Progress Energy's CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: Duke Energy (DUK)

Progress Energy (PGN) Q4 2010 Earnings Call February 18, 2011 10:00 AM ET

Executives

Megan Wisz -

William Johnson - Chairman, Chief Executive Officer, President and Chair of Executive Committee

Mark Mulhern - Chief Financial Officer and Senior Vice President of Finance

Bryan Kimzey -

Analysts

Dan Eggers - Crédit Suisse AG

Neil Mehta - Goldman Sachs

Paul Patterson - Glenrock Associates

Paul Ridzon - KeyBanc Capital Markets Inc.

Marc de Croisset - FBR Capital Markets & Co.

Neil Kalton - Wells Fargo Securities, LLC

Gordon Howald - Caylon

Operator

Good morning, and welcome to the Progress Energy's Fourth Quarter and Year-End 2010 Earnings Conference Call. [Operator Instructions] For opening remarks and introductions, I now turn the conference over to Megan Wisz of Progress Energy. Please go ahead, ma'am.

Megan Wisz

Thank you, Alicia. Good morning. And welcome to everyone. Joining me this morning are Bill Johnson, Chairman, President and Chief Executive Officer; Mark Mulhern, Chief Financial Officer; and other members of our senior management team. We are currently being webcast from our Investor Relations page at progress-energy.com. I direct your attention to our website, where we had included a set of slides, which accompany our speakers' prepared remarks this morning. These slides can be found at progress-energy.com/webcast.

Today, we will be making forward-looking statements as well as reviewing historical information. There are numerous factors that may cause future or actual results to differ materially from these statements, and we outlined these in our earnings release, Form 10-K, 10-Q and other SEC filings as well as the risk factor discussion also found in our Form 10-K and 10-Q. For your information, we plan to file our Form 10-K at the end of the month.

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

William Johnson

Thank you, Megan. Good morning, everyone. We're glad you joined our call this morning. Our quarter and our 2010 full year results were quite good, so let's dive right in.

As Slide 3 indicates, I'll provide highlights for the quarter and full-year financial results. And look at the filing schedule for our recently announced merger with Duke Energy, an update on our Crystal River Unit 3 outage and comments on our key focus areas for 2011. Then Mark Mulhern will provide more detail on the numbers behind our financial results.

Let's start with ongoing earnings on Slide 4. For the fourth quarter, we reported ongoing earnings of $133 million, compared to $142 million for the same quarter a year ago. On a per-share basis, we're down $0.05 from the fourth quarter 2009, principally due to higher O&M and tax expenses.

For the full year 2010, ongoing earnings were $889 million, compared to $846 million for the same period a year ago. On a per-share basis, we're up $0.03 due to favorable weather during the year, partially offset by higher O&M expenses. Our ongoing earnings of $3.06 exceeded the high end of our 2010 guidance range.

The economy in our service area has continued to demonstrate modest recovery and obviously the weather was a significant contributor to the year's results. Record cold weather in Florida followed by extreme heat last summer in all three states had a positive impact of $0.44 per share on a year-over-year basis.

Today, we're providing our 2011 ongoing earnings guidance range of $3 to $3.20 per share. Now clearly, weather was a significant contributor last year. On a weather-normalized basis for our 2011 estimates, the higher use of the cost of removal amortization in Florida and lower O&M expenses in the Carolinas will offset the weather gains of last year. Mark will discuss the 2011 earnings drivers a little bit later.

As shown on Slide 5, we've been able to show earnings growth over a very difficult economic time for our region and nation. This consistency is the product of the financial and operational discipline we focus on every day. As you know, on January 10, we announced the strategic merger with Duke Energy. Information about this merger can be found on the Progress and Duke websites, as well as through the many filings we've made with the Securities and Exchange Commission. We will incorporate a scorecard to help you track where we are in the multistep-approval process required for the merger. Slide 6 shows an example of the scorecard, and this should make it easy for you to see our progress at any point as we move forward with filings and approvals.

