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EX-32.B - EXHIBIT 32 (B) - DUKE ENERGY PROGRESS, INC.exhibit32b.htm
EX-31.E - EXHIBIT 32 (E) - DUKE ENERGY PROGRESS, INC.exhibit32e.htm
EX-31.E - EXHIBIT 31 (E) - DUKE ENERGY PROGRESS, INC.exhibit31e.htm
EX-32.C - EXHIBIT 32 (C) - DUKE ENERGY PROGRESS, INC.exhibit32c.htm
EX-31.F - EXHIBIT 31 (F) - DUKE ENERGY PROGRESS, INC.exhibit31f.htm
EX-31.B - EXHIBIT 31 (B) - DUKE ENERGY PROGRESS, INC.exhibit31b.htm
EX-32.A - EXHIBIT 32 (A) - DUKE ENERGY PROGRESS, INC.exhibit32a.htm
EX-31.C - EXHIBIT 31 (C) - DUKE ENERGY PROGRESS, INC.exhibit31c.htm
EX-32.F - EXHIBIT 32 (F) - DUKE ENERGY PROGRESS, INC.exhibit32f.htm
EX-32.D - EXHIBIT 32 (D) - DUKE ENERGY PROGRESS, INC.exhibit32d.htm
EX-31.D - EXHIBIT 31 (D) - DUKE ENERGY PROGRESS, INC.exhibit31d.htm
EX-31.A - EXHIBIT 31 (A) - DUKE ENERGY PROGRESS, INC.exhibit31a.htm
EX-10.B - AMENDMENT OF THE SUPPLEMENTAL SENIOR EXECUTIVE RETIREMENT PLAN - DUKE ENERGY PROGRESS, INC.exhibit10b.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                    .


Commission File Number
Exact name of registrants as specified in their charters, states of incorporation, addresses of principal executive offices,
and telephone numbers
I.R.S. Employer Identification Number
 
pgn logo
 
     
1-15929
Progress Energy, Inc.
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone:   (919) 546-6111
State of Incorporation: North Carolina
56-2155481
     
1-3382
Carolina Power & Light Company
d/b/a Progress Energy Carolinas, Inc.
410 South Wilmington Street
Raleigh, North Carolina  27601-1748
Telephone:   (919) 546-6111
State of Incorporation: North Carolina
56-0165465
     
1-3274
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
299 First Avenue North
St. Petersburg, Florida  33701
Telephone:   (727) 820-5151
State of Incorporation: Florida
59-0247770

NONE
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Progress Energy, Inc. (Progress Energy)
Yes
x
No
o
Carolina Power & Light Company (PEC)
Yes
x
No
o
Florida Power Corporation (PEF)
Yes
x
No
o

 
 
 

 
 
Indicate by check mark whether each registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files).

Progress Energy
Yes
x
No
o
PEC
Yes
x
No
o
PEF
Yes
x
No
o

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Progress Energy
Large accelerated filer
x
Accelerated filer
o
 
Non-accelerated filer
o
Smaller reporting company
o
         
PEC
Large accelerated filer
o
Accelerated filer
o
 
Non-accelerated filer
x
Smaller reporting company
o
         
PEF
Large accelerated filer
o
Accelerated filer
o
 
Non-accelerated filer
x
Smaller reporting company
o

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Progress Energy
Yes
o
No
x
PEC
Yes
o
No
x
PEF
Yes
o
No
x

At May 3, 2012, each registrant had the following shares of common stock outstanding:

Registrant
Description
Shares
Progress Energy
Common Stock (Without Par Value)
296,021,515
     
PEC
Common Stock (Without Par Value)
159,608,055 (all of which were held directly by Progress Energy, Inc.)
     
PEF
Common Stock (Without Par Value)
100 (all of which were held indirectly by Progress Energy, Inc.)

This combined Form 10-Q is filed separately by three registrants: Progress Energy, PEC and PEF (collectively, the Progress Registrants). Information contained herein relating to any individual registrant is filed by such registrant solely on its own behalf. Each registrant makes no representation as to information relating exclusively to the other registrants.

PEF meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

 
 

 

TABLE OF CONTENTS
2
 
5
 
PART I.  FINANCIAL INFORMATION
 
7
     
 
Unaudited Condensed Interim Financial Statements:
 
     
 
Progress Energy, Inc. (Progress Energy)
 
 
7
 
8
 
9
     
 
Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. (PEC)
 
 
10
 
11
 
12
     
 
Florida Power Corporation d/b/a Progress Energy Florida, Inc. (PEF)
 
 
13
 
14
 
15
     
 
16
     
63
     
93
     
96
     
PART II.  OTHER INFORMATION
 
97
     
97
     
97
     
99
     
101

 
1

 

GLOSSARY OF TERMS
 
We use the words “Progress Energy,” “we,” “us” or “our” with respect to certain information to indicate that such information relates to Progress Energy, Inc. and its subsidiaries on a consolidated basis. When appropriate, the parent holding company or the subsidiaries of Progress Energy are specifically identified on an unconsolidated basis as we discuss their various business activities.
 
