Progress Energy Q4 2009 Earnings Call Transcript

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Progress Energy, Inc. (NYSE:PNG) Q4 2009 Earnings Call February 11, 2010 10:00 AM ET


Robert F. Drennan, Jr. - Vice President of Investor Relations,

William D. Johnson – Chairman of the board, President and Chief Executive Officer

Mark F. Mulhern - Chief Financial Officer

Vincent M. Dolan - President and Chief Executive Officer of Progress Energy Florida


Angie Storozynski - Macquarie Capital

Carrie St. Louis - Fidelity Investments

Paul Patterson - Glenrock Associates

Risa Heteki (ph) – Decade Capital

Vedula Murti - CDP US

Michael Worms - BMO


Good morning and welcome to Progress Energy’s 2009 Year End Earnings Conference Call. (Operator’s Instructions).

For opening remarks and introductions, I now turn the conference call over to Bob Drennan of Progress Energy. Please go ahead, sir.

Robert F. Drennan, Jr.

Thank you, Jessica and good morning and welcome to everyone. Joining me this morning are Bill Johnson, our Chairman and Chief Executive Officer; Mark Mulhern, our Chief Financial Officer; and other members of our management team. As a reminder, this call will be archived on our website for the next two weeks. We are currently being webcast from our Investor Relations page at We are also offering an audio replay of this call in the Windows Media format, which will be available from our website.

I would direct your attention to our website, where we have included a set of slides which accompany our speaker’s prepared remarks this morning. These slides can be found at

Today, we will be making forward-looking statements as well as reviewing historical information. There are numerous factors that may cause future actual results to differ materially from these statements, and we outlined these on our earnings release, Form 10-K, 10-Q, and other SEC filings as well as a risk factor discussion which is also found in our forms 10-K and 10-Q. (Inaudible) about way of information, we plan on releasing our form 10-K on February 26th.

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

William D. Johnson

Thanks, Bob. Good morning, everyone. We understand we’re not the biggest news in the sector this morning so we appreciate you being on the call with us and we’ll bill down the information we covered on our call several weeks ago.

In addition to Mark and I, we have Vincent Dolan and Lloyd Yates, the CEOs of our two utilities, with us here today. If you turn to slide four, it outlines the topics I’ll cover today. We’ll talk in more depth about 2009 and 2010 and I’ll speak to a few specific issues such as Florida regulatory matters, the crystal river outage and our fleet modernisation strategy.

So let’s start with ongoing earnings on slide five. For 2009 we’re reporting fourth quarter ongoing earnings per share of $0.50 up $0.03 over the fourth quarter a year ago. And four year earnings were $3.03 up $0.07 over 2008. The 2009 result is within our original guidance and within the narrowed range of $3.00-$3.05 we provided last month.

So we posted good solid results in a challenging year, thanks to the aggressive cost management and the highly focused attention of our employees. And today we’re also affirming the ongoing earnings guidance for 2010 that we provided last month $2.85-$3.05 per share.

On slide six we poured out our strong track record of delivering on our earnings per share commitments. We know investors count on us to do what we say we will do, just as our customers count on us for reliable service.

Turn to slide seven; we cite some of the significant milestones we achieved last year. I’ll point out just a few here, for the total enterprise we were named to the Dow Jones sustainability index for the fifth year in a row in 2009 and we launched a 100MG rooftop solar initiative. In the Carolinas we secured 20-year contract extensions with two large wholesale customers and we placed the new combustion turbine service while breaking ground on a new combined cycle plan.

Last year we announced another part of our fleet modernisation strategy, a major coal-to-gas program in North Carolina, which represents a break-through opportunity that has received widespread positive attention and I’ll speak more on that in a minute.

You’ll recall that Progress Energy Florida completed a fleet modernisation project as a Bartow plan last summer. This oil to gas repowering was an outstanding success in terms of project management, capacity expansion and emissions reductions, and there is more of this to be done in Florida when the time is right. And despite the disappointing regulatory outcome in Florida last month, keep in mind that we did have successful outcomes in a number of regulatory (inaudible) in Florida last year. I’ll also talk more about the recent rate case decision in a moment.

So we made substantial progress in 2009, despite the economy. And if we move to slide 8, I want to give you a feel for how we’re approaching 2010, which is going to be another challenging year for us.

You know as managers of this enterprise we think of our job in terms of managing the present while creating the future. In other words, dealing effectively with the immediate realities and also laying the groundwork for a strong future. Now to do that effectively on any sustainable basis requires a constructive stable regulatory of policy environment. It requires a recognition of the costs involved in building and operating a reliable utilities system and a recognition that our ability to do so depends on the confidence of investors. It also requires an understanding of the need for near-term investment to return long-term benefits and their short-term decisions can have longer-term impacts.

