operator

Paul Ridzon at KeyBanc, your line is open sir.

Paul Ridzon - KeyBanc Capital Markets

When did the Carolina peakers come online?

Mark F. Mulhern - Senior Vice President, Finance

Wayne County coming on I think in 2009, then the combined cycle at Richmond is like, I think, 2011, 2012. We can check that in a second with Bob.

Paul Ridzon - KeyBanc Capital Markets

Those are being constructed now or --?

Mark F. Mulhern - Senior Vice President, Finance

Yes.

Paul Ridzon - KeyBanc Capital Markets

We'll continue to see AFUDC ramp up?

Mark F. Mulhern - Senior Vice President, Finance

Yes.

Paul Ridzon - KeyBanc Capital Markets

What's the status of the synfuel carryforwards? How much cash protection do you have there on your taxes?

Mark F. Mulhern - Senior Vice President, Finance

I am looking around the room just to see if I have that number. Still close 700 million of synfuel. I was going to let Peter address the questions. I think it's like close to $700 million until last fall.

Paul Ridzon - KeyBanc Capital Markets

So, you got a nice equity buffer there.

Mark F. Mulhern - Senior Vice President, Finance

Yes.

Paul Ridzon - KeyBanc Capital Markets

And then just looking as the sales aren't kind of emerging in Florida as envisioned, what kind of margins are you seeing as you remarket that power into the wholesale market as opposed to retail?

Mark F. Mulhern - Senior Vice President, Finance

I am laughing at Bob Drennan because I knew this question was going to come. The wholesale margins obviously are not as lucrative as the retail margins would be, and fuel plays into that. But I don't... Paul, you may have to call me back on that. And I will let Bob try to get you some details on that.

Paul Ridzon - KeyBanc Capital Markets

Right. Somewhat comfortable you think or just --?

Mark F. Mulhern - Senior Vice President, Finance

I would say they will be lower.

Paul Ridzon - KeyBanc Capital Markets

Okay.

Mark F. Mulhern - Senior Vice President, Finance

But we've... I think what's happened here is we have had a fairly significant amount of pick-up in volume in wholesale. To think about what we have done of new and/or extended contract, it's close to... when you add up the megawatts, it's close to 400 megawatts of new or expanded wholesale sales in Florida. So, the numbers, I think, are coming in strong because of volume, not necessarily because of better margins.

Paul Ridzon - KeyBanc Capital Markets

And that's

Mark F. Mulhern - Senior Vice President, Finance

And those are all FERC ROE... kind of that's the FERC ROE on those contracts.

Paul Ridzon - KeyBanc Capital Markets

And the fuel costs embedded in the margin is top stack?

Mark F. Mulhern - Senior Vice President, Finance

It depends on the contract, Paul.

Paul Ridzon - KeyBanc Capital Markets

And then any things you ought to be looking at as we think about the third quarter as far as unusual stuff happening or not happening?

Mark F. Mulhern - Senior Vice President, Finance

Not that comes to mind. Obviously, this regulatory filing will be important to us. So, getting the smokestacks filing approved and then we have got a number regulatory things if you look on page two of your release, you see us doing a number of things, including energy efficiency and conservation programs in the Carolinas, we've got the nuclear Levy cost filing in Florida. So, there are a number of things on the regulatory agenda that our near position, I would be watching.

Paul Ridzon - KeyBanc Capital Markets

Thank you very much and good luck, Peter, take care.

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

Thanks, Paul.

Operator

We will hear next from Ashar Khan with SAP Capital.

Ashar Khan - SAP Capital

Good morning.

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

Good morning.

Ashar Khan - SAP Capital

I just wanted to go with this adjusted O&M, I guess, table that at S4.

Mark F. Mulhern - Senior Vice President, Finance

Yes.

Ashar Khan - SAP Capital

Am I right ongoing earning are now going to reflect this, so ongoing earnings has adjusted O&M of 819 as part of what's reported as ongoing earnings. Is that to way to look at it?

Mark F. Mulhern - Senior Vice President, Finance

Well, I might just hesitate in how you phrase that. What I would say is, what this tends to do is remove the clause recoveries here. So if you think about the clause recovery, there is an element in revenue, and there is an element in expense. Those two things should match. What the removal of those does is kind normalizes O&M. So, they are not... O&M looked at in isolation would be abnormally high. And you see it on that table, reported GAAP O&M of 5.3.... growth year over... six months over six month includes items that are recoverable. So, all we are trying to do is backup the recoverable items to show you a pure O&M number on a comparative basis, if that makes sense.

Ashar Khan - SAP Capital

Mark, I might follow this offline because I was trying to do was on your variance tables you showed that for six months, O&M was a negative $0.01. And I couldn't reconcile the negative $0.01 to either the adjusted O&M number or the reported GAAP O&M number. And I might look with Bob to try to see how those are kind of --

Mark F. Mulhern - Senior Vice President, Finance

If you call Bob, he'll be able to help you.

Ashar Khan - SAP Capital

And my second question was, what is the... and I am sorry, I might have missed that, a lot disturbance on my system. What is the impact of getting the ruling and not getting the ruling on the Clean Smokestacks amortization for the year?

Mark F. Mulhern - Senior Vice President, Finance

Well, on Smokestacks in particular, what we outlined was if in fact we are allowed to put those costs into rate base some time in the future and not amortize, we will not have to record the amortization expense that we had anticipated.

