Progress Energy Announces 2011 Second-Quarter Results; Reaffirms Full-Year 2011 Earnings Guidance

RALEIGH, N.C., Aug. 4, 2011 /PRNewswire/ -- Progress Energy (NYSE: PGN) announced second-quarter GAAP earnings of $176 million, or $0.60 per share, compared with GAAP earnings of $180 million, or $0.62 per share, for the same period last year. Second-quarter ongoing earnings were $211 million, or $0.71 per share, compared to $181 million, or $0.63 per share, for the same period last year. The significant drivers in ongoing earnings per share were lower depreciation and amortization expense in Florida and increased clauses and other margin, partially offset by unfavorable retail growth and usage in the Carolinas and decreased wholesale revenues 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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"Favorable weather in the second quarter, coupled with continued financial discipline within the company, helped us successfully deliver on our earnings per share goal for the first half of the year," said Bill Johnson, Progress Energy chairman, president and CEO. "We continue to feel the effects of a challenging economy in our service area, but we remain focused on managing the business effectively and making wise investments to meet our customers' needs today and in the future, as we prepare for our pending merger with Duke Energy."

Progress Energy reaffirms 2011 ongoing earnings guidance of $3.00 to $3.20 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 and integration costs from our proposed strategic combination with Duke Energy Corporation (the Merger). Progress Energy is not able to provide a corresponding GAAP equivalent for the 2011 ongoing earnings guidance due to the uncertain nature and amount of these adjustments.

Progress Energy will host a conference call and webcast at 10 a.m. ET today to review second-quarter 2011 financial performance, as well as provide an overall business update. Additional details are provided at the end of this earnings release.

See the second-quarter 2011 business highlights for detailed 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

• Received conditional approval of the Merger from the Kentucky Public Service Commission, which is subject to acceptance by Duke Energy and Progress Energy.
• Entered into a memorandum of understanding to settle a lawsuit that is a consolidation of nine class action lawsuits filed on behalf of Progress Energy's shareholders regarding the Merger, subject to court approval.
• Received approval from the Federal Communications Commission of the Assignment of Authorization filings to transfer control of radio system licenses.
• Scheduled special meetings on August 23, 2011, for Duke Energy and Progress Energy shareholders to vote on the Merger. Mailed joint proxy statement to shareholders of record as of July 5, 2011.
• The Merger is targeted to close by the end of 2011.

Financial and Regulatory

• Received approval from the Public Service Commission of South Carolina to recover increased costs in two components of customer rates: fuel used in electricity generation and investments in energy-efficiency (EE) and demand-side management (DSM) programs. New rates were effective July 1, 2011.
• Filed with the North Carolina Utilities Commission to recover increased costs in three components of customer rates: fuel used in electricity generation, investments in EE programs, and renewable energy. If approved, rates would be effective December 1, 2011.

Power System

• Filed a status update with the Florida Public Service Commission (FPSC) regarding Crystal River Nuclear Plant (CR3), which outlined the selection of a repair option, the estimated repair costs, the estimated time it will take to bring CR3 back into commercial service, based on the company's initial review, and a discussion of PEF's ability to satisfy its projected loads using existing capacity resources. The procedural schedule for the prudence review is still pending.
• Received notification from the Nuclear Regulatory Commission that our improved performance at the Robinson Nuclear Plant will result in decreased agency oversight. Robinson will continue to work their strategic improvement plan and take definitive steps to return the plant to top industry performance while achieving safe and predictable plant operations.
• Placed in service newly constructed 600-megawatt (MW) combined-cycle natural gas plant at the Richmond County Energy Complex near Hamlet, North Carolina. The approximately $575 million project was completed on schedule and under budget.
• Broke ground on new 620-MW combined-cycle natural gas plant at the L.V. Sutton Energy Complex near Wilmington, North Carolina. The approximately $600 million project is expected to create more than 700 construction jobs over the 24-month building process. Piedmont Natural Gas is building a gas pipeline to the site, enhancing gas supply to the region.