One way to describe our role is regulated public utilities, is that we raise private capital to carry out public policy and our regulators send direct and indirect signals about the policy they want us to implement. These signals inform the way we manage the present and also create the future and to influence our ability to access and deploy capital.

So let me give you some examples of our dual focus on the present and the future and how it’s affected by regulatory action. Obviously managing the present includes both operational and financial performance. It requires daily attention to operating our system, serving customers and managing projects, it also means exercising the financial discipline to meet our earnings per share target, which this year requires us to redouble our belt tightening and efficiency measures.

Regulatory support for sufficient O&M funding is obviously important to managing the business, so addressing the Florida rate decision will be a specific challenge for us in managing the present, with as little impact on customers as possible. Another challenge will be concluding the Crystal River 3 extended outage, which I’ll address in a moment.

At the same time we’re dealing with these short-term problems, we will work on creating long-term value for our customers and shareholders. So we’ll take additional steps this year in continuing to build our balanced solution portfolio in a way that meets customer needs, public policies, and our own financial objectives.

This effort spans a spectrum of initiatives from energy efficiency programs, alterative energy projects, investments and state-of-the-art power systems. These system investments include smart-grid and fleet modernisation in the near to mid-term and new advanced nuclear in the longer term. Of course, we cannot take these steps unless the jurisdictions where we operate have signalled this as a policy direction they support.

On that note, there has been considerable comment about the current regulatory situation in Florida, so I want to emphasize that we will continue to work with our customers and regulators to foster a constructive regulatory climate in Florida. This is vital, given the need for substantial investment there in the years ahead.

At this point our assessment of the policy direction has been adopted in Florida, is one that emphasizes minimizing near-term expenditure that would impact rates and we certainly understand the concerns regarding electric rates, particularly in these difficult economic times.

But we also note there is much to do in Florida in the near-term and beyond to address the energy and environmental challenges of the future. So we have to increase our efforts to insure this is a state where private capital can be raised to effectively implement public policy.

Meanwhile, in an internal way we are producing long-term value as our company wide effort called continuous business excellence. Unlike short-term bell tightening this is a systematic effort to achieve sustainable, internal efficiency improvements and we’re already seeing good early success with this program.

Now if you turn to slide nine I’ll give you an update on the Florida rate case follow up and the upcoming Levy filings, the Florida PSC will issue its written order in our base rate case next week on the 17th. But you already know the basic facts and the bottom line of the commission’s decision. No rate increase beyond the $132 million approved last year for the Bartlow project.

When we get the written order we will study specifics and evaluate our options going forward. Our options we will evaluate will include filing an appeal of the order, taking regulatory relief in 2010, given our updated energy forecast for the year and preparing and filing another full base rate case, also consider some combination of these options. But again we have to wait and see the written order before we can make any decisions here. And we’ll also be mindful of the economic circumstances in our communities and the impact on our customers.

Meanwhile, we have two filings with the PSC on our Levy Nuclear Project, a large project that is greatly dependant on the willingness of investors to put their capital to work in Florida. Despite the annual nuclear cost recovery process we file on March 1, our final tree-up numbers for 2009 cost associated with Levy.

On May 1 we file 2010 and 2011 projections, as well as information on the projects long term feasibility. Building state of the art nuclear plants will be an essential part of how the US addresses climate change while securing our energy supply. As you know, the federal licensing process has affected the schedule for Levy and the federal signals for new nuclear as still decidedly mixed, in with more positive talk lately.

And at the state level in Florida, it’s not at all clear that the current atmosphere is conducive for an investment of this type and size, particularly if it raises electric rates in the near term.

But naturally all of this gives us pause, even though nuclear expansion is clearly part of the right long term solution for reducing greenhouse gas emissions and increasing our nation’s energy independence. So we have much to consider in this changing regulatory and policy landscape as we make our decisions on the future of the Levy Project.

At a minimum, if we move forward with the project we expect that it necessarily will be on a slower schedule with much less spending in the near term.

If you go to Slide 10 I’ll update you on the extended outage at our Crystal River 3 Nuclear Plant in Florida. This was a planned outage that began last September included a significant of scope of work. Including retain, refueling and maintenance, but also steam generation replacement in our power outbreak. We originally were going to return the plant to service by the end of December, until we discovered a crack in the concrete on one wall section of the containment building, the large cylindrical building shown on the slide. Further investigation showed what’s called a delamination in the section of the wall near the opening that was part of replacing the steam generations. The delamination causes separation or gap within one section of the outer nine inch portion of a nearly 42 inch thick concrete wall.