Now if you turn to Slide 7. It provides an update on the outage in our Crystal River Nuclear Plant in Florida. As most of you know, concrete delamination or cracking occurred in a section at the containment building in late 2009 when we created an opening to replace the steam generators. Last fall, we completed the final concrete placements to repair the containment building.

Following concrete curing, we began a systematic process of re-tensioning the steel tendons that encircle the building. We've now completed more than half of that re-tensioning. We expect to complete re-tensioning in March and return the unit to service after post-repair testing and start-up activities in April.

Nuclear safety remains our top priority, and our plans and actions will continue to reflect this commitment. A number of factors affecting return to service date, including regulatory reviews by the NRC [Nuclear Regulatory Commission] and other agencies, emergent work, final engineering designs, testing, weather and other development.

Slide 7 summarizes the cost of the outage to end-of-year 2010 for both the repair and the replacement power. Through December, the total for repair costs was about $150 million, and for replacement power, about $288 million. Partially offsetting these expenditures are about $181 million in proceeds from NEIL, the mutual insurance company created by the nuclear utilities. In addition, we have booked receivables for another $101 million expected to be received from NEIL. Now we are currently recovering a portion of the replacement of power costs not covered by insurance. The Florida PSC will hold a separate proceeding later this year to evaluate the engineering decisions and repair costs associated with returning the unit to service.

As I've noted before on these calls, we've been very transparent with the NRC, state regulators, the industry and other stakeholders throughout this process, and we'll continue to keep these groups informed. Our primary focus is on returning this important asset to safe, reliable operation for many years to come.

Next, please turn to Slide 8, which highlights four key focus areas for our company in 2011. These areas are addition to our daily efforts to excel in the fundamentals, which include safety, operational excellence and customer satisfaction. We're keeping our sights on our core responsibilities, even as we move forward with merger-approval activities.

The first focus area is to build on the initiatives we began last year to improve the performance of our nuclear fleet. We are implementing a comprehensive plan to return our fleet to a consistently high level of performance in safety, reliability and value year after year.

The second focus is to accelerate our efforts in what we call Continuous Business Excellence. This is a company-wide initiative we started a couple of years ago to take a closer look at how we do our work so we can improve efficiency and service, while achieving sustainable cost savings.

The third area is to continue executing our balanced solutions strategy. We are optimizing a diverse portfolio of investments and initiatives that help us prepare for future customer needs and meet emerging regulatory requirements. This balanced approach includes everything from fleet modernization in the Smart Grid to energy efficiency programs and alternative energy projects.

The final focus area for 2011 involves getting ready for the Duke-Progress merger. We're getting organized the planned integration of the two companies and secure a timely merger approvals. We're intent on positioning the combined company for success. With that, I'll ask Mark Mulhern, our CFO, to provide more details on our financials.

Mark Mulhern

Thank you, Bill. And good morning. I'm going to cover the topics on Slide 9, so let's begin.

Slide 10 shows our fourth quarter and full-year ongoing earnings. For the fourth quarter 2010, we reported $0.45 versus $0.50 last year, for the Carolinas was up $0.04, Florida was down $0.11 and Corporate and Other was $0.02 favorable.

In Florida, the fourth quarter decline was driven primarily by the pension deferral in 2009 that was expensed in 2010, and also by a decline in AFUDC earnings and OPEB charge. For the full year, we reported $3.06 versus $3.03 last year. Carolinas was up $0.20 over 2009, Florida was down $0.06 and the Corporate and Other was $0.11 unfavorable.

So I'll shift to Slide 11, which is our waterfall chart, it illustrates the positive and negative drivers for the fourth quarter. Key variances here were weather, clauses and other margin, which were offset by higher O&M and income tax items. Due to favorable weather in Florida, we did not amortize any additional cost or removal obligation in the fourth quarter.

