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Progress Energy (NYSE:PGN)

Q1 2012 Earnings Call

May 03, 2012 11:00 am ET

Executives

Beau Pratt -

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

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

Jeffrey M. Stone - Chief Accounting Officer and Controller

Analysts

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Dan Eggers - Crédit Suisse AG, Research Division

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

James D. von Riesemann - UBS Investment Bank, Research Division

Andrew Levi

Travis Miller - Morningstar Inc., Research Division

James L. Dobson - Wunderlich Securities Inc., Research Division

Unknown Analyst

Operator

Good morning, and welcome to the Progress Energy's First Quarter 2012 Earnings Conference Call. [Operator Instructions] For opening remarks and introductions, I now turn the conference call over to Beau Pratt of Progress Energy. Please go ahead, sir.

Beau Pratt

Thank you, Doris. Good morning, and welcome, everyone. Joining me today 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/webcast, where we've also included a set of slides, which accompany our speakers' prepared remarks.

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

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 D. Johnson

Thanks, Beau, and good morning, everyone. Thanks for joining us on the call this morning. As you know, we released our first quarter financial results this morning, and as you've heard from other companies over the last 2 weeks, the incredibly mild weather was a major factor in the quarter for us as well.

As shown on Slide 3, I'll open with a few comments on earnings, and then update you on recent progress with the merger. I'll also provide a regulatory and operational update and comment on our corporate focus areas. Then Mark will provide more details on the financial results.

So now, turn to Slide 4 for the first quarter ongoing earnings. For the quarter, we reported ongoing earnings of $143 million compared to $202 million for the same quarter a year ago. Our earnings were down sharply for the same quarter last year, driven primarily by 2 things: the extremely mild weather this winter in the Carolinas and higher O&M costs. As Mark will discuss in more detail, the O&M costs were higher mainly because of the additional planned major outage in our nuclear fleet in the quarter and the investments we're making in the nuclear fleet to improve performance and resilience in the future.

Today, we are affirming our 2012 stand-alone guidance range of $3.10 to $3.25 per share of ongoing earnings. Now in the first quarter, we did not produce the earnings we have projected, but we are just $0.05 per share behind our year-to-date budget. And in a moment, Mark will provide more perspective on this point.

We are pursuing a regulatory initiative in the Carolinas to levelize the cost of multiple nuclear outages in a year to better match those expenses to the benefits customers receive. In addition, the regulatory flexibility we have around cost of removal in Florida provides optionality to help overcome this slow start to the year.

Now before updating you on where we stand on the merger approvals, I want to remind you of the benefits of the Duke Energy, Progress Energy merger for our customers and our investors. Despite short-term challenges in the business landscape, the case we first articulated early last year remains extremely compelling.

Slide 5 summarizes the benefits of the merger. The financial strength that comes with greater scale and diversity, the best practices we can leverage, the fuel and joint dispatch savings and other efficiencies that will help us offset some of the rising costs for customers, and finally, the stronger prospects for short and long-term earnings and dividend growth. The strategic rationale for this merger remains strong, and we continue working together with Duke to make it happen. As you know, 2 large utility mergers have closed so far this year, and the last one took 18 months, which will be about the same length of time as ours when we closed in early July.

Turning to Slide 6, you'll see the status of the various federal and state approvals for the merger. Last week, we cleared the 30-day review period for our updated Hart-Scott-Rodino filing with the Department of Justice. We're working in parallel on the approvals from the 3 remaining agencies and expect to wrap those up within the next 2 months. And we're making good progress to that end.

As described on Slide 7, we filed a new mitigation plan in March with the FERC in response to their December order. The plan consists of new and upgraded transmission to increase the power import capability into the Duke and Progress control areas. We identified 7 specific projects to address the FERC's competitive market concerns, and we estimate it will take about $110 million in 3 years to complete these projects.