So we notified the NRC and have kept them well informed of this. They also promptly began and exhaustive route cause analysis, which has proven to be an extraordinary complex undertaking involving the leading concrete and civil experts in the world. This analysis points to an integrate interplay of several factors that cause this condition. So we are finalizing the analysis for a repair plan. Expect to complete the repair and return the plant to serve by mid year.

The plant is in a safe condition and safety will obviously remain our top priority here. We have not finalized our estimates on the repair and replacement power costs yet. Once the plant returns to service we will ask the Florida PSC to open a docket on this outage so the commission and interested parties can review all the relevant facts.

Now I’d like to say a word about our fleet modernization strategy before Mark Mulhern provides detail on the company’s financials. The debate over climate change has been ongoing for several years and shows little signs of immediate conclusion. But I think the ultimate direction is clear and we need to start preparing our operations for this transition to a lower carbon future. And we’re doing this through several parts of our balanced solution. But the biggest impact we can make in the early years is to reduce our generation emissions.

Our strategy in this regards has been first, to control emissions from our largest and most efficient coal plants by installing scrubbers, SCRs and the like. The second step is retiring our older, uncontrolled coal and oil units and replacing them with more efficient natural gas units. This will provide a bridge to new advanced nuclear, more mature renewals as scale and greater penetration of efficiency.

We started this process at Bartow in Florida, which I said earlier on oil to gas conversion we completed last summer.

You’ll see on Slide 11, now that our focus has turned squarely to the Carolinas. The reason for this is simple and takes me back to my opening comments. We have received clear, unambiguous policy and regulatory direction in support in the Carolinas to pursue this path. So in North Carolina we plan to retire all 11 of our remaining un-scrubbed coal units by the end of 2017. This represents nearly 1,500 megawatts, about 30% of our coal fleet in the state. And we’ll replace that capacity and more with combined cycle natural gas and possibly bio mask conversions.

So this fleet modernization strategy has many benefits. It will result in substantial reduction in NOx, So2 and mercury emissions, and will be a substantial down payment on our carbon reduction strategy. It also reduces our exposure to potential issues related to coal ash management. And it results in lower economic development, including construction, support and operations jobs while producing utility rate base growth.

This is probably the bigger fleet and good modernization story that we hope to continue pursuing at both utilities.

We see enormous long term value in this approach for our stakeholders across the board. Now I’ll ask Mark to go into more details about our financials.

Mark F. Mulhern

Thank you, Bill and good morning to everyone. My objective today is to give you a brief overview of the earnings drivers for 2009 and then give you more details to support our 2010 earnings guidance of 285-305 per share. I’ll also spend a few minutes on Cap Ex, cash flow and our discussions with the rating agencies in the aftermath of the Florida A Case.

So let me begin with Slide 14 which shows the earnings per share at each of the utilities for the fourth quarter and for all of 2009. The key point is that our increase of $0.07 year over year includes dilution from the issuance of $640 million of new equity in 2009. So as Bill showed you earlier, our ongoing earnings actually increased by $70 million over 2008.

Slide 15 is a water fall chart showing the components of what drove 2009’s earnings. Key items here include positive weather, higher retail rates in Florida and returns on our capital investments. These positives were offset by weaker than projected retail growth and usage, dilution from the issuance of shares and higher interest expense.

So we delivered $3.03 in EPS for 2009, just short of the mid point of our guidance. And as we have said, we had a couple of winter storms right at the end of the year that increased O&M and because of timing we were unable to mitigate. Otherwise we would have been right at our mid point of $3.05.

So for those of you interested in variance analysis on the income statement, we’ve summarized the key drivers of selected items on Slide 16. And hopefully this will help you in understanding the primary changes from the 2008 income statement.

You’ll recall we included this because of the way certain things flow through the income statement. For example, Florida’s nuclear cost recovery shows up in the revenue line but has an almost equal offset in the depreciation and amortization line. So again, this is designed to help you navigate to the variances on the income statement.

For 2009 we are pleased to have continued our track record of delivering on the earnings guidance we established at the beginning of the year. Meeting our commitments and managing the present is the key theme that Bill emphasizes throughout the company. And it’s working and you see the evidence of our ability to do what we say we’re going to do.

So now I’ll shift to the expectations for 2010. Slide 17 shows a waterfall chart that reconciles our 2009 actual to the mid point of our 2010 projected ongoing earnings per share range. And I’ll briefly walk you through the reds and the greens so you get a sense of what is behind our numbers.