Slide 12 shows the waterfall chart for the full year 2010. Weather, a $0.44, was the key positive driver. And under our Florida regulatory settlement, we were allowed to amortize up to $150 million of the cost of removal obligation in 2010. We only utilized $60 million or $0.11, and the unused $90 million carries over into 2011.

As you can see, several items offset the unusually favorable weather: O&M, interest expense, share dilution and other income tax items. I will address the quarter and the full-year unfavorable O&M variances in just a few moments.

On Slide 13, we provided detail on the 2010 retail sales by customer class, so that numbers on the bottom of the slide show that our weather-adjusted sales growth exceeded forecast at both utilities. Carolinas had an increase of 2% versus our forecast of 0.6%, primarily due to a stronger industrial recovery in 2010 that we have forecasted. Meanwhile, Florida had a decline of 1.8% versus a negative 2.2% forecast due to the continued weak economy, which we believe has begun to finally turn around.

Now if you turn to Slide 14, which is our standard slide on customer growth and low-usage accounts, Florida continues to show a steady uptick in customer growth. In fact, Florida had a net addition of 4,000 customers for the full year 2010, which was the first time we've seen positive customer growth in Florida since 2007. Carolinas added 10,000 new customers.

On Slide 15, we've provided some transparency around the O&M variance for the fourth quarter and the full-year 2010. For the full year, the majority of the increase are $0.19 was driven by three scheduled nuclear refueling and maintenance outages in 2010 compared to two in 2009, and other factors included extended outages and more emergent work, primarily on our Robinson Nuclear Plant. In addition, we had $0.09 of nonrecurring prior-year benefits due to a pension deferral in Florida and a change in vacation benefits policy. So it's important to note that, excluding the above two items, the balance of our O&M costs increased approximately 1% over 2009.

Slide 16 gives you some more detail behind our 2011 ongoing earnings guidance by utility. Carolinas slightly declined due to normal weather and then partially offset by lower O&M. Florida on the other hand is able to more than offset normal weather with higher cost of removal amortization and a higher rate base. Corporate and Other is favorable primarily due to lower interest expense.

So Slide 17 is a waterfall illustrating our 2011 ongoing EPS drivers. Largest drivers, the 2010 weather-normalization adjustment of $0.54. We expect to offset this with $0.36 of additional cost of removal amortization in Florida and $0.25 of improved O&M costs.

The improved O&M costs are primarily driven by fewer nuclear outages in 2011. So three planned refueling outages and the unplanned outages at Robinson drove 2010's higher O&M spending. There's only one planned refueling outage in 2011. The other primary drivers are favorable clauses and other margin and growth in usage, offset by a little higher D&A and lower wholesale revenues primarily in Florida.

So I just like to take a moment to highlight the retail sales growth and usage assumptions in our 2011 guidance. We project retail sales growth in 2011 versus 2010 in the Carolinas up 0.8%, and in Florida, a positive 0.7%. While that's a lower growth rate in the Carolinas from 2010, it reflects a more normal run rate trend. And in Florida, we project a return to positive sales growth, reflecting an improvement in the Florida economy.

I'd also like to just make a comment about our wholesale revenues, and these are actually shown on Slide 18. As I mentioned a moment ago, Florida wholesale revenues are expected to decline in 2011 due to contract expirations. However, this trend should reverse in 2012 due to amended contracts.

Carolinas wholesale revenues are fairly steady in 2011 but will begin increasing materially in 2012 and '13 due to wholesale contract extensions and expansions with city of Fayetteville and the NCEMC. You can find additional details supporting the guidance in the appendix to this presentation.

So then as you go to Slide 19, it shows our rate base growth for the next three years for both utilities. In previous years, this chart showed higher growth rates in Florida compared to the Carolinas. This thread is now reversed because we have completed the major environmental upgrade of Florida's Crystal River units 4 and 5 and embarked on the construction of three combined cycle plants in North Carolina. So this rate base growth supports our ongoing EPS growth targets.