We proposed an interim mitigation plan to cover that 3-year period. The interim proposal involves firm power sales to 3 firms in sufficient quantities to mitigate the market power concerns. Last week, the FERC's public comment period on our plan ended. Several interveners filed responses to the plan and this week, our 2 companies filed our rebuttal to those intervener comments. As you know, we earlier requested the FERC to rule on our plan by June 8 to allow sufficient time to gain merger approval in the Carolinas by early July.

Meanwhile, we've been working with the North Carolina Public Staff in the Office of Regulatory Staff in South Carolina to resolve the retail rate making issues that's resulting from our revised mitigation plan filed with the FERC in March, as well as other merger related matters that have arisen since the merger hearings last year. You might have seen coverage of a recent interview with the public staff lawyer who's engaged in the merger discussions, and we agree with the comments in that interview.

A potential settlement agreement will likely hold Carolina retail customers harmless from the FERC mitigation plan cost while clarifying accounting and rate making treatment. In addition, it will clarify a number of provisions in the original agreement filed with the North Carolina Commission in September. And finally, we'll affirm the $650 million in joint dispatch and fuel savings for Carolina retail customers. And we're confident that in short order, we will finalize an agreement with the public staff and ORS regarding all the retail rate-making issues related to the mitigation plan and the merger.

So overall, we're pleased with the progress on these settlement discussions, and appreciate the pragmatic and constructive approach by the public staff in North Carolina and ORS in South Carolina. We believe this progress keeps us moving forward towards realizing the significant benefits of this merger for our customers and shareholders.

Now turn to Slide 8, and I'll just remind you that shortly after our last earnings call, the Florida Public Service Commission approved the comprehensive settlement agreement we have reached with our Florida interveners. This agreement provides greater certainty on cost recovery related to Crystal River 3 and the Levy nuclear project, as well as customer rate stability through 2016. It's a balanced plan that provides a good platform for moving forward.

Also, in Florida this week, we submitted our annual nuclear cost-recovery filing with the Public Service Commission. In this filing, we indicated a shift in the in-service dates of the 2 Levy nuclear units, and we now project that the first unit would begin service in 2024, followed by the second 18 months later. This 3-year shift is due to the lower than projected customer demand, the lingering impacts of the economic slowdown, the uncertainty about future carbon regulation and the current low natural gas prices. We are still seeking to obtain the combined operating license for the Levy project and expect to receive that license next year. The project cleared a significant milestone last Friday when the NRC and Army Corps of Engineers issued its final environmental impact statement for Levy. The NRC found no environmental impacts that would prevent it from issuing the combined operating license.

New nuclear generation remains an important part of a balanced portfolio for the future, and we will reduce carbon intensity and improve the fuel diversity of electric generation in Florida.

As for our current nuclear fleet, we are working our way through an unusually busy schedule of planned outages, 3 in the first half of this year, as compared with 1 last year. We've already completed the outages at Robinson and Brunswick and began the one at Harris in late April. And we've never had 3 back to back outages like this before. Now the planned outages this year, and actually in the last couple of years, involve far more than just refueling the reactors. We're making major investments in the future performance, predictability, resilience and safety of our nuclear fleet. And we're already beginning to see positive results in all of these areas.

During the Robinson outage, for example, we replaced the low pressure turbines, which increased output by about 20 megawatts and should also boost reliability. And we will continue our multiyear upgrade modifications at Harris, increasing its power output approximately 30 megawatts as a result of this outage.

The Harris plant entered its plant outage following a breaker-to-breaker run in which the plant operated continuously for 525 days during the fuel cycle that started in November 2010. It was an impressive accomplishment that demonstrates the safe reliable performance we want consistently across the fleet. The greater scope of our planned nuclear outage work will continue the improvement in performance and predictability needed for the long term. And it will better prepare us to address Fukushima-related changes, as well as the integration and synergy achievement in the merger.

As for Crystal River 3, we continue to work with NEIL, our insurance provider, for recovery repair costs and associated replacement power costs. We've not yet received the definitive determination from NEIL about insurance coverage related to the March 2011 delamination. Our negotiations with NEIL continue, and we believe that all applicable costs associated with bringing Crystal River 3 back into service are covered.