First, we start with adjusting 2009 to normal weather. So you deduct $0.06 to get to the $2.97. And as I say that, remember, we have had a very cold January in both utilities. Where we set new inner peaks at PEC and PEF in January. And February’s weather continues to be colder than normal. So we expect to see a significant impact of weather in our first quarter numbers.

So I won’t cover every box on the waterfall, but give you key items on the positives. The increased investments box its positive $0.19, represents capital investments being completed and shifting to cash recovery either through clauses or base range. A big, big portion of this is finishing the environmental work at PEF.

Next item is Bartow plus $0.15 which is the full year impact of the recovery we were granted in the Florida rate case. So you will recall we got interim relief for this in the second half of 2009.

The next item regulatory release O&M of plus $0.10, those (inaudible) we’re still deciding our course of action in Florida where we’ve incorporated our plan $0.10 or approximately $50 million pre tax that we have pointed towards regulatory relief. You will recall we had a similar item in last year’s assumptions that turned out well with respect to interim and limited rate relief and an accounting order and pension.

Obviously the landscape in Florida has changed but we believe there are options available to us that could help us address this item.

If for some reason we are unsuccessful in the regulatory arena and we will require further cuts at O&M, our company has a successful track record in cost management. So if it comes to O&M reductions, you should have confidence that we will deliver.

It should be noted however, that further cuts in O&M in Florida will likely lead to reductions in service quality. Our customers in Florida have come to expect a certain level of service that was supported by the constructive regulatory environment over the last decade since the merger in 2000.

Next item, PEC retail revenue book (inaudible) plus $0.09. I’ll show you a chart in a few minutes on kilowatt hour sales in each of the utilities. But this line effectively represents an assumption that PEC will see higher growth and usage in 2010 of approximately 0.6% higher kilowatt hours over 2009 actuals. But this equates to about $0.09 after tax. We do expect a decline actually in kilowatt hour sales in Florida.

So a couple of minutes on the negatives. Interest expense of minus $0.15 represents the higher debt levels at the holding company based on the financing we did late in 2009. And slightly higher rates assumed for 2010.

We then have share dilution of $0.11. This incorporates an updated assumption of approximately $500 million of new equity issued through the investor plus plans. And we felt this was necessary given the lower amount of cash we received in the rate case and the need to preserve balance sheet strength at the utilities.

And I will note, we sold about $50 million in equity through the investor plus plan in December of 2009 at prices above $39 a share.

On the wholesale margin negativity of $0.10. We explained on our last call that there are several contracts that expired at the end of 2009, with due to decreased demand in Florida will not be renewed or replaced in the short term. That equates to approximately $0.10 of negativity versus 2009.

So earlier I touched on the Florida retail revenue assumption. So when you do all the math across the waterfall chart you get to the $2.95 or the mid point of our range.

We feel very confident about achieving this range despite a very challenging landscape. Our management and execution skills will be tested here. But as we have demonstrated we are up for the challenge.

So some more detail on the waterfall chart, Slide 18 gives you more detail on the weather normalized retail kilowatt hour sales. So again, connecting the assumptions in the guidance, in the Carolinas, we are projecting a positive 2010 in kilowatt hour sales after two years of decline. That is primarily driven by less negativity in the industrial sector and an up-tick in residential and commercial sales as we see a gradual improvement in the economy.

In Florida we continue to forecast a decline, but at the level about 1/2 of last year’s decline. And this is a significant issue for us and why we were disappointed that the regulators in Florida failed to recognize the impact of declining revenues in a heavily fixed cost business.

Shifting to Slide 19, is our traditional customer growth and low usage slide. You can see trends improving. But again, we expect a long slow recovery. And in Florida in particular it is very much dependant on the rest of the country’s economic recovery.

On Slide 20, we show our O&M cost management three year history. We did have some higher nuclear costs in 2009. But otherwise we’re able to manage, minimize the increase in O&M to a 1.8% increase year over year.

For 2010 recognizing the challenges we face, we have already adjusted our compensation plans down by 50 million versus 2009. We have communicated this to our employees and are committed to focusing on what we can control.

So now I’ll shift to Cap Ex and cash flow and financing plans for 2010. To Slide 21 shows our projected capital expenditures for 2010 through 2012. And I’ll mention a couple of points here. First of all, we have not included any new nuclear capital here. We did that intentionally because our direction here is under review and discussion. As Bill said, you can expect a slower schedule for the Levy Project and less capital the next few years than we have previously communicated. But with the regulatory fines we have coming up you will see more clarity around that in the next few months.

Next thing I’ll mention is we have worked internally to reduce Cap Ex over the next three year by about $600 million. This is not readily obviously to you because our Cap Ex numbers from last year’s analysis meeting actually changed quite a bit with the coal to gas repowering announcement in the Carolinas in 2009.

