Progress Energy Announces 2011 Results and 2012 Earnings Guidance

RALEIGH, N.C., Feb. 16, 2012 /PRNewswire/ -- Progress Energy (NYSE: PGN) announced full-year GAAP earnings of $575 million, or $1.94 per share, compared with GAAP earnings of $856 million, or $2.95 per share, for the same period last year. GAAP earnings were reduced by a charge recorded for the $288 million to be refunded to Florida customers through the fuel clause in accordance with a comprehensive settlement agreement. Full-year ongoing earnings were $871 million, or $2.95 per share, compared to $889 million, or $3.06 per share, last year. The significant drivers in ongoing earnings per share were the less favorable impact of weather, partly offset by lower amortization expense in Florida. (See the discussion later in this release for a reconciliation of ongoing earnings per share to GAAP earnings per share.)

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Fourth-quarter GAAP loss was $76 million, or $0.25 per share, compared with GAAP earnings of $125 million, or $0.42 per share, for the same period last year. The fourth quarter GAAP loss resulted from the previously noted charge recorded for the $288 million to be refunded to Florida customers. Fourth-quarter ongoing earnings were $114 million, or $0.39 per share, compared to $133 million, or $0.45 per share, for the same period last year. The significant drivers in ongoing earnings per share were the less favorable impact of weather, partly offset by lower O&M. (See the discussion later in this release for a reconciliation of ongoing earnings per share to GAAP earnings per share.)

"In 2011, we had lower than expected sales, particularly in the Carolinas' retail market. The lower sales, coupled with some unusual expenses, negatively affected our overall financial performance for the year," said Bill Johnson, Progress Energy chairman, president and CEO. "When you take into account the nature of the unusual items, it is clear that our employees maintained excellent focus on providing safe, reliable and efficient services for our customers, which lays the groundwork for stronger financial performance in 2012."

Progress Energy announces 2012 ongoing earnings guidance of $3.10 to $3.25 per share. The ongoing earnings guidance excludes the impact, if any, from discontinued operations, the effects of certain identified gains and charges and any merger-related costs from our proposed merger with Duke Energy Corporation. Progress Energy is not able to provide a corresponding GAAP equivalent for the 2012 ongoing earnings guidance due to the uncertain nature and amount of these adjustments.

Progress Energy will host a conference call and webcast at 2 p.m. ET today to review fourth-quarter and full-year 2011 financial performance, as well as discuss 2012 earnings guidance and provide an overall business update. Additional details are provided at the end of this earnings release.

See the 2011 Business Highlights for detailed fourth-quarter and full-year 2011 earnings variance analyses for the Progress Energy Carolinas (PEC), Progress Energy Florida (PEF) and Corporate and Other Businesses segments.

RECENT DEVELOPMENTS

Duke Energy – Progress Energy Merger

• On Dec. 14, 2011, the Federal Energy Regulatory Commission (FERC) rejected a market power mitigation plan as submitted jointly by Progress Energy and Duke Energy in October. The plan was submitted to address the stated concerns from the FERC, related to excess market power under certain conditions, while preserving the value of the merger for customers and shareholders. The FERC conditionally approved the merger Sept. 30, 2011. The utilities are working to develop a new mitigation plan to address the agency's conditions.
• On Jan. 8, 2012, the company extended the termination date of the merger agreement with Duke Energy to July 8, 2012, as permitted by the original merger agreement between the two companies, to facilitate continued regulatory reviews.
• On Dec. 2, 2011, the company received approval from the Nuclear Regulatory Commission (NRC) of indirect transfer of control of licenses for Progress Energy's nuclear facilities to include Duke Energy as the ultimate parent corporation on these licenses.
• On Dec. 12, 2011, the South Carolina Public Service Commission (SCPSC) held hearings regarding the application for approval of the joint dispatch agreement between the two companies after closing the merger.  The docket will remain open pending the FERC's issuance of its final orders on the merger-related actions before the FERC.
• On Sept. 20-22, 2011, the NCUC held hearings regarding the merger application. On Nov. 23, 2011, Progress Energy and Duke Energy filed proposed orders and briefs with the NCUC. The docket will remain open pending the FERC's issuance of its final orders on the merger-related actions before the FERC.