Now as I've said on previous calls, Crystal River 3 resolution requires clarity on several things, specifically regulatory treatment, a highly developed repair plan with good visibility around cost and schedule and a coverage decision by the insurer. We have the regulatory clarity needed, and are well along in getting the engineering work to the point that we can reach an informed decision on the repair option. We should have the engineering product this month and also select a vendor to do the repairs if that is the ultimate decision. This should then enable us to reach conclusion with NEIL on insurance coverage, and assuming we have coverage and move forward with repair, we should begin the work by the end of this year. I expect to conduct an appropriate review of the repair/retire decision with the new Duke Energy board after the merger is completed.

I'll also take the opportunity here to remind you of our recent announcement about our plan to convert our Anclote units 1 and 2 in Florida from being fueled by oil and natural gas to 100% natural gas. The conversion of this 1,000-megawatt plant to all natural gas will provide our customers in Florida clean, affordable energy for years to come, and will also be an important and very cost-effective step in achieving compliance with the EPA's recent MACT rule.

In closing, with Slide 9, I will refresh you on our 2012 corporate focus areas. As discussed on last quarter's call, these 4 enterprise priorities are in addition to our emphasis on excelling in the fundamentals, and I'm pleased to report we're making good headway on all fronts. As mentioned, we've already completed 2 of 3 major rescheduled outages at our nuclear plants and expect a successful outage at Harris as a follow-up to its record-breaking run. We're making investments and changes in our nuclear fleet that will set the stage for excellent long-term performance, and we're building on the success of the record generation that our Carolinas nuclear fleet produced last year.

Meanwhile, our employees throughout the company continue to focus on systematically improving the business, an effort we call Continuous Business Excellence. They're collaborating to streamline work processes, achieve greater efficiencies and create new value for our customers and shareholders.

We're also making major strides on our balanced solution strategy to prepare for the future. We continue working toward adding 2 more combined cycle natural gas plants in the Carolinas in 2013 and toward replacing the old technology with advanced equipment during the Anclote conversion in Florida.

As for the final item on Slide 9, we have restarted our merger integration planning activity and will build momentum to be ready for our July 1 target merger close day. Given the strong rationale for this merger and our responsiveness to the regulators, we expect a positive outcome on the remaining approvals. And we look forward to a successful combination.

Now I'll ask Mark to provide a little more detail on the financials.

Mark F. Mulhern

Thank you, Bill, and good morning. On Slide 10, I detailed the areas that I will cover this morning, along with the first quarter financial results. I will review our first quarter retail sales and customer growth figures, and I'll provide an update on major capital projects and close with an ongoing earnings outlook for the rest of the year.

If you go to Slide 11, it presents the ongoing earning results for the first quarter of 2012 compared to the first quarter of 2011. The Carolinas were down sharply in the first quarter, primarily due to the additional planned nuclear outage, which I'll discuss in more detail in a minute, and unfavorable weather compared to the prior year. We experienced 28% lower heating degree days compared to Q1 last year, which results in $0.10 of lower earnings in the Carolinas.

Florida posted an increase of $0.06 for the quarter, primarily due to lower O&M expenses related to a reversal of certain liabilities associated with Crystal River 3. This reversal was in accordance with the 2012 settlement agreement approved by the commission in February. So on a consolidated basis, we were down $0.21 for the quarter.

Slide 12 is our waterfall slide of key drivers for the quarter, and as I mentioned, milder weather was the largest negative driver of the quarter-over-quarter variance and resulted in an $0.11 reduction. Also of note, O&M expense in the Carolinas was significantly higher this quarter, again due to the timing of the planned nuclear outages this year. And I will outline our plans to address that variance in a few minutes.

Another key driver this quarter was the pick-up we received from the reversal of certain liabilities related to CR3, which totaled $51 million. The 2012 settlement agreement provided for CR3 to be placed in extended cold shut down, and as a result, allowed for the suspension and reversal of certain accruals in anticipation of removing the plant from base rates in 2013. And this provision, contributed $0.08 of favorability. And when combined with the $22 million lower-cost of removal we've booked this quarter, the effects of the settlement provided about $0.06 of favorability at Progress Energy Florida.