And the last point I would make is we have changed the risk profile of our Cap Ex plan in light of the Florida regulatory decision. And you can see this splits at the bottom of Slide 21 where we’ve effectively shifted our Cap Ex split from roughly 65%, 35% to PEF to closer to 65% to Progress Energy Carolinas.

So some of this change would have happened naturally as we completed the scrubber work at Crystal River 4 and 5, the nuclear upright and the steam generation replacement in CR3. But new capital investments to deliver a balanced portfolio will be concentrated at PEC until we see a more favorable investment climate at PEF.

So we will continue to work to reduce our capital expenditures and have some flexibility on timing that could reduce the numbers further in the short term.

On Slide 22, we show a summary cash flow picture. And no real big surprises here in terms of sources and uses. We expect the 800 million or so of needs to be addressed through debt at each of the utilities and new equity through the investor plus plan.

So on Slide 23 we show our liquidity and our debt maturities. You know we have a June maturity at PEF, $300 million to address. And we will take care of the rest of the $700 million, 2011 maturity at the holding company that we partially funded last year.

On Slide 24, it gives you a breakdown by entity of where we will raise capital, including the planned equity. So we think we have a reasonable executable financing plan for 2010. And we’ll pay attention to market opportunities as we have historically to achieve the optimum cost of capital.

I will say, we’ve been pro active and try to get in front of things and we will continue with that philosophy. As far as our discussing with the rating agencies, we have summarized where they are post rate decision on Slide 25. We have had regular constructive dialog with all of them and intend to give them our latest projection so that they can complete their evaluations over the next six weeks or so.

Our objectives with the agencies are pretty clear. We expect to remain investment rated R entities. And get to a stable outlook. As you have seen we have adjusted our Cap Ex and equity assumptions and hopefully they will recognize our commitment to solid credit ratings and our strong history of balancing shareholder and debt holder interests.

So we will keep you apprised of the results of those reviews.

So before I turn it over to Bill, I know I covered a lot of material, Bob Drennan and his IT team will be happy to answer some of your more detailed modeling questions. And we will out on the road to continue to tell our story over the next few months.

So again, thank you for your interest in our company and Bill, it’s back to you.

William D. Johnson

Thanks, Mark. Before we take your questions, I want to emphasize three key value drivers for Progress Energy that are shown on Slide 26. Our attractive sustainable dividend, our strong future growth prospects as the economy rebounds and as our wholesale contractual growth kicks in, and our fleet modernization strategy of both utilities.

Now, we’ll be glad to take your questions.

Question and Answer Session


Thank you. Today’s question and answer session will be continued electronically. (Operator’s instructions) We’ll go first to Angie Storozynski with Macquarie Capital.

Angie Storozynski - Macquarie Capital

Thank you. I wanted to talk about Florida and your next steps. I see those three strategies. Could we maybe talk a little bit more about the limited rate relief in 2010, what would it entail? And what kind of factors would you consider in your decision to actually file another rate case? Would you, for instance, wait for the outcome of our coming elections in November or it doesn’t matter at all?

Mark F. Mulhern

Thanks for the question, appreciate it. We’re going through, obviously, an evaluation of all of the things you mentioned. But you know the fundamental thing is when we found our information for our rate case, we had a further decline in revenues post those filings. So we have a short ball effectively in the top line that we have to address. And so that will be probably the focus of how we would discuss any limited filing. We are assessing, obviously, the whole political environment there. And we obviously watched how FP&L the outcome of their rate case and the things that were considered in those decisions. So we’re balancing all those factors. And you just have to watch what we do.

Angie Storozynski - Macquarie Capital

Okay. Your Cap Ex spending, on your nuclear Cap Ex, anything we should wait for – I mean, I understand that you’re going to slow down your spending. But how can we gauge that? What is it going to be dependant on? Is it the outcome of the next steps in Florida that’s going to determine the spending levels or is there – your balance sheet situation, your credit rating, what is going to trigger or decide the pace of spending?

William D. Johnson

Let me start with that. So a couple of things will determine this. Basically, everything you mentioned. First of all, the appetite in Florida for a large project that has any impact on rates in the near term, there is no appetite for that. And obviously this project has to go later and the spending has to go later. So you got a balance the appetite of the regulator and the customer to pay for improving the future. You have to also look at when you need the plan in terms of load and demand, what your other options are. You have to factor in what the thinking is on climate change legalization and when that’s going to happen. So all the factors at this point, I think we could just say it’ll be later. And we will reduce spending in the earlier years. But until we get to that May 1 filing I don’t think we’ll have a lot more detail than that.

Angie Storozynski - Macquarie Capital

Okay. Thank you.