The following abbreviations, acronyms or initialisms are used by the Progress Registrants:
 
TERM
DEFINITION
   
   
2011 Form 10-K
Progress Registrants’ annual report on Form 10-K for the fiscal year ended December 31, 2011
401(k)
Progress Energy 401(k) Savings & Stock Ownership Plan
AFUDC
Allowance for funds used during construction
Anclote
PEF’s Anclote Units 1 and 2
ARO
Asset retirement obligation
ASC
FASB Accounting Standards Codification
ASLB
Atomic Safety and Licensing Board
the Asset Purchase Agreement
Agreement by and among Global, Earthco and certain affiliates, and the Progress Affiliates as amended on August 23, 2000
ASU
Accounting Standards Update
Audit Committee
Audit and Corporate Performance Committee of Progress Energy’s board of directors
BART
Best Available Retrofit Technology
Base Revenues
Non-GAAP measure defined as operating revenues excluding clause recoverable regulatory returns, miscellaneous revenues, fuel and other pass-through revenues and refunds, if any
Brunswick
PEC’s Brunswick Nuclear Plant
Btu
British thermal unit
CAA
Clean Air Act
CAIR
Clean Air Interstate Rule
CAVR
Clean Air Visibility Rule
CCRC
Capacity Cost-Recovery Clause
CERCLA or Superfund
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended
Clean Smokestacks Act
North Carolina Clean Smokestacks Act
CO2
Carbon dioxide
COL
Combined license
Corporate and Other
Corporate and Other segment primarily includes the Parent, Progress Energy Service Company and miscellaneous other nonregulated businesses
CR1 and CR2
PEF’s Crystal River Units 1 and 2 coal-fired steam turbines
CR3
PEF’s Crystal River Nuclear Plant Unit 3
CR4 and CR5
PEF’s Crystal River Units 4 and 5 coal-fired steam turbines
CSAPR
Cross-State Air Pollution Rule
CVO
Contingent value obligation
D.C. Court of Appeals
U.S. Court of Appeals for the District of Columbia Circuit
DOE
U.S. Department of Energy
DOJ
U.S. Department of Justice
DSM
Demand-side management
Duke Energy
Duke Energy Corporation
Earthco
Four coal-based solid synthetic fuels limited liability companies of which three were wholly owned
ECCR
Energy Conservation Cost Recovery Clause
ECRC
Environmental Cost Recovery Clause
 
 
2

 
 
EE
Energy efficiency
EIP
Equity Incentive Plan
EPA
U.S. Environmental Protection Agency
EPC
Engineering, procurement and construction
ESOP
Employee Stock Ownership Plan
FASB
Financial Accounting Standards Board
FDEP
Florida Department of Environmental Protection
FERC
Federal Energy Regulatory Commission
FGT
Florida Gas Transmission Company, LLC
Fitch
Fitch Ratings
the Florida Global Case
U.S. Global, LLC v. Progress Energy, Inc. et al.
Florida Progress
Florida Progress Corporation
FPSC
Florida Public Service Commission
Funding Corp.
Florida Progress Funding Corporation, a wholly owned subsidiary of Florida Progress
GAAP
Accounting principles generally accepted in the United States of America
GHG
Greenhouse gas
Global
U.S. Global, LLC
GWh
Gigawatt-hours
Harris
PEC’s Shearon Harris Nuclear Plant
IPP
Progress Energy Investor Plus Plan
kV
Kilovolt
kVA
Kilovolt-ampere
kWh
Kilowatt-hours
Levy
PEF’s proposed Levy Units No. 1 and No. 2 Nuclear Power Plants
LIBOR
London Inter Bank Offered Rate
MACT
Maximum achievable control technology
MATS
Mercury and Air Toxics Standards
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in PART I, Item 2 of this Form 10-Q
Medicare Act
Medicare Prescription Drug, Improvement and Modernization Act of 2003
the Merger Agreement
Agreement and Plan of Merger, dated as of January 8, 2011, by and among Progress Energy and Duke Energy
MGP
Manufactured gas plant
MW
Megawatts
MWh
Megawatt-hours
Moody’s
Moody’s Investors Service, Inc.
NAAQS
National Ambient Air Quality Standards
NC REPS
North Carolina Renewable Energy and Energy Efficiency Portfolio Standard
NCUC
North Carolina Utilities Commission
NDT
Nuclear decommissioning trust
NEIL
Nuclear Electric Insurance Limited
NERC
North American Electric Reliability Corporation
NO2
Nitrogen dioxide
North Carolina Global Case
Progress Synfuel Holdings, Inc. et al. v. U.S. Global, LLC
NOx
Nitrogen oxides
NRC
Nuclear Regulatory Commission
O&M
Operation and maintenance expense
OATT
Open Access Transmission Tariff
OCI
Other comprehensive income
Ongoing Earnings
Non-GAAP financial measure defined as GAAP net income attributable to controlling interests after excluding discontinued operations and the effects of certain identified gains and charges
OPEB
Postretirement benefits other than pensions
 