So Slide 13 presents the actual and weather-normalized retail energy sales for the first quarter of '12 compared to first quarter of 2011. The Carolinas saw a 0.5% increase in growth and usage. On a weather-adjusted basis, total retail sales are positive for the year. The quarter-to-quarter change in residential growth and usage is negatively skewed by the extreme weather in January 2011, that we believe was not fully captured in the weather adjustment factor last year. So our year-to-date growth in usage numbers in the Carolinas are in line with our retail forecast assumptions.

Florida's total retail sales for the first quarter were a positive 1.8%, and is trending ahead of our forecast for the year of a negative 0.4%. When compared to the first quarter of 2011, our residential class was down due to this year's milder weather. However on a weather-adjusted basis, we're seeing some encouraging trends in growth and usage as the economy begins to heal.

On Slide 14, the left side of that slide shows our average customer growth at PEC and PEF for the quarter. And on the right, we've included some unemployment statistics for the states in which we serve, as well as the nation. Looking at customer growth, it appears that the Carolinas have emerged from a bottom as we added about 9,000 customers in the first quarter of this year compared to 7,000 last year. We're seeing a notable expansion of our commercial class as unemployment and the economy begin to show signs of improvement.

In Florida, customer growth continued its upward trajectory in the first quarter. We added 11,000 new customers compared to 8,000 last year and are seeing the most notable pick-up in the residential and commercial sectors of our business. And as you've heard on some of the other calls, the Florida economy is seeing some positive signs of improvement as noted by the 16% year-over-year improvement in Florida's unemployment rate.

On Slide 15, our major capital projects, the Lee Plant and Smart Grid programs are over 75% complete and are on track for timely completion. Our Sutton combined-cycle plant is approaching 50% completion and remains on track for a late 2013 completion. And as a reminder, our announced capital expenditures do not include any cost related to the CR3 repair or upgrade work.

So finally on Slide 16, to give you some insight into the ongoing earnings EPS guidance range for 2012, and how we can overcome the slow first quarter start. Our first quarter results are down from last year, again, largely due to negative weather and higher nuclear O&M spending. However, on a positive note, the Florida settlement provided some favorability for the quarter due to the regulatory liability reversals. As a result of that benefit, we booked less cost of removal this quarter compared to 2011 and continued to retain a healthy balance for future use. We believe we can offset the first quarter unfavorability and achieve our guidance through a number of factors by the end of the year.

After the mild winter, a return to normal weather should provide a solid foundation for earnings as we enter the high revenue periods of the calendar at both utilities. Additionally, 2 regulatory items are key to our 2012 success. And as we've discussed here this morning, nuclear outage timing in the Carolinas can cause significant earning fluctuations between the years. As a result, we have begun discussions with the North Carolina Public staff and the South Carolina Office of Regulatory Staff about adopting a methodology to levelize PEC's nuclear refueling outage costs.

Under this methodology, the incurred outage costs are deferred and amortized over the plant's operating cycle between scheduled refueling outages, which is typically 18 to 24 months. This will ultimately result in PEC consistently recognizing the cost of an average number of outages each year. There's no rate impact to customers from this change and it allows us a better means of matching the costs of the outage with the period over which the benefit is realized.

This change results in a noncash deferral in the first year of implementation. If implemented in 2012, approximately $80 million to $90 million or $0.17 to $0.18 would be deferred. Outage levelization is utilized by several other utilities and is a generally accepted practice and will require an accounting order from state regulators, which we may look to secure later this year.

So if you look back at Slide 12 for a moment and assume that we got approval to implement levelization, you'd effectively add back $0.17 to the $0.48, and the quarter would look like $0.65 versus $0.69 a year ago.

The other regulatory item is in Florida. The PEF rate settlement provides the company flexibility to record a lower depreciation expense through the amortization of cost of removal through the term of the settlement. The estimated cost of removal balance at the end of the first quarter was $216 million, providing us flexibility around timing of its utilization.