Financial and Regulatory

• Filed a comprehensive settlement agreement on Jan. 20, 2012, with the Florida Public Service Commission (FPSC) that helps moderate electricity costs for customers in the coming years by giving customers a $288 million refund through the fuel clause over the next four years.  It resolves the CR3 outage issues before the FPSC and provides additional rate certainty related to the proposed Levy County nuclear project and base rates. The FPSC will meet Feb. 20, 2012, and a decision on the agreement is expected on Feb. 22, 2012.
• Received approval from the FPSC to recover all proposed costs in PEF's annual filings for fuel and purchased power, environmental projects and energy-efficiency programs. The overall result of these recoveries is a 3 percent increase in total customer bills in 2012. This change reflects the company's prior decision to reduce short-term spending on the proposed Levy County nuclear project, offset by an increase in fuel costs due to the unavailability of the Crystal River Nuclear Plant (CR3). Within the fuel clause, PEF received approval to collect replacement power costs related to the CR3 outage.
• PEF is continuing to work with Nuclear Electric Insurance Limited (NEIL) for recovery of applicable repair costs and associated replacement power costs. While PEF has not yet received a definitive determination from NEIL about insurance coverage related to the March 2011 delamination, negotiations with NEIL continue and PEF believes that all applicable costs associated with bringing CR3 back into service are covered.
• Received approval from the North Carolina Utilities Commission (NCUC) of a fuel settlement agreement for an increase in the fuel component of PEC customer rates driven by rising fuel prices.
• Concluded Contingent Value Obligations (CVOs) tender offer on Feb. 15, 2012, and as a result, approximately 84 percent of the CVOs were repurchased either through a negotiated settlement agreement or through the tender offer.

Power System

• Achieved all-time generation records in 2011 at the company's nuclear plants in the Carolinas.  Brunswick Nuclear Plant Unit 1, located in Southport, N.C., and the Harris Nuclear Plant, located in New Hill, N.C., set annual generation records, each producing more than 8 million MWh of electricity in 2011.
• Set annual generation record of more than 7.3 million MWh at the Bartow Combined-Cycle Plant in Florida in 2011.
• Officially retired the Weatherspoon coal-fired plant Oct. 1, 2011, and advanced the PEC fleet-modernization plan, including ongoing construction of the new gas-fueled Lee and Sutton combined-cycle plants and related natural gas pipelines and infrastructure.

Alternative Energy and Energy Efficiency

• Assisted customers in saving more than 260 million kWh through energy-efficiency programs and measures in 2011 throughout the Carolinas and Florida.
• In December 2011, the City of Raleigh placed a 1.3-megawatt solar photovoltaic (PV) array into service on the PEC system.
• Announced the start of a two-year research-and-development partnership between PEC and the City of Raleigh to evaluate solar-powered electric vehicle charging stations.

2012 Annual Meeting of Shareholders

• Progress Energy's Board of Directors established Aug. 8, 2012, as the date for our Annual Meeting of Shareholders, contingent on the merger with Duke Energy not closing before that date. The deadline for submitting shareholder proposals for inclusion in the 2012 proxy statement for the Annual Meeting is May 1, 2012.

Press releases regarding various announcements are available on the company's website at www.progress-energy.com/aboutus/news.

2011 BUSINESS HIGHLIGHTS

Below are the fourth-quarter and full-year 2011 earnings variance analyses for the company's segments. See the reconciliation tables in the Ongoing Earnings Adjustments section and on pages S-1 and S-2 of the supplemental data for a reconciliation of ongoing earnings per share to GAAP earnings per share. Also see the attached supplemental data schedules for additional information on PEC and PEF electric revenues, energy sales, energy supply, weather impacts and other topics.

QUARTER-OVER-QUARTER ONGOING EPS VARIANCE ANALYSIS

Progress Energy Carolinas

• Reported fourth-quarter ongoing earnings per share of $0.30, compared with $0.42 for the same period last year; GAAP earnings per share of $0.26, compared with $0.40 for the same period last year.
• Reported primary quarter-over-quarter ongoing earnings per share favorability of:
  • $0.01 clauses and other margin
  • $0.01 O&M
  • $0.01 income taxes
• Reported primary quarter-over-quarter ongoing earnings per share unfavorability of:
  • $(0.10) weather primarily due to 30 percent lower heating-degree days
  • $(0.02) wholesale primarily due to lower demand driven by the unfavorable impact of weather
  • $(0.02) depreciation and amortization primarily due to higher depreciable asset base partially resulting from placing the newly constructed combined-cycle unit at the Smith Energy Complex into service in mid-2011
  • $(0.01) retail growth and usage
• 6,000 net increase in the average number of customers for the three months ended Dec. 31, 2011, compared to the same period in 2010