Alternative Energy and Energy Efficiency

• Received notification that FPSC voted unanimously to close the DSM plan docket and maintain PEF's current successful mix of EE programs and measures in order to balance rate impacts to customers.
• Co-organized Plug-In 2011 electric vehicle conference held July 18-21, 2011, in Raleigh, North Carolina, with the Electric Power Research Institute and Duke Energy, marking the first time this major industry conference has been held outside California.
• Received 12 Chevrolet Volts as part of a two-year demonstration and research program with General Motors to introduce customers to electric vehicles, advance vehicle electrification and establish vehicle charging programs to pave the way for consumers.
• Participated in one-month Toyota Prius Plug-in national demonstration and research program to evaluate its performance, use it in public outreach efforts and work to better understand consumer charging behavior and the associated effects on the electric grid.
• Launched customer benchmarking program that provides energy usage information and efficiency tips to a random sampling of customers in the Carolinas. Usage is anonymously compared to nearby homes of similar size and design.
• Issued requests for proposals for electricity generated from:
  • Solar resources in PEC's service territory; and
  • Wind resources that can be delivered to PEC's transmission grid.

J.D. Power & Associates Survey

• PEC received top-quartile ranking regionally and nationally in the latest residential customer satisfaction survey from J.D. Power & Associates.

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

SECOND-QUARTER 2011 BUSINESS HIGHLIGHTS

Below are the second-quarter and year-to-date 2011 earnings variance analyses for the company's segments. See the reconciliation tables in the ongoing earnings adjustments 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 second-quarter ongoing earnings per share of $0.37, compared with $0.39 for the same period last year; GAAP earnings per share of $0.36, compared with $0.38 for the same period last year.
• Reported primary quarter-over-quarter ongoing earnings per share favorability of:
• $0.04 O&M primarily due to lower nuclear plant outage costs (fewer outages in 2011), partially offset by higher nuclear maintenance costs (to improve Robinson Nuclear Plant performance and higher dry storage costs) and higher employee benefits expense
• $0.03 clauses and other margin primarily due to increased spending on DSM programs
• $0.01 AFUDC equity
• Reported primary quarter-over-quarter ongoing earnings per share unfavorability of:
• $(0.03) retail growth and usage
• $(0.02) weather primarily due to 6 percent lower cooling-degree days than 2010
• $(0.02) other
• $(0.01) depreciation and amortization
• $(0.01) income taxes
• $(0.01) share dilution
• 6,000 net increase in the average number of customers for the three months ended June 30, 2011, compared to the same period in 2010

Progress Energy Florida

• Reported second-quarter ongoing earnings per share of $0.48, compared with $0.41 for the same period last year; GAAP earnings per share of $0.38, compared with $0.41 for the same period last year.
• Reported primary quarter-over-quarter ongoing earnings per share favorability of:
• $0.09 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 base rate settlement agreement
• $0.03 clauses and other margin primarily due to lower current year estimated CR3 joint owner replacement power costs in 2011 compared to 2010
• $0.01 retail growth and usage
• Reported primary quarter-over-quarter ongoing earnings per share unfavorability of:
• $(0.02) wholesale primarily due to decreased revenues from wholesale contracts that expired in 2010
• $(0.02) O&M primarily due to higher plant outage costs (increased number and scope of maintenance outages) and higher employee benefits expense
• $(0.01) AFUDC equity
• $(0.01) share dilution
• 8,000 net increase in the average number of customers for the three months ended June 30, 2011, compared to the same period in 2010

Corporate and Other Businesses (includes primarily Holding Company debt)

• Reported second-quarter ongoing and GAAP after-tax expenses of $0.14 per share compared with after-tax ongoing and GAAP expenses of $0.17 per share for the same period last year.
• Reported primary quarter-over-quarter ongoing after-tax expenses per share favorability of:
• $0.02 interest expense primarily due to lower average debt outstanding
• $0.01 income taxes