The remaining key items for 2012 are centered around effectively operating our core business. So we're making great progress towards the completion of our 2 combined cycle plants in the Carolinas. These plants, both of which are slated to enter service in 2013, will provide PEC customers additional fuel diversity and savings. Additionally, we are focused on disciplined O&M cost management in all parts of the business, especially as we complete our third and final nuclear outage at Harris in the second quarter.

So in closing, given our focus on effective cost management, the flexibility provided by the 2 regulatory items and an expectation of a return to somewhat normal weather through the remainder of the year, our 2012 earnings per share guidance of $3.10 to $3.25 is achievable.

The appendix, I will not review the slides, but we have provided some additional information we'll be happy to discuss if you have questions. I realize we've went through this material quickly, but expect to have some questions that IR can help you follow-up with.

And I'm now going to turn it back to Bill, and we'll take your questions

William D. Johnson

Thanks, Mark, and Doris, we're ready to take our listeners questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jonathan Arnold with Deutsche Bank.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Can I just -- on Crystal River, if I remember rightly, there was sort of an element in the settlement, which there were 2 parts depending on whether you started repairs before the end of this year or not. You obviously talked about feeling like you're close to having an engineering study complete. How do you feel about making that year-end timing on starting repair?

William D. Johnson

Given what we know today, Jonathan, I feel fairly confident that we will start this by the end of the year. If the decision is to repair, because I said earlier that we are going to proceed down this path with NEIL, with the engineering and then with the new combined board. But I think there's plenty of time to get this started by the end of the year.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

And in the past, you've said that it was hard to conceive of a scenario where it would not make sense to repair. Can you just update on your view on that statement?

William D. Johnson

I think what I've said in the past is that if you assume reasonable repair cost and coverage, the best thing for the customer there is to repair it. Over the long term, there's a lot of customer benefit to this. But still, we have some work to do on that engineering plan and the coverage decision before we can actually say what it is we're going to do.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Okay. And maybe just on another area, I was looking at the Slide 13 with the retail sales numbers. You mentioned something about weather normalization, having been not perfect, maybe last year, but how do you manage to have all the segments negative in the Carolinas and that the retail total number be 0.5% positive?

William D. Johnson

That's a good, good question, Jonathan. We've asked as well -- we had something called unbilled revenue effectively, which has to do with the timing of when we actually bill the customer and when service is delivered that contributes to that, that is a common thing throughout the sector.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

So the billing's up -- sort of better than what you're showing in the segments effectively?

Jeffrey M. Stone

Yes, this is Jeff Stone, Corporate Controller. What you see on the charts are the billed revenue number and when we record unbilled, which is, again, it's standard accounting practice across the utility industry, because it's an estimate, we don't allocate it across the classes. The total retail is probably a more accurate picture of what truly has gone on, on a calendar basis for the company.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Okay. And that 0.5% number, is that sort of including the additional day from the leap year or have you sort of x-ed that out?

Jeffrey M. Stone

It is. No, it's in there.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Okay. So it would've been sort of down little as of now?

William D. Johnson

Yes, that's correct.

Operator

And our next question comes from Dan Eggers from Credit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

I guess can we talk a little bit about the merger, the joint dispatch savings at $650 million, with the drop in power prices and commodity prices? There's been some talk that it was going to be a little harder to achieve. You feel pretty confident about that? Can you just kind of share a little more how you guys are seeing that kind of benefit in a lower price environment?

William D. Johnson

Dan, I don't think we want to talk too much about this until we have public the agreement we'll reach with the 2 staffs in the Carolinas and obviously, some things have changed, coal burn is down, gas burn is up. But there are a lot of elements that go into fuel, transportation, all kinds of things. And we still think this is achievable, but I would wait until we have the settlement agreement public before we talk about that anymore.

Dan Eggers - Crédit Suisse AG, Research Division

Yes, I guess, Bill, it's kind of as far as the settlement agreement goes, what is your level of confidence you guys can have that done before there's a final resolution out of FERC. Does one have to happen before the other? Are they going to be treated relatively independently?