Our next question comes from Carrie St. Louis with Fidelity.

Carrie St. Louis - Fidelity Investments

Good morning. So, I appreciated, Bill, your discussion this morning about the fact that private capital has to be raised to fund these public policy initiatives that are generally coming out of utilities. And as a bond holder in your company I’m just extremely concerned about the message that Florida is sending. It’s not appropriate. And I have choices where to put my capital. And I appreciate that you guys are trying to be very thoughtful about these decisions that you’re making regarding filing rate cases and Cap Ex cuts. But to me, I think that you also own your current investors some clarity about some changes here in response to this. Because I just really don’t think that they’re sending constructive messages.

So I want to go back to this Cap Ex slide that you guys are referring to. How is it changed? How have the ’10 and forward numbers changed versus where we would have been at this time last year?

Mark F. Mulhern

If you’ll recall last year we had on the slide some fairly significant potential new nuclear spending. Obviously we left that off the slide this year intentionally. You know those numbers are going to be a lot lower than they were in last year’s filing.

The other thing that I would point to is really the capital in terms of growth, investment in Generation in particular, has been shifted to the Carolinas through the coal to gas repowering strategy. If you think about the growth Cap Ex in Florida, really what’s being done there is finishing what we can’t really back away from. And that is finishing the scrubber work that Crystal River 4 and 5, which is in progress and makes sense to finish. We’ve got a nuclear operated CR3 that is in progress. It makes sense to finish. And actually those couple things has clause recovery around them. So we’re really then sitting there then finishing whatever was in progress in Florida and so that any discretionary growth capital that we would then spend is being concentrated on the coal to gas repowering strategy in Carolina and some smart grid investment in Carolina. That’s how I would characterize it.

Carrie St. Louis - Fidelity Investments

What was the split of, kind of, either EBITDA or cash flow for 2009 between PEC and PEF? Do you have that?

Mark F. Mulhern

I’m looking around in the room. We might have to get you that. Let us get you that.

Carrie St. Louis - Fidelity Investments

Okay. Because if I remember correctly, I think PEC is generally been higher, it’s not materially, but greater than 50%. Is that fairish?

Mark F. Mulhern

Yes, yes. Directionally that is correct.

Carrie St. Louis - Fidelity Investments

Okay. Just so I understand, the discussion about an investment grade rating. Well, you guys are not really – you guys are mid triple B company. And when I hear investment grade, I appreciate that that you’re going to stay investment grade. But to me there should be an absolute commitment to try to retain the current ratings. Obviously Florida aside they’re going to be under pressure for specific reasons. But your hold (inaudible) rating, I’m not real happy to hear that we’re just trying to hold investment grade there. Can you elaborate on that? Is that really the intent or why would you think you’d be unable to hold your current mid triple B ratings there?

Mark F. Mulhern

Okay. I think without getting into what the agencies are actually going to do. I mean, I think you’ve characterized correctly. I think that’s exactly how we view ourselves. I think our simple commentary on Florida has been, we recognize that the risk rating changes and that changes the dynamics. And so my simple comment on our last call was, I couldn’t cut enough Cap Ex to issue enough equity to keep the Florida rating where it is at this point, is the way I kind of simply think about it. But I agree with you, the holding companies should be able to potentially keep it’s rating. So I think we’re striving for that and we’ll be in dialog with the agencies about how they’re going to look at it.

Carrie St. Louis - Fidelity Investments

Well, I think the message and what everyone is kind of searching here for is obviously a sterner response to Florida. I think that whether you want to make it public or not is your decision as a company. But I just hope in these upcoming discussions with the agencies that you can try to make it abundantly clear to them that they are not sending the right public policy messages that all of your investors having choices to where you put your capital. And I think the agencies need to understand clearly whether you’re willing to put it out in public or not of the direction of these capital allocations.

William D. Johnson

Let me just sort of response overall to your comments. You said in the early part about our obligation to our investors. I want you to know that we take extremely seriously. And that we will work tirelessly to make sure that those obligations are met. But I also want you to know we are not a company of people that will take meaningless steps. We’re going to engage in a constructive dialog to explain why it’s important to be able to attract investment, which translate into jobs and tax base and all kinds of good things. So we are going to do exactly as you describe, which is look out for the interest of our investors while maintaining our obligations to serve and being as constructive as we can in the regulatory and policy arenas.

Carrie St. Louis - Fidelity Investments

Okay. That’s just kind of, where I was hoping that we could go. Thank you.


Our next question comes from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

Good morning guys, how are you. Listen, I just wanted to – and I’m going to apologize for this, on Slide 17, depreciation, I’m wondering where the difference in depreciation as a result of the rate case in Florida, where that shows up?