YEAR-OVER-YEAR ONGOING EPS VARIANCE ANALYSIS

Progress Energy Carolinas

• Reported year-to-date ongoing earnings per share of $0.85, compared with $0.90 for the same period last year; GAAP earnings per share of $0.80, compared with $0.86 for the same period last year.
• Reported primary year-over-year ongoing earnings per share favorability of:
• $0.04 O&M primarily due to lower nuclear plant outage costs (fewer outages in 2011), partially offset by higher nuclear maintenance costs (to improve Robinson Nuclear Plant performance and higher dry storage costs) and higher employee benefits expense
• $0.03 AFUDC equity primarily due to increased construction project costs
• $0.02 clauses and other margin primarily due to increased spending on DSM programs
• Reported primary year-over-year ongoing earnings per share unfavorability of:
• $(0.09) weather primarily due to 14 percent lower heating-degree days and 4 percent lower cooling-degree days than 2010
• $(0.02) depreciation and amortization primarily due to higher depreciable asset base
• $(0.01) retail growth and usage
• $(0.02) share dilution
• 6,000 net increase in the average number of customers for the six months ended June 30, 2011, compared to the same period in 2010

Progress Energy Florida

• Reported year-to-date ongoing earnings per share of $0.85, compared with $0.81 for the same period last year; GAAP earnings per share of $0.72, compared with $0.77 for the same period last year.
• Reported primary year-over-year ongoing earnings per share favorability of:
• $0.24 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 base rate settlement agreement
• $0.02 clauses and other margin primarily due to higher returns on Environmental Cost Recovery Clause (ECRC) assets due to placing a total of approximately $230 million of Clean Air Interstate Rule projects into service in the second quarter of 2010
• $0.02 other primarily due to litigation judgment in 2011
• Reported primary year-over-year ongoing earnings per share unfavorability of:
• $(0.10) weather primarily due to 55 percent lower heating-degree days than 2010
• $(0.05) wholesale primarily due to decreased revenues from wholesale contracts that expired in 2010
• $(0.03) O&M primarily due to higher employee benefits expense and higher plant outage costs (increased number and scope of maintenance outages)
• $(0.01) retail growth and usage
• $(0.01) interest expense
• $(0.01) income taxes
• $(0.03) share dilution
• 8,000 net increase in the average number of customers for the six months ended June 30, 2011, compared to the same period in 2010

Corporate and Other Businesses (includes primarily Holding Company debt)

• Reported year-to-date ongoing and GAAP after-tax expenses of $0.30 per share compared with after-tax ongoing and GAAP expenses of $0.34 per share for the same period last year.
• Reported primary year-over-year ongoing after-tax expenses per share favorability of:
• $0.01 O&M
• $0.01 interest expense
• $0.01 income taxes
• $0.01 share dilution

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.

Contingent Value Obligation (CVO) Mark-to-Market

In connection with the acquisition of Florida Progress Corporation, Progress Energy issued 98.6 million CVOs. Each CVO represents 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 unrealized 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.

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 December 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.

Impairment

The company has recorded impairments of certain miscellaneous investments. 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 of 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 a charge 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.

CR3 Indemnification Charge

The company recorded a CR3 indemnification charge for estimated future years' joint owner replacement power costs (through the expiration of the indemnification provisions of the joint owner agreement) because 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 August 4, 2011, at 10 a.m. ET (7 a.m. PT). Investors, media and the public may listen to the conference call by dialing (913) 312-0832, confirmation code 8792283. If you encounter problems, please contact Investor Relations at (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 9:30 a.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 more than 22,000 megawatts of generation capacity and approximately $10 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 EE 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 operations and maintenance expense (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 (NDT) 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 Condensed Consolidated Interim 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.

SOURCE Progress Energy