 
3

 
 
ORS
South Carolina Office of Regulatory Staff
the Parent
Progress Energy, Inc. holding company on an unconsolidated basis
PEC
Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc.
PEF
Florida Power Corporation d/b/a Progress Energy Florida, Inc.
PESC
Progress Energy Service Company, LLC
Power Agency
North Carolina Eastern Municipal Power Agency
PPACA
Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act
Preferred Securities
7.10% Cumulative Quarterly Income Preferred Securities due 2039, Series A issued by the Trust
Preferred Securities Guarantee
Florida Progress’ guarantee of all distributions related to the Preferred Securities
Progress Affiliates
Five affiliated coal-based solid synthetic fuels facilities
Progress Energy
Progress Energy, Inc. and subsidiaries on a consolidated basis
Progress Registrants
The reporting registrants within the Progress Energy consolidated group. Collectively, Progress Energy, Inc., PEC and PEF
PRP
Potentially responsible party, as defined in CERCLA
PSSP
Performance Share Sub-Plan
QF
Qualifying facility
RCA
Revolving credit agreement
Reagents
Commodities such as ammonia and limestone used in emissions control technologies
REPS
Renewable energy portfolio standard
the Registration Statement
The registration statement filed on Form S-4 by Duke Energy related to the Merger
Robinson
PEC’s Robinson Nuclear Plant
ROE
Return on equity
RSU
Restricted stock unit
SCPSC
Public Service Commission of South Carolina
Section 29
Section 29 of the Code
Section 29/45K
General business tax credits earned after December 31, 2005 for synthetic fuels production in accordance with Section 29
Section 45K
Section 45K of the Code
Section 316(b)
Section 316(b) of the Clean Water Act
(See Note/s “#”)
For all sections, this is a cross-reference to the Combined Notes to the Financial Statements contained in PART I, Item 1 of this Form 10-Q
SERC
SERC Reliability Corporation
S&P
Standard & Poor’s Rating Services
SO2
Sulfur dioxide
SOx
Sulfur oxides
Subordinated Notes
7.10% Junior Subordinated Deferrable Interest Notes due 2039 issued by Funding Corp.
Tax Agreement
Intercompany Income Tax Allocation Agreement
the Trust
FPC Capital I
the Utilities
Collectively, PEC and PEF
VIE
Variable interest entity
VSP
Voluntary severance plan
Ward
Ward Transformer site located in Raleigh, N.C.
Ward OU1
Operable unit for stream segments downstream from the Ward site
Ward OU2
Operable unit for further investigation at the Ward facility and certain adjacent areas
   


 
4

 

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
 
In this combined report, each of the Progress Registrants makes 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 combined Form 10-Q that are not historical facts are forward looking and, accordingly, 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. Any forward-looking statement is based on information current as of the date of this report and speaks only as of the date on which such statement is made, and the Progress Registrants undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made.
 
In addition, examples of forward-looking statements discussed in this Form 10-Q include, but are not limited to, statements made in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) including, but not limited to, statements under the following headings: “Merger” about the proposed merger between Progress Energy and Duke Energy Corporation (Duke Energy) and the impact of the merger on our strategy and liquidity; “Results of Operations” about trends and uncertainties; “Liquidity and Capital Resources” about operating cash flows, future liquidity requirements and estimated capital expenditures; and “Other Matters” about the effects of new environmental regulations, changes in the regulatory environment, meeting anticipated demand in our regulated service territories, potential nuclear construction and our synthetic fuels tax credits.
 
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 PEF’s Crystal River Unit No. 3 Nuclear Plant (CR3) could prove more extensive than is currently identified, such repairs could prove not to be feasible, the cost 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;
·  
our 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;
·  
our 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;
·  
our 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;
 
 
5

 
 
·  
the Progress Registrants’ ability to control costs, including operations and maintenance expense (O&M) and large construction projects;
·  
our subsidiaries’ ability to pay upstream dividends or distributions to Progress Energy, Inc. holding company (the Parent);
·  
current economic conditions;
·  
our 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 each of the Progress Registrants;
·  
the Progress Registrants’ ability to maintain their current credit ratings and the impacts in the event their 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 (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 the Progress Registrants’ filings with the SEC. Many, but not all, of the factors that may impact actual results are discussed in Item 1A, “Risk Factors,” in the Progress Registrants’ most recent annual report on Form 10-K, which was filed with the SEC on February 29, 2012, and is updated for material changes, if any, in this Form 10-Q and in our other SEC filings. All such factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can management assess the effect of each such factor on the Progress Registrants.
 