Progress Energy Florida

• Reported fourth-quarter ongoing earnings per share of $0.26, compared with $0.17 for the same period last year; GAAP loss per share of $0.34, compared with GAAP earnings of $0.17 per share for the same period last year.
• Reported primary quarter-over-quarter ongoing earnings per share favorability of:
  • $0.08 O&M primarily due to lower employee benefits expense and lower distribution costs
  • $0.08 depreciation and amortization primarily due to a reduction in the cost of removal component of amortization expense in accordance with the 2010 settlement agreement
  • $0.02 clauses and other margin primarily due to lower current year's joint owner indemnification costs
  • $0.01 retail growth and usage
  • $0.01 allowance for funds used during construction (AFUDC) equity
  • $0.01 interest expense
  • $0.01 income taxes
  • $0.01 other
• Reported primary quarter-over-quarter ongoing earnings per share unfavorability of:
  • $(0.11) weather primarily due to 71 percent lower heating-degree days and 5 percent lower cooling-degree days
  • $(0.03) wholesale primarily due to decreased revenues from wholesale contracts that expired in 2010
• 9,000 net increase in the average number of customers for the three months ended Dec. 31, 2011, compared to the same period in 2010

Corporate and Other Businesses (includes primarily Holding Company debt)

• Reported fourth-quarter ongoing after-tax expenses of $0.17 per share compared with after-tax expenses of $0.14 per share for the same period last year; GAAP after-tax expenses of $0.17 per share, compared with after-tax expenses of $0.15 per share for the same period last year.
• Reported primary quarter-over-quarter ongoing after-tax expense per share unfavorability of:
  • $(0.02) other primarily due to higher stock-based compensation expense resulting from the increase in Progress Energy's stock price
  • $(0.01) income taxes

YEAR-OVER-YEAR ONGOING EPS VARIANCE ANALYSIS

Progress Energy Carolinas

• Reported full-year ongoing earnings per share of $1.83, compared with $2.13 for the same period last year; GAAP earnings per share of $1.73, compared with $2.06 for the same period last year.
• Reported primary year-over-year ongoing earnings per share favorability of:
  • $0.04 clauses and other margin primarily due to recovery of increased spending on demand-side management (DSM) programs
  • $0.04 O&M primarily due to lower nuclear plant outage costs (fewer outages in 2011) and the noncapital portion of a judgment from spent fuel litigation, partially offset by higher nuclear O&M costs (to improve Robinson Nuclear Plant performance and higher spent fuel storage costs), higher storm costs and higher fossil generation outage and maintenance costs
  • $0.03 AFUDC equity primarily due to increased construction project costs
  • $0.03 income taxes primarily due to changes in tax estimates
• Reported primary year-over-year ongoing earnings per share unfavorability of:
  • $(0.22) weather primarily due to 20 percent lower heating-degree days and 5 percent lower cooling-degree days
  • $(0.07) other operating primarily due to the retail disallowance in 2011 of replacement power costs resulting from the prior-year performance of nuclear plants
  • $(0.06) depreciation and amortization primarily due to higher depreciable asset base partially resulting from placing the newly constructed combined-cycle unit at the Smith Energy Complex into service in mid-2011
  • $(0.04) wholesale primarily due to lower demand driven by the unfavorable impact of weather and decreased revenues from a wholesale contract that expired in early 2011
  • $(0.02) retail growth and usage
  • $(0.03) share dilution
• 6,000 net increase in the average number of customers for 2011 compared to 2010

Progress Energy Florida

• Reported full-year ongoing earnings per share of $1.79, compared with $1.59 for the same period last year; GAAP earnings per share of $1.06, compared with $1.56 for the same period last year.
• Reported primary year-over-year ongoing earnings per share favorability of:
  • $0.37 depreciation and amortization primarily due to an increase in the reduction in the cost of removal component of amortization expense in accordance with the 2010 settlement agreement
  • $0.09 O&M primarily due to lower employee-related expenses, lower distribution costs, lower uncollectible account expense and lower environmental remediation expense
  • $0.04 other operating primarily due to a litigation judgment in 2011
  • $0.04 interest expense due to the 2011 settlement of 2004 and 2005 income tax audits
  • $0.03 clauses and other margin primarily due to higher returns on Environmental Cost Recovery Clause assets due to placing a total of approximately $230 million of Clean Air Interstate Rule projects into service in mid-2010
  • $0.01 retail growth and usage
  • $0.01 AFUDC equity
• Reported primary year-over-year ongoing earnings per share unfavorability of:
  • $(0.23) weather primarily due to 61 percent lower heating-degree days
  • $(0.11) wholesale primarily due to decreased revenues from wholesale contracts that expired in 2010
  • $(0.01) income taxes
  • $(0.01) other
  • $(0.03) share dilution
• 8,000 net increase in the average number of customers for 2011 compared to 2010