William D. Johnson

I think they're treated relatively independently. The FERC, we would hope some time before June 8. The Carolinas, we would expect probably before then or at least to have the settlement agreement public. There's still a process that follows that, where I think they would get comments and the commission would have to take some action, but I think the settlement itself will be pretty quickly here.

Dan Eggers - Crédit Suisse AG, Research Division

And from a priority perspective, in addition to the staffs, who else should we be looking for as far as ideal signatories to help with the process?

William D. Johnson

The usual suspects, Dan.

Dan Eggers - Crédit Suisse AG, Research Division

Okay. And then just on -- really feel I make sure I have this scribble in my head, the 3 in the first half of this year, how does that quarterly compare to what happened last year from a refueling -- if we are just trying to balance out our quarters the rest of this year.

Mark F. Mulhern

Dan, we had one outage last year. I think it was in the first half of the year. So it would've been, and this is probably comparable to the first quarter this year, so I think 1 versus 2 this year to last. And in this first half of the year, we will have 3 versus 1. So we'll be done with our outages in the first half of the year, so no planned outages in the second half of 2012.

Operator

Our next question comes from Michael Lapides with Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Can you be a little bit more specific on your commentary about what's embedded in guidance for year-over-year changes in O&M?

Mark F. Mulhern

Sure. And I think conspicuously, Michael, what you saw in our waterfall that we put out in December for the full year, you'll notice, there was not an O&M bar on that chart. That was intentional because what we had in our plan was we obviously knew we were having 3 refueling outages in 2012, and we knew we'd have higher nuclear O&M. But our plan all along contemplated regulatory success around the levelization. So I would say flat O&M effectively across the rest of the company and then slightly up for nuclear because it won't -- the outage levelization, assuming we got it, wouldn't alleviate it completely. So that's how I would think about O&M for the year.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Meaning flat O&M in both Florida and Carolinas, excluding the nuclear outage that occurred in the first quarter?

Mark F. Mulhern

Yes, and I would say, some of that will get taken care of again in the levelization process. But yes, that's how I would think about it.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. And what about financing? Like can you -- I recall that you'll get a debt tranche or get a repayment of a debt tranche a couple of weeks or so ago. Can you talk about debt financing and potential savings on debt costs done during 2012?

Mark F. Mulhern

Sure. You're right, you referred to a holding company maturity that we had due in April that we just repaid. That was a $450 million number, and that had a 685 coupon on it that got replaced with 3.15% debt, so pretty attractive, obviously the rate environment that we're in right now. We do have some upcoming financing in Carolina, so we're still -- obviously, the 2 combined cycle plants and we have a schedule maturity in PEC that we will refinance and we'll probably add some additional debt to that to take out some of the short-term borrowings we've had to fund the construction program. Rates, clearly, are attractive to us these days. So any refinancing opportunities we have, we're going to save some money on interest costs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Got it. Last item, just Bill, and thinking about the rate case timeline in the Carolinas, and which of the gas plants will be included in that docket versus which might have to be included in later dockets?

William D. Johnson

It's a good question that we don't really have the answer to yet. We will file some time later this year in the Carolinas. Part of that timing will depend on where the plants are in their construction schedule frankly. And it'd be nice to get them both in one case. There's the ability even if with the historic test, you are to do known and measurable changes or to reach some agreement how you would feather them in later. But I think we're probably a quarter away from answering that question, Michael.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

So if you filed in like November, December of 2012, you legally can get the Sutton plant, which is due online in 2013 in the rates?

William D. Johnson

You can at least talk about it. But again, I think we're a quarter away from being any more specific than we are on that.

Operator

And from UBS we'll go next to Jim von Riesemann.

James D. von Riesemann - UBS Investment Bank, Research Division

Bill, just a couple of questions on merger process, if you don't mind. The first one is regarding the FERC bench decision. Do you know if the FERC is required to notify the Stock Exchange prior to issuing its decision, especially the plans to issue that decision during market hours?