Slide 20 shows more granularity on the major construction projects in progress. The items relate primarily to our coal-to-gas repowering strategy in the Carolinas. We expect our Richmond County combined-cycle plant to be in service in June of this year. We have broken ground on our Lee combined-cycle plant. We broke ground in September of 2010 and expect to begin construction on our Sutton combined-cycle plant in the second half of this year. And we continue to make progress on Smart Grid in both the Carolinas and Florida.

Slide 21 is our customary detail on capital expenditures and again reflects the shift in CapEx from Florida in 2008 and '09 to more investment in the Carolinas in 2010 through '12.

Slide 22 shows the projected cash flows for 2011 versus the actual 2010 numbers. The biggest variances here relate to the use of $235 million of cost of removal in 2011 versus the $60 million we actually booked in 2010, and the higher 2011 pension contribution of $350 million versus the $129 million contribution in 2010.

The positive weather impact in 2010 is not expected to recur, but we should see an incremental cash benefit of approximately $200 million from bonus depreciation. And just as a reminder, our prior forecast had included the use of synthetic fuel tax credits to offset our cash tax liability to the AMT [alternative minimum tax] rate. We believe that bonus depreciation will reduce taxable income, such that we do not project using any synthetic fuel tax credits in 2011. Therefore, we should bring approximately $800 million of synthetic fuel tax credit carryforwards to the merged company.

In Slide 23 our financing plan, you'll note that we already have completed our holding company issuance to address a March 1 maturity. The remainder of the financing activity will occur at the utilities, with Progress Energy Carolinas having higher amounts due to its construction costs related to the coal-to-gas repowering. And as we've noted previously, there will not be any material equity issuances, except for some minor shares for employee benefit plans.

So before I turn it back to Bill for Q&A, let me recap by pointing out that: We delivered on ongoing earnings above our 2010 guidance; we preserved flexibility for 2011 and 2012 with our cost of removal amortization strategy in Florida; our total shareholder return for 2010 was 12.6%; our 2011 guidance of $3 to $3.20 is reasonable and achievable; and our cash-flow profile and financing plans fully support our dividend. So we're very excited about the prospects of the merger but remain focused on delivering results for 2011 as we work through the regulatory approvals and the integration plan. So with that, I'll turn it back to Bill for your questions.

William Johnson

Thanks, Mark. As you've heard, we had a strong finish to 2010 and an exciting start for 2011. We're clear about what we need to do to accomplish this year, and I'm very pleased with the focus and commitment of our management team and workforce. And with that, we'll take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dan Eggers from Crédit Suisse.

Dan Eggers - Crédit Suisse AG

I wonder if we could just talk a little bit more about kind of the economic backdrop by the two service territories and your volume growth of less than 1%? And kind your expectations around customer gains in both territories? And maybe some thoughts on how you guys expect usage to play out, not only in 2011 but, kind of, extending forward with energy efficiency and that sort of thing?

Mark Mulhern

Yes, Dan, I mean, I think you've seen our numbers in terms of what we have forecasted here, kind of less than 1% in both utilities. You got those numbers, right. I think in Florida, the noteworthy thing is we have had kind of negative expectation and actually had negative 1.8% in kilowatt-hour sales in 2010. I think we're feeling like the economy is improving slowly in both territories. I mean, you should actually see it on the customer growth slides. The Florida's number's turned around. We think Carolinas has kind of flattened out here. And our industrial customer base in Carolinas we had good growth in 2010, expect that to maybe to be a little less in 2011. But by and large, cautiously optimistic about, again, a slow return to some level of growth in normal usage. We haven't been able to put our fingers much on the impact of efficiency programs, we obviously have a number of them, and especially in the Carolinas and some in Florida as well. Now -- we haven’t seen a measurable impact, and again we had unusually strong weather in both summer and winter at both utilities. So it's a little hard to see through those weather-adjusted numbers, whether that's having any impact.

Dan Eggers - Crédit Suisse AG

But your assumption for '11 is going to be that there is some net usage declines on a per customer level, is that reasonable against your overall volume growth?