Corporate and Other Businesses (includes primarily Holding Company debt)

• Reported full-year ongoing after-tax expenses of $0.67 per share compared with after-tax expenses of $0.66 per share for the same period last year; GAAP after-tax expenses of $0.85 per share, compared with after-tax expenses of $0.67 per share for the same period last year.
• Reported primary year-over-year ongoing after-tax expenses per share favorability of:
  • $0.01 share dilution
• Reported primary year-over-year ongoing after-tax expenses per share unfavorability of:
  • $(0.01) income taxes
  • $(0.01) other

ONGOING EARNINGS ADJUSTMENTS

Progress Energy's management uses ongoing earnings per share to evaluate the operations of the company and to establish goals for management and employees. Management believes this non-GAAP measure is appropriate for understanding the business and assessing our potential future performance, because excluded items are limited to those that we believe are not representative of our fundamental core earnings. Ongoing earnings as presented here may not be comparable to similarly titled measures used by other companies. The following table provides a reconciliation of ongoing earnings per share to reported GAAP earnings per share.

Reconciling adjustments from ongoing earnings to GAAP earnings are as follows:

Tax Levelization

Generally accepted accounting principles require companies to apply an effective tax rate to interim periods that is consistent with a company's estimated annual tax rate. The company projects the effective tax rate for the year and then, based upon projected operating income for each quarter, increases or decreases the tax expense recorded in that quarter to reflect the projected tax rate. Because this adjustment varies by quarter but has no impact on annual earnings, management does not consider this item to be representative of the company's fundamental core earnings.

Impairment

The company has recorded impairments of certain miscellaneous investments and other assets. Management does not consider these items to be representative of the company's fundamental core earnings.

Plant Retirement Charges

The company recognized charges for the impact of PEC's decision to retire certain coal-fired generating units, with resulting reduced emissions for compliance with the Clean Smokestacks Act's emission targets. Since the coal-fired generating units will be retired prior to their estimated useful lives, management does not consider this charge to be representative of the company's fundamental core earnings.

Change in the Tax Treatment of the Medicare Part D Subsidy

The federal Patient Protection and Affordable Care Act (PPACA) and the related Health Care and Education Reconciliation Act, which made various amendments to the PPACA, were enacted in March 2010. Under prior law, employers could claim a deduction for the entire cost of providing retiree prescription drug coverage even though a portion of the cost was offset by the retiree drug subsidy received. As a result of the PPACA, as amended, retiree drug subsidy payments will effectively become taxable in tax years beginning after Dec. 31, 2012, by requiring the amount of the subsidy received to be offset against the employer's deduction. Under GAAP, changes in tax law are accounted for in the period of enactment. Management does not consider this item to be representative of the company's fundamental core earnings.

Discontinued Operations

The company has completed its business strategy of divesting nonregulated businesses to reduce its business risk and focus on core operations of the Utilities. Management does not consider this item to be representative of the company's fundamental core earnings.

Merger and Integration Costs

The company recorded charges for merger and integration costs related to the merger.  Management does not consider this item to be representative of the company's fundamental core earnings.

Contingent Value Obligations (CVO) Mark-to-Market

In connection with the acquisition of Florida Progress Corporation, Progress Energy issued CVOs that represent the right of the holder to receive contingent payments based on net after-tax cash flows above certain levels of four synthetic fuels facilities purchased by subsidiaries of Florida Progress Corporation in October 1999. The CVO liability is valued at fair value, and gains and losses from changes in fair value are recognized in earnings each quarter. Progress Energy is unable to predict the changes in the fair value of the CVOs, and management does not consider this item to be representative of the company's fundamental core earnings.

Amount to be Refunded to Customers

The company recorded a charge for an amount to be refunded to PEF customers through the fuel clause in accordance with the proposed 2012 settlement agreement. Management does not consider this item to be representative of the company's fundamental core earnings.

CR3 Indemnification Adjustment (Charge)

The company recorded a CR3 indemnification charge, and subsequent adjustment, for estimated future years' joint owner replacement power costs (through the expiration of the indemnification provisions of the joint owner agreement). Since GAAP requires that the charge be accounted for in the period in which it becomes probable and estimable rather than the periods to which it relates, management does not consider this item to be representative of the company's fundamental core earnings.