William D. Johnson

I do not know the answer to that question. I have noticed in both of our decisions out of the FERC, they've both come after hours, and there's been a little commentary around that they do that so they don't affect the market. But whether they have to tell the Exchange or not, I don't know the answer to that.

James D. von Riesemann - UBS Investment Bank, Research Division

Okay, great. Second question is, are there any final processes that the Progress board needs to undertake regarding the merger, namely final thumbs up, thumbs down, financial reviews, et cetera? And do you know if those processes, if any, are the same for your merger partner?

William D. Johnson

I think there are some processes that involve final board approval, but I think the discretionary is pretty limited. It's governed by the terms of the merger agreement so if you have all the regulatory approvals and you meet all the standards of the merger agreement, I think that's mostly a pro forma kind of approval. And then there are some paperwork transactions you go through with the Secretary of State and the Exchange and those things. But all of this is driven by the merger agreement. And I think once you have the regulatory approvals, it's pro forma.

Operator

And our next question comes from Andy Levi with Avon Capital.

Andrew Levi

I guess I'll stick on the merger theme here, but one, I was happy to hear that things seem to be moving along in the Carolinas. And just secondly, Bill, maybe you can just talk about because this is kind of in all types of things bouncing around, do you have conversations with Jim Rogers? Have you guys been talking?

William D. Johnson

We talk frequently, several times every week.

Operator

Our next question comes from Travis Miller with Morningstar.

Travis Miller - Morningstar Inc., Research Division

Looking at the FERC plan and the mitigation plan and the other negotiations there, what customers would bear some of those costs for the transmission projects, potentially higher purchase power costs? Where do those costs fall on the customer base?

William D. Johnson

Again, I don't want to be too specific on this until we actually have a signed agreement that it can be made public. But you saw from the interview with the public staff attorney that the expectation is that retail customers will be held harmless from the impacts of the mitigation plan. So again, I think you'd get a lot more clarity on this when you get to see that agreement.

Travis Miller - Morningstar Inc., Research Division

Okay. And would the state be able to have jurisdiction, depending on what that agreement came to be? Could they accept or reject that based on rate impacts?

William D. Johnson

The state?

Travis Miller - Morningstar Inc., Research Division

The state, yes.

William D. Johnson

I think at some point, the state commission will have to rule on that agreement, yes. So eventually, when it gets through that part of the process, they will have to say yes or no to it.

Travis Miller - Morningstar Inc., Research Division

Okay, so it doesn't end at the FERC then. It has to go.

William D. Johnson

But we expect these things are all going to come together in plenty of time to get this merger done.

Operator

And from Wunderlich Securities, we'll go next to Jay Dobson.

James L. Dobson - Wunderlich Securities Inc., Research Division

Bill, I was hoping you could tell a little bit about the industrial sales in the Carolinas down little bit, and so maybe just talk a little bit about what you're seeing in the economy there? Florida as well, although, I think Mark covered the lion's share of that.

Mark F. Mulhern

Jay, I'll chime in here. I got the notes in front of me, so it's probably just easier for me. Industrial sales in the Carolinas were slightly up over 2011 on weather just much in industrial, but I would say that a couple of sectors that point to that had some significance rubber and plastics were up quite a bit and the largest decline would have been in textiles. We are seeing across the economy in the Carolinas, some glimmers of hope here in terms of recovery. So there's been a little bit of activity in the real estate and home construction area that has been helpful. Our commercial sales were up a bit in '12 compared to '11. So by and large, I'd say we don't have as concentrated in industrial basis some of the other utilities in the Southeast, but I think we're pretty pleased to see what were some of these green shoots of improvement.

James L. Dobson - Wunderlich Securities Inc., Research Division

Okay. Your Slide 13 was actually showing industrial sales down. Did you just say it was up, or is there...

Mark F. Mulhern

I'm sorry. I'm sorry, down. You're right. I was reading from a note. I wasn't looking at the chart. Sorry about that.

James L. Dobson - Wunderlich Securities Inc., Research Division

No worries. So what you're saying is there are some green shoots in there, but just relative to the same period a year ago, we're not quite there but there's nothing that's really alarming in there?