Mark Mulhern

I think that's probably reasonable.

Dan Eggers - Crédit Suisse AG

And then on O&M, the bulk of the improvement year-on-year, I guess is going to be on the nuclear O&M side. Remind us, what kind of run rate we should look for without a '12 normalization, which should be kind of a two to three refueling run rate, is that should be the standard expectations as somewhere between last year's number and the down $0.25 number for '11?

Mark Mulhern

Yes. I mean, because we've had some issues, obviously, around outages and with Crystal River and with the delamination thing, we'd probably will go to two to three outages a year, going forward, that's how I would think about it. We just had unusual cycle here where we've had our Crystal River plant down, then we've had some unusual things happen at Robinson, but two to three is a good expectation going forward.

Dan Eggers - Crédit Suisse AG

So probably against the 2011 run rate now, you probably add what, about a nickel to a dime of kind of normalized run rate cost if you went back in all schedules?

Mark Mulhern

We kind of put like a $35 million pretax number on there is kind of how I think about that outage cost in round numbers, give or take.

Dan Eggers - Crédit Suisse AG

And then last question is on the bonus depreciation. If I think about a $2 billion capital program, the $200 million, the bonus depreciation you guys are looking for kind of mathematically, looks a little light. Is there a timing issue with how you guys are able to recognize some of the CapEx and bonus depreciation? Or is the $200 million what you can use this year and there's going to be a deferral that would carry over into '12?

Mark Mulhern

I'd say two things about that. The tax folks obviously are very cautious about Treasury’s, guidance around how, what qualifies and what doesn't, which is logical. And so I think, you could accuse us maybe of being a little conservative here. But I do think that timing is important here. Our combined cycles when they go in service and when they will qualify for the 100% versus 50% of something you got to go through and analyze and look at. And again as you know, our numbers maybe don't look as big as some others because we always had an assumption and our plan that we were going to use the syn [synthetic] fuels credits to get to AMT anyway. So I mean, I think that's how you should think about that $200 million -- is my incremental number to what I had previously thought in my plan.

Dan Eggers - Crédit Suisse AG

So the bonus depreciation, that's just going to be the -- you're just talking about how much more cash you had in plans, so the $200 million, is just your AMT obligation, right?

Mark Mulhern

Exactly.

Operator

Our next question comes from Gordon Howald from East Shore Partners.

Gordon Howald - Caylon

Mark, could you provide what the achieved ROE was in 2010 at PEF actual and weather-normalized?

Mark Mulhern

I can. I think the actual number was like 11.25%. And I'm looking at Brian for the weather-normalized number.

Bryan Kimzey

8.75%

Mark Mulhern

The 8.75% on a weather-normalized basis, Gordon.

Gordon Howald - Caylon

Bill, you created quite a number of headlines at the NARUC [National Association of Regulatory Utility Commissioners] conference recently, calling attention to the cost of all the EPA rules and what they'll have on utility customers. It seems the EPA's Gina McCarthy, who I think you're in a panel with, seems to be living, for a lack of a better phrase, in an ideological bubble, urging quick action on the part of the PUCs to spend, spend, spend as a prudent course of action. My question is this, do you believe the EPA has any conception of what the impact all these new rules are going to have on utility customer bills? I never hear the word “customer costs” coming from Washington. And second, what is the early reaction from regulators in the Carolinas and Florida regarding the pending rules that they're going to be handed down by the EPA pretty soon?