Mark F. Mulhern

There’s a D&A, depreciation and amortization box, second from the left, $0.06 negative.

Paul Patterson - Glenrock Associates


Mark F. Mulhern

And this is a complex area, Paul. So you may want to call Brian Kinsey (ph) about this because he labored over this. But they changed the depreciation rate on a number of the assets in Florida. You got to go through detail analysis to really get to the real numbers.

Paul Patterson - Glenrock Associates

Okay. So what you’re saying is it’s complicated. So although there is that benefit in the rate case it’s offset by some other depreciation adjustments? Is that sort of the long and short of it?

Mark F. Mulhern

I’m sorry, we’re just collaborating here. When you see the scrubber projects going into to service there’s some offsets to these things. So higher depreciation related to those issues that will show up once those projects are put in service and start to be depreciated offset some of that. So if you call us we can walk you through the specifics of the depreciation.

William D. Johnson

Frank Kinsey can.

Paul Patterson - Glenrock Associates

Okay. I know you guys are adjusted your Cap Ex outlook with respect to Florida, right? But with respect to the depreciation, you will have an increase in rate based growth, is that correct? I mean, how should we think about that in Florida because of what happened with the rate case?

Mark F. Mulhern

You’ll see a little higher rate base. Again, when you finish Crystal River 4 and 5 will be finished some time during the year. So you’ll see that as increase to the rate base. Probably a little bit of spending on the up rate a Crystal River 3. So, yes, you should see a little higher rate base in Florida.

Paul Patterson - Glenrock Associates

So when should we think of the outlook for you guys going back into the regulatory environment in Florida?

Mark F. Mulhern

Well, as Bill talked about in his comments, we’re evaluating what to do in the short term based on where we are, specifically, you’ve heard us talk about potentially going back for a limited review. There may be some options on accounting orders that we’re evaluating. Very similar to what we did last year. I’m trying to look at this holistically and try to put a package on the table that can make some sense for everybody here and help us address some of the short problems that we need to address.

Paul Patterson - Glenrock Associates

Okay. Now the investor plus issuance of equity. How should we think of that being issued, I guess? Could you give us a little bit of flavor as to how that shows up in the market?

Mark F. Mulhern

It’ll be throughout the year. I can’t tell you exactly ratably how we do it. But you know we have some options we can put effectively an offering and then decide on pricing here. It’s very similar to some of those dribble and drip programs you’ve seen from of the other companies.

Paul Patterson - Glenrock Associates

Okay. And then with reset to retail sales growth, I mean, would you say this is like the end of the decrease – when you look out past 2010, how should we think about Florida? You’re looking at a larger down year this way on another weather normalized basis it seems. What’s your thought further out and just in general, sort of, how should we think about the growth outlook for you company past this, kind of, lousy couple of years?

Mark F. Mulhern

We have not changed the target of the EPS, growing earnings per share 4%-5%. And we specifically (inaudible) in that change, that after a fair amount of debate internally about it. And I’ll give you the reason why. I mean, I do think that the service territories that we operate in will come back as the economy gets back. I think the Carolinas probably maybe a little faster than Florida because Florida had such a real estate impact there. So the rest of the economy probably needs to improve a little bit for the population migration to occur in Florida that we have historically had. So I don’t think it’s going to snap back quite to the levels, obliviously, that it was. But I think you’ll see a gradual improvement over time. And in general we think we’re better positioned than most to see some growth from that recovery.

Paul Patterson - Glenrock Associates

Okay. Great. Thanks a lot.


Our next question comes from Risa Heteki with Decade Capital.

Risa Heteki– Decade Capital

Thank you very much. I guess just talking again about the Florida nuke. Could you talk about that a little bit more? Is this just kind of a delay or is it essentially cancelled or just a give a little more color on that?

Mark F. Mulhern

Sure, it’s not cancelled. You might recall going back a little bit we announced a delay in the original schedule, I think of 20-36 months, something along those lines related to not being able to achieve limited work authorizations from the NRC. Since we’ve made that decision we’ve been looking at the schedule and cost estimate, those kind of things, that go along with the change. And that process will continue until we make the May 1 filing. So we are not announcing anything like a cancellation. Actually all we’re announcing today is we think it’ll be later than we thought it was six months ago. But until we have a little more clarity in that May 1 filing we don’t have a lot more to say.

Florida is a high petroleum based system. So there’s a lot of gas and oil in Florida. The need for new nuclear in Florida is quite apparent to everybody that looks at this question. Especially when we get into a carbon reduced world where we are going to be building more nuclear in this country. So I think it is a very good project, certainly a viable long term project. And the question really is, in the short term, in the next couple of years, what’s the trajectory.