Progress Energy's conference call with the investment community will be held Feb. 16, 2012, at 2 p.m. ET (11 a.m. PT). Investors, media and the public may listen to the conference call by dialing 1.913.312.1411, confirmation code 5496498. If you encounter problems, please contact Investor Relations at 1.919.546.6057.

A webcast of the live conference call will be available at www.progress-energy.com/webcast. The webcast will be archived on the site for at least 30 days following the call for those unable to listen in real time. The webcast will include audio of the conference call and a slide presentation referred to by management during the call. The slide presentation will be available for download beginning at 1:30 p.m. ET today at www.progress-energy.com/webcast.

Progress Energy (NYSE: PGN), headquartered in Raleigh, N.C., is a Fortune 500 energy company with 23,000 megawatts of generation capacity and approximately $9 billion in annual revenues. Progress Energy includes two major electric utilities that serve approximately 3.1 million customers in the Carolinas and Florida. The company has earned the Edison Electric Institute's Edison Award, the industry's highest honor, in recognition of its operational excellence, and was the first utility to receive the prestigious J.D. Power and Associates Founder's Award for customer service. The company is pursuing a balanced strategy for a secure energy future, which includes aggressive energy-efficiency programs, investments in renewable energy technologies and a state-of-the-art power system. Progress Energy celebrated a century of service in 2008. Visit the company's website at www.progress-energy.com.

Caution Regarding Forward-Looking Information:

This release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The matters discussed throughout this document involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

Examples of factors that you should consider with respect to any forward-looking statements made throughout this document include, but are not limited to, the following:

• our ability to obtain the approvals required to complete the merger and the impact of compliance with material restrictions or conditions potentially imposed by our regulators;
• the risk that the merger is terminated prior to completion and results in significant transaction costs to us;
• our ability to achieve the anticipated results and benefits of the merger;
• the impact of business uncertainties and contractual restrictions while the merger is pending;
• the scope of necessary repairs of the delamination of CR3 could prove more extensive than is currently identified, such repairs could prove not to be feasible, the costs of repair and/or replacement power could exceed our estimates and insurance coverage or may not be recoverable through the regulatory process;
• the impact of fluid and complex laws and regulations, including those relating to the environment and energy policy;
• our ability to recover eligible costs and earn an adequate return on investment through the regulatory process;
• the ability to successfully operate electric generating facilities and deliver electricity to customers;
• the impact on our facilities and businesses from a terrorist attack, cyber security threats and other catastrophic events;
• the ability to meet the anticipated future need for additional baseload generation and associated transmission facilities in our regulated service territories and the accompanying regulatory and financial risks;
• our ability to meet current and future renewable energy requirements;
• the inherent risks associated with the operation and potential construction of nuclear facilities, including environmental, health, safety, regulatory and financial risks;
• the financial resources and capital needed to comply with environmental laws and regulations;
• risks associated with climate change;
• weather and drought conditions that directly influence the production, delivery and demand for electricity;
• recurring seasonal fluctuations in demand for electricity;
• the ability to recover in a timely manner, if at all, costs associated with future significant weather events through the regulatory process;
• fluctuations in the price of energy commodities and purchased power and our ability to recover such costs through the regulatory process;
• our ability to control costs, including O&M and large construction projects;
• the ability of our subsidiaries to pay upstream dividends or distributions to Progress Energy, Inc. holding company;
• current economic conditions;
• the ability to successfully access capital markets on favorable terms;
• the stability of commercial credit markets and our access to short- and long-term credit;
• the impact that increases in leverage or reductions in cash flow may have on us;
• our ability to maintain our current credit ratings and the impacts in the event our credit ratings are downgraded;
• the investment performance of our nuclear decommissioning trust funds;
• the investment performance of the assets of our pension and benefit plans and resulting impact on future funding requirements;
• the impact of potential goodwill impairments;
• our ability to fully utilize tax credits generated from the previous production and sale of qualifying synthetic fuels under Internal Revenue Code Section 29/45K; and
• the outcome of any ongoing or future litigation or similar disputes and the impact of any such outcome or related settlements.

Many of these risks similarly impact our nonreporting subsidiaries.

These and other risk factors are detailed from time to time in our filings with the SEC. All such factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control.

Any forward-looking statement is based on information current as of the date of this document and speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after that date on which such statement is made.

The Unaudited Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report to shareholders.  These statements have been prepared for the purpose of providing information concerning the Company and not in connection with any sale, offer for sale, or solicitation of an offer to buy any securities.