William Johnson

But I will say about the EPA, I think, historically they have not had very deep understanding of the actual cost of the impact of their rules. I will say in this instance, they have had a very good dialogue with the industry about this. I mentioned in my comments a study that ICF did for EEI. One of the reasons we did that was to help inform the EPA, at their request actually, of what these things actually cost. Things like scrubbers, and so I think they're actually trying hard to figure out what the impact is, and we'll have a much better understanding of that as a result of the work industry and the EPA have done together. So I think they understand that there's a cost issue here, and that cost issue takes me to your second point, which is what is your reaction to regulators. The balance here is public health and safety, economy, economic growth and consumer pressure right? Those are the things you're trying to balance. And the state regulators are the ones that have to bear the brunt of dealing with cost increases to customers. So I'd say the reaction to this is, they would like to see a way, where we can achieve our public health and safety goals in the least cost manner with more flexibility in the schedule and the standards. It was very obvious in the room at NARUC that they're concerned about having to deal with these cost increases, especially at this time in the economy. So I think that's where they are.

Gordon Howald - Caylon

Is there any way for you, for your company, for Progress Energy, and even for Progress Energy and Duke in the future to, I guess, manage the inherent risk associated with that, the risk of rising customer costs?

William Johnson

Well, of course, that very issue is one of the reasons that we agreed to do this merger. I mean, the merger is designed to make a stronger, financially bigger scope and also mitigate the inevitable cost increases to customers. So that's one of the driving ideas behind the merger, and I think we will achieve that.

Operator

Our next question comes from Neil Mehta from Goldman Sachs.

Neil Mehta - Goldman Sachs

On nonfuel O&M, as I think about the consolidated progress in Duke entity. You guys have talked about a 5% to 7% savings rates associated with the acquisition. Can you remind us over how many years you expect to realize that savings, and what would enable you to earn on the higher end of that band?

Mark Mulhern

Yes, Neil. I think, you're right. We did make those disclosures kind of 5% to 7% of combined nonfuel O&M. I think there's a lot of things to think about here. Obviously, you're going to have some costs to achieve at the front end of this thing. I think in terms of both companies, regulatory calendar and how we do our integration ultimately, will depend on timing of all those. There's some obvious things, right? That out-of-the-box that you would naturally see. Obviously, we have duplication in our kind of service company activities. So just in terms of the corporate centers, you're going to have some duplication that would seem to me, you could potentially get to those synergies faster. But I think in terms of integrating companies, I think just think timing is going to take a little while to put these two companies together. And once we get through further down the road with regulatory approvals, we'll provide you with a little more insight on those numbers.

Neil Mehta - Goldman Sachs

As we think about Progress stand-alone, how should we think about the trajectory of AFUDC? I see you've provided guidance through '11. But at Progress stand-alone after 2011, what is the AFUDC level look like in the Carolinas and then also in Florida?

Mark Mulhern

Yes, Neil. I would point you to the page that has the major projects on it. And that's going to drive your AFUDC in the Carolinas. So we obviously haven't given numbers, much guidance beyond '11. But if you just look at those construction projects, I think they finish up in '13, '14 time frames. So you'll see AFUDC accrue at that level. There'll be a little bit in Florida. Obviously, we've got startup activities going on there in terms of Crystal River 3 upgrade, and some of the investments we're making in the Smart Grid. So there'll be some there, but most of it will be in Carolinas.

Neil Mehta - Goldman Sachs

Is it still your intention to target the high end of your ROE band in Florida using the cost of removal mechanism, right? I mean, we should be thinking about the higher end at PEF?

Mark Mulhern

You should.

Operator

Our next question comes from Marc de Croisset from FBR.

Marc de Croisset - FBR Capital Markets & Co.

Have you estimated the cost of compliance for potential EPA regulations across your system? Or is it still too early to tell?

William Johnson

Marc, we have some early swags on that. But the problem is, the number of options and what the rules actually say are so broad at this point, that it's really hard for us to have anything that we'd say in public about it. If you look at the range of rules that come out and the range of activities that we could engage in, that could be significant capital number. But I just don't think there is enough clarity at least for us to put out a number that we have any confidence in at this point.

Marc de Croisset - FBR Capital Markets & Co.

Also, on South Carolina, in particular, just changing tack. Have you seen any particular economic weakness in that state in either retail segments?