Risa Heteki– Decade Capital

Is there some push back now internally or maybe it was regulators and so forth on the nuke because we’re in a new era where it seems like natural gas is – a lot of experts are thinking it’s kind of going to be more stable in the $6 range rather than going up and down the $10-$12 and thus with gas now stable maybe there’s no need for big nuke anymore.

Mark F. Mulhern

No, I don’t think we have any of that push back. The way we think about this is natural gas as a bridge fuel for about a 20 year period, maybe. If you start looking at carbon reduction targets in any meaningful way, after 2025 or 2030, you can’t get there on an all gas platform. And so I think that significant nuclear build in this country needs to be done regardless of what that gas price is. But maybe the need for it is a little later than originally planned. So that’s the way we think about it. Gas is a bridge for a 20 year period. And then you have to have nuclear somewhere before the end of that period to get you to the 2050 targets.

Risa Heteki– Decade Capital

And just lastly, you may have mentioned this, but on Slide 17 where you have the regulatory relief O&M, $0.10 driver. That just refers to a potential up tick from an interim or a full case in Florida, like a partial year impact or what is that again?

Mark F. Mulhern

That is correctly. It would this menu that we talked about, potentially a limited rate release and then potentially some accounting orders if those were relevant. And again, if we’re not successful in that arena we would then go to further O&M reductions.

Risa Heteki– Decade Capital

Okay. Thank you very much.


(Operator’s instructions) Well go next to Vedula Murti with CDP US.

Vedula Murti - CDP US

Good morning. To follow up on what Risa was asking about when you do your May 1st filing, are you going to be doing a full update on the cost benefit analysis in terms of – with regards to updated new carbon and gas and that type of things in terms of ascertaining the ongoing benefit of pursuing maybe at some point down the line?

Mark F. Mulhern

Yeah. That’s essentially right. Vedula, I’m going to ask Vinny Dolan to expand on that answer.

Vincent M. Dolan

Good morning. Yeah. On May 1 we’ll be filing – every year we started this last year, this was one of the successful outcomes that Bill talked about in October and what will happen again in the fall this year. The commission is going to determine three things, the prudence of our expenditures to date, the cost factors for recovery going forward into 2011 and the ongoing feasibility of the projects. So they will look at all those factors. And this is the way the statutory construction was set up here in Florida. They will do that every year and review with us and all the other interested parties to make that determination. So all of that will be part of the formal proceedings.

Vedula Murti - CDP US

Okay. And maybe it’s a little premature for this, but can you tell us right now how much of expenditures to date are currently be recouped and can you just (inaudible) to how much incremental and investment needs to then be updated and put into rates at this time?

Vincent M. Dolan

Vedula I can give you a rough idea an answer to that question. In broad numbers, and don’t hold me to the specifics because they’re not perfect. But think about, we’ve spent approximately $750 million on the project to date. And we’ve gotten recovery or approval for recovery for about $500 million. So between the deferral that we’ve gotten approved that we’re collecting over five years and the dollars we’ve actually collected, about $500 of that $750 is, again, either being recovered currently or has been recovered. So that leaves you $250 short or so. And that will be part of this upcoming filing that we’re going to make.

Vedula Murti - CDP US

Terrific. Thank you very much.


Our next question comes from Michael Worms with BMO.

Michael Worms - BMO

Thank you. Good morning everyone. Just, I hate to beat up on the Levy Project, but one further question, should Levy get pushed out again, fairly significantly. What other alternatives are there in Florida? Would there be the ability to perhaps do some more environmental spending on some of the other plants you have? Kind of elaborate a little bit on that.

William D. Johnson

Yeah. You have a couple options. If you need something before Levy comes in, additional combined cycle natural gas is an option. We have two uncontrolled small coal units. And we can certainly consider the option of controlling them and continue to operate them. So we have a lot of generation options in conventional space. And also you all have to figure in the renewable and efficiency pieces in the next decade or so. So there’s a lot of moving parts. But we do have options.

Michael Worms - BMO

Bill, would you need regulatory approval in Florida to go forward on the environmental part (inaudible) related to the coal plants?

William D. Johnson


Michael Worms - BMO

Thank you.


This does conclude today’s question and answer session. At this time I would like to turn the call back to our speakers for any additional or closing remarks.

William D. Johnson

Thanks for being with us today. I’ll close by reminding you that meeting our commitments despite touch challenges is core confidence of this company. I’m confident we’ll manage our way through this period in a way that meets our short term priorities while creating good long term value for investors and our customers. Thank you.


This does conclude today’s conference. Again, we thank you for your participations.

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