Ashar Khan - SAP Capital

And that's how much?

Mark F. Mulhern - Senior Vice President, Finance

In 2008, it was $122 million.

Ashar Khan - SAP Capital

And you have recorded none of it in the first six months?

Mark F. Mulhern - Senior Vice President, Finance

No, we've actually recorded $15 million in quarter one and then none in quarter two, we recorded $15 million of Harris accelerated depreciation in quarter two. We have got $30 million in the books year-to-date.

Ashar Khan - SAP Capital

Okay, okay.

Mark F. Mulhern - Senior Vice President, Finance

So, if we get the ruling, what we would then go be able to do is take more Harris in 2008 and then we have that flexibility that I talked about in my comments that basically says you have about... as if today we have $75 million remaining of... this gets to the minimum on the Harris depreciation. And it can go all the way up to $295 million, I think, the number.

Ashar Khan - SAP Capital

Okay.

Mark F. Mulhern - Senior Vice President, Finance

So a flexibility to take more amortization under Harris. So I think in essence, getting the ruling just allows us to return to the flexibility we had under the old program, which gave min and max on Harris depreciation.

Ashar Khan - SAP Capital

Okay. And then your comment was that one of the reasons you were asking the commission for an advance was higher O&M, but then I look at adjusted O&M line, it's like... on the sheet it's only like 2.9% for the six months, so I am seeing 2.9% in the current environment is pretty damn good. So I am trying to see are expenses going to be going up later or next year or where is the hits going to start coming because 2.9 is a pretty number?

Mark F. Mulhern - Senior Vice President, Finance

Yes, some of the O&M has not manifested itself, Ashar, in terms of things that we have to do in nuclear space. I use one example, there is a new fatigue rule in nuclear space that will require us to add additional personnel. So, that's coming to us. We've got some NERC requirements that we've got on vegetation management that we will leak in over here. So we anticipate some of this. But some of this was... if you look at the regulatory filing, you have to put it in perspective. There is a historical record you kind of again have to look at via the projections that we updated at various times. So, some of the numbers that we are seeing in expenses, we did anticipate them build into our plan. You are right. Some of that is to come in the future.

Ashar Khan - SAP Capital

Okay, thank you very much

Mark F. Mulhern - Senior Vice President, Finance

You are welcome.

Operator

Next question comes from Tom O'Neil [ph] with Highbridge Capital Management.

Unidentified Analyst

Good morning. Just had a question on the cost increase, it sounds like a lot of these are specific to the Carolinas, but just curious to what extent there is carryover on some these items into Florida?

Mark F. Mulhern - Senior Vice President, Finance

Yes, most of these are Carolina-related, but there probably is some carryover into Florida. Obviously, we have got a nuclear plant in Florida that's going to be faced with the same fatigue rules, same vegetation management issues in Florida, no question. They do have some applicability across both jurisdictions.

Unidentified Analyst

Okay. And then on the wholesale sales, am I understanding you right saying that those contracts sort of fall off in 2010 and there is just sort of an assumption that retail demand resumes?

Mark F. Mulhern - Senior Vice President, Finance

Yes, potentially although we may obviously be interested in renewing or expanding those contracts at that time we get to it, but right now, you are right, the commitment is though 09.

Unidentified Analyst

Okay. And is there any argument in the state about weather those should be applied to offset fuel rate increases?

Mark F. Mulhern - Senior Vice President, Finance

Not that I am aware of.

Unidentified Analyst

Okay, thank you.

Mark F. Mulhern - Senior Vice President, Finance

Welcome.

Operator

[Operator Instructions] Next question comes from the line of... and I apologize if I mispronounce the name, it's Carrie St. Louis with Fidelity.

Unidentified Analyst

Hi, good morning.

Unidentified Analyst

Hi, Carrie.

Unidentified Analyst

I wanted to ask a question about the Levy County plan and may be you have got this previously, but I just wanted to kind of get updated thinking on the deal we funding, weather or not you guys have commentated is that... would you need DOE funding to move forward with the project, has your Broad decided that and do you think that that is a criteria that the Florida Commission would also make some comment on thorough their upcoming decision?

Mark F. Mulhern - Senior Vice President, Finance

An excellent question, Carrie, one we have spent a fair amount of time on. On the DOE front, obviously we could avail ourselves in that program. We would be interested in doing that and we have continued to watch very closely the provisions and evaluate the cost and some of the things that are there. I think what we've said at least to others is that we don't... we have not laid it out an absolute requirement. Would it be helpful? Absolutely helpful. But we don't think it is an absolute requirement for us to move forward.

We have got some particular complexities with respect to the mortgage. I know you are probably familiar with. And the way DOE program is at least set up, that gives us some... may be some structural challenges. But we are looking at those to see if they are... if there is anything that we can do under the program. So I would say in summary that it's not an essential thing for us, it'd be nice to have if it worked and it made logical sense to us.

Unidentified Analyst

Okay. And then about the Florida Commission, due to think that's going to be a requirement that they hold you to or not?

Mark F. Mulhern - Senior Vice President, Finance

No, I do not.

Unidentified Analyst

You don't. Okay, thank you.

Operator

And at this time there are no further questions in the queue. Ladies and gentlemen, this does conclude today's PGN second quarter 2008 earnings conference call. We thank you all for your participation. You may now disconnect your lines and have a great day.

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