Mark Mulhern

Nothing that I would say is unusual. We serve a few hundred thousand customers in South Carolina. We obviously have generation there. I wouldn't say there's anything unusual that would be noteworthy in economic space. They've had the same kind of issues with respect to unemployment and some of the other issues that have affected other states in the Southeast. But I wouldn't say anything particularly noteworthy.

Marc de Croisset - FBR Capital Markets & Co.

And last, on rate case activity, do you have a sense for how the rate case activity might unfold in the Carolinas and Florida over the next couple of years? And is it likely to change now that you're merging with Duke?

William Johnson

Let me start with Florida. We have a settlement down there that takes us to the beginning of '13 or the end of '12, whichever is correct. So the rate- case cycle there, I would expect us to be in 2012 before the commission trying to recoup some of the things we didn't get in the last case. We put a lot of money in the ground there. We have this settlement that has cost of removal, but we actually need to get more cash out of that just to make the plans work. So I think that's pretty solid in '12. In the Carolinas, given the construction schedule for the combined cycles, we have sort of a tentative plan for '13-ish, and that probably doesn't change. Although it's a little too soon to say, but we are putting a lot of capital to work in these combined cycles, and we'll have to have a rate case somewhere in that process. So '13-ish is about the best we can do on that at the moment.

Operator

Our next question comes from Paul Ridzon from KeyBanc.

Paul Ridzon - KeyBanc Capital Markets Inc.

At year-end '10, how much Florida amortization was left? Can you remind us?

Mark Mulhern

Yes, I can. I'm looking around the table. We took $60 million in '10, so I think there's -- or $75 million, something like that, ballpark number.

Paul Ridzon - KeyBanc Capital Markets Inc.

And you touched on bonus depreciation, you kind of netted against some other items. But do you have the absolute value for '10 and '11 that you expect?

Mark Mulhern

I don't have it right here. I really was talking about it in terms of the incremental cash impact to the plan. But if you call one of these of guys, we could probably get you those numbers.

Paul Ridzon - KeyBanc Capital Markets Inc.

And then just, I guess, Slide 19, where you got your rate base growth, I mean you baked in the deferred tax impact of bonus depreciation in those numbers?

Mark Mulhern

Yes, and it was not overly significant.

Operator

Our next question comes from Paul Patterson from Glenrock Associates.

Paul Patterson - Glenrock Associates

Basically, I wanted to sort of follow up on Dan's question about usage. I'm sorry if I just missed it. You guys expect usage per-customer sort of offset customer growth. Could you give us a little more flavor on that? And did I hear that correctly?

William Johnson

Well, what I think what Dan was asking was whether we had seen any impact of conservation or efficiency programs. And I think the way we answered that question was '10 was a difficult year to kind of measure that just because of the unusual weather. So even the weather-adjusted numbers, it's just not as exact as you'd like it to be. So what I would say is, even though we had some -- we obviously have programs in both utilities, energy efficiency programs that customers are availing themselves up, it's been hard to really measure it. So what I added to Dan's question was, we have seen a return to customer growth, and this was shown on the charts. And so, I would say, hard to make a judgment whether -- how much impact that's really having.

Paul Patterson - Glenrock Associates

So when we’re looking forward, when we're going forward, I guess, 2011 and beyond, what's your sort of outlook in terms of conservation or energy efficiency in terms of its impact on sales? Can you give us a little bit of flavor on that? Because there was a neighboring utility that did seem to, I guess, with weather normalization, seem to get a little more conservative in terms of what its growth outlook was. And I'm just wondering if you could give us a little bit flavor as to what you guys are seeing?

William Johnson

Yes, I mean I think we've -- what we said in the guidance numbers that we've put out that we expect less than 1% kind of growth in kilowatt-hour sales in both utilities. And in Florida in particular, that's an improvement because we've been negative for a number of years in Florida due to the economy. I think we're optimistic with what we have characterized our thinking today about Florida, that things are beginning to recover. We're seeing early signs of that. Carolinas was slower to have a negative impact, and that we think, it's flattened out and at least, in terms of residential, commercial. We think we're going to have some growth going forward here. Our industrial customers probably contributed a little stronger in 2010 in Carolinas than we maybe had projected. And we think that'll probably even out here a little bit in '11. So overall, we think, again, with kind a little less than 1%-ish kind of growth. But we're still optimistic that Florida on longer-term has great prospects for growth over the long-term and Carolinas will return to some normal degree of growth rate.