Mark F. Mulhern

That's right.

James L. Dobson - Wunderlich Securities Inc., Research Division

Okay, great. Bill, then I'll try this one on you. We're talking about the state settlement and I know you don't want to get too deep into this, but the $650 million of fuel savings contemplated is currently contemplated over 5 years. Is the settlement at all considering a sixth year in that or is probably 5 years sort of where we're going to stick?

William D. Johnson

So I want to evade that question by saying let's wait a little while. We'll get this thing done and out there publicly, and I'll call you and answer the question then.

James L. Dobson - Wunderlich Securities Inc., Research Division

Outstanding. Then last one for Mark, back to the nuclear levelization, can you give us a little better idea when we might see this, and I'm really thinking about it in regards to the last question and the negotiations that are going on regarding the merger and how you can also do sort of the nuclear levelization, understanding it is only an accounting order. But then, maybe, and I'm sure you don't want to talk worst-case, but if you don't get it, should we just take $0.17 out of the high and the low end of guidance?

Mark F. Mulhern

Jay, here's what I'd say about that. We just started this and we were planful on the way we thought about this. In other words, what we did in our original planning for 2012, we knew we're going to have the outages, so we had this assumption in our plan that we would have some success here. And what I would say is we really wanted to get through the outage cost and understand and make sure that we knew what the cost were before we initiated significant dialogue about getting the accounting orders. So we will evaluate that and continue on. We just started our Harris outage, so we'll get through that in the next month or so, and evaluate at that point in time what our timing might be with respect to that. So that's how would I would just think about it.

James L. Dobson - Wunderlich Securities Inc., Research Division

Got you. So your discussions probably are third quarter-ish?

Mark F. Mulhern

That's probably accurate.

Operator

And we'll go next to Sachin Shah [ph] with Tullett Prebon [ph].

Unknown Analyst

So just out of curiosity, I know FERC is really tight-lipped on the review. But just want to get your, kind of reading the tea leaves of if you guys are in the settlement talks with both North Carolina and South Carolina, if that should bode well from FERC's perspective or for that matter, your perspective that FERC could rule positively as they would look at that settlement talks for them to make a positive decision ultimately and how you kind of see that kind of playing out?

William D. Johnson

Yes, so we obviously feel good about the productive level of discussions we had with the state folks. We don't have any greater clarity than you about what happens at the FERC, especially once you make a filing there. The ex parte rules are very strict. All I can say is that we have read the December order carefully. If you read our mitigation plan, I think we have touched on every issue in there and addressed it. I think our response to the intervener comments was also very direct and sort of comprehensive. So I have confidence that we have answered the questions and put forth a plan, but we will wait and see what the result is at the FERC.

Unknown Analyst

Okay. So I mean, their decisions are not contingent on North Carolina, South Carolina, but I guess my question is would that make their decision a little bit easier, knowing that, that settlement was in place and as you stated, and is already known, you try to address most of their concerns that they filed back in December?

William D. Johnson

All I can say is that we are working hard in all 3 of those jurisdictions and addressing every issue that comes up. I feel good about where we are in all this, at least given our ability to address what we know. But other than that, I don't think I can speculate on how they interact with each other.

Operator

[Operator Instructions] And we'll go next to Greg Rice [ph] with Catapult [ph].

Unknown Analyst

I just have a quick technical question regarding the merger. If, for some reason, you've determined that you'd not want to go through with the merger, could it simply ops to pay the break-up fee and walk away?

William D. Johnson

The merger agreement is a publicly filed document and I would encourage you to read that provision and determine for yourself. I don't think I want to get into a discussion about anything like that.

Operator

And at this time, there are no further questions in the queue. Mr. Johnson, I'll turn the call back to you for any closing or additional remarks.

William D. Johnson

Thanks, Doris. We appreciate everyone being on the call. We appreciate your questions and your interest in the company. So have a good day, and we'll see you at the end of the next quarter.

Operator

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.

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