Paul Patterson - Glenrock Associates

And I guess, what I'm sort of asking here is do you see significant offsets to customer growth from increased conservation? Or what is your expected impact associated with lower usage per customer going forward? I mean just sort of a big picture here, I guess you can break it up by service territory but sort of what you see, as your sort of crystal ball, in terms of any change in customer usage patterns that may impact? I mean clearly, you guys have been traditionally in a strong customer growth area compared to the rest of the country. I guess what I'm trying to figure out here is, do you guys see any significant change in customer behavior that might lead to a substantial offset for that growth from conservation, what have you?

William Johnson

Yes, let me try that one. So what you're hearing from us is a very conservative approach here. And the conservatism is because of the experience of the last couple of years, it's really hard to figure out exactly what customers are doing. So we had a decline in 2009 generally across the board. And then you have 2010, when you have such significant weather impact. That weather impact really is hard to separate out specific customer behavior. There is a little bit of art to this process, maybe more art than science. So our view is, let's be a little conservative about our projections just because there's some uncertainties. My own opinion here is that going forward, there will be maybe some decline in usage. We're pushing a number of efficiency programs and other things, and that may lead to a -- but I think it would be a small decline in usage, and will be offset as the economy recovers by growth. And so on a net-net basis, I don’t see that having a big impact on us.

Paul Patterson - Glenrock Associates

And in terms of the syn fuel balance that you guys talked about, I think you said, if I heard it correctly, $800 million would be available for the, I guess, the merged company. I know that sometimes is, with certain tax credits and stuff, sometimes there's a limitation in terms of its application to the entire company. Did I understand correctly that the $800 million really be -- for the merged company, pretty much available to offset within, obviously certain parameters, the cash taxes that you’d be paying once the merger takes place?

Mark Mulhern

Paul, what I would say to that it's kind of early days. We really haven't kind of looked at each other's tax positions and credits. They've got some things they’ve got investments and credits in, and so I wouldn't make too definitive statement about that yet. But the point I was making really was just that we're not using any of those credits, which we probably had anticipated. And I think this audience is probably has anticipated that we would be using credits here just because they've been carried forward for a while. And so, I wouldn't make any real statement yet about the combined ability to use the credits and how they will be utilized. But they're there, and I think it's a positive in terms of how I see it going forward.

Operator

Our next question comes from a Neil Kalton from Wells Fargo Securities.

Neil Kalton - Wells Fargo Securities, LLC

Just a quick question on North Carolina, I wonder if you could update us on the outlook for nuclear-related legislation, maybe sometime in 2011? Given the changes in the legislature over the course of the last six months, what's the outlook now I guess?

William Johnson

I wouldn't say it's just related to nuclear legislation. Our interest here is in regulatory modernization. And sort of that overhaul of how the entire system works to make us competitive with other states surrounding us, so that we can attract the capital here we need to do these projects. So we are talking to a lot of people about this. We are going to take -- make an attempt this year in the legislature in North Carolina to do some regulatory modernization. And the success of that will depend in part on how well our legislature can deal with the significant budget issue they have in front of us. So we're talking about it. We'll make an attempt. I think there is a general understanding here of the importance of this and what it would mean for the state and for development in the state. So just stay tuned as we go out through the year. But this is a good year to try to make these changes.

Operator

[Operator Instructions] At this time, we have no further questions.

William Johnson

Well, thanks again all of you for being on our call. Thanks for your interest in Progress Energy. Enjoy the long weekend.

Operator

That does conclude today's conference. We thank you for your participation.

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