 
6

 

PART I.  FINANCIAL INFORMATION

ITEM 1.                 FINANCIAL STATEMENTS
 
 
 
 
   
 
 
PROGRESS ENERGY, INC.
UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2012
 
 
 
   
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS of COMPREHENSIVE INCOME
 
(in millions except per share data)
 
 
   
 
 
Three months ended March 31
 
2012
   
2011
 
Operating revenues
  $ 2,092     $ 2,167  
Operating expenses
               
Fuel used in electric generation
    685       718  
Purchased power
    210       220  
Operation and maintenance
    529       494  
Depreciation, amortization and accretion
    166       154  
Taxes other than on income
    138       140  
Other
    -       (10 )
Total operating expenses
    1,728       1,716  
Operating income
    364       451  
Other income
               
Interest income
    1       1  
Allowance for equity funds used during construction
    24       29  
Other, net
    13       3  
Total other income, net
    38       33  
Interest charges
               
Interest charges
    194       199  
Allowance for borrowed funds used during construction
    (9 )     (9 )
Total interest charges, net
    185       190  
Income from continuing operations before income tax
    217       294  
Income tax expense
    76       107  
Income from continuing operations
    141       187  
Discontinued operations, net of tax
    11       (2 )
Net income
    152       185  
Net income attributable to noncontrolling interests, net of tax
    (2 )     (1 )
Net income attributable to controlling interests
  $ 150     $ 184  
Average common shares outstanding – basic
    297       295  
Basic and diluted earnings per common share
               
Income from continuing operations attributable to controlling interests, net of tax
  $ 0.47     $ 0.63  
Discontinued operations attributable to controlling interests, net of tax
    0.04       (0.01 )
Net income attributable to controlling interests
  $ 0.51     $ 0.62  
Dividends declared per common share
  $ 0.620     $ 0.620  
Net income amounts attributable to controlling interests
               
Income from continuing operations, net of tax
  $ 139     $ 186  
Discontinued operations, net of tax
    11       (2 )
Net income attributable to controlling interests
  $ 150     $ 184  
Comprehensive income
               
Comprehensive income
  $ 157     $ 189  
Comprehensive income attributable to noncontrolling interests, net of tax
    (2 )     (1 )
Comprehensive income attributable to controlling interests
  $ 155     $ 188  
 
See Notes to Progress Energy, Inc. Unaudited Condensed Consolidated Interim Financial Statements.

 
7

 

PROGRESS ENERGY, INC.
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
(in millions)
 
March 31, 2012
   
December 31, 2011
 
ASSETS
 
 
   
 
 
Utility plant
 
 
   
 
 
Utility plant in service
  $ 31,284     $ 31,065  
Accumulated depreciation
    (12,141 )     (12,001 )
Utility plant in service, net
    19,143       19,064  
Other utility plant, net
    217       217  
Construction work in progress
    2,698       2,449  
Nuclear fuel, net of amortization
    747       767  
Total utility plant, net
    22,805       22,497  
Current assets
               
Cash and cash equivalents
    565       230  
Receivables, net
    758       889  
Inventory, net
    1,447       1,438  
Regulatory assets
    250       275  
Derivative collateral posted
    166       147  
Deferred tax assets
    518       371  
Prepayments and other current assets
    131       133  
Total current assets
    3,835       3,483  
Deferred debits and other assets
               
Regulatory assets
    3,123       3,025  
Nuclear decommissioning trust funds
    1,762       1,647  
Miscellaneous other property and investments
    413       407  
Goodwill
    3,655       3,655  
Other assets and deferred debits
    382       345  
Total deferred debits and other assets
    9,335       9,079  
Total assets
  $ 35,975     $ 35,059  
CAPITALIZATION AND LIABILITIES
               
Common stock equity
               
Common stock without par value, 500 million shares authorized, 296
  million and 295 million shares issued and outstanding, respectively
  $ 7,451     $ 7,434  
Accumulated other comprehensive loss
    (160 )     (165 )
Retained earnings
    2,718       2,752  
Total common stock equity
    10,009       10,021  
Noncontrolling interests
    2       4  
Total equity
    10,011       10,025  
Preferred stock of subsidiaries
    93       93  
Long-term debt, affiliate
    273       273  
Long-term debt, net
    11,742       11,718  
Total capitalization
    22,119       22,109  
Current liabilities
               
Current portion of long-term debt
    1,375       950  
Short-term debt
    1,056       671  
Accounts payable
    878       909  
Interest accrued
    193       200  
Dividends declared
    2       78  
Customer deposits
    343       340  
Derivative liabilities
    484       436  
Accrued compensation and other benefits
    127       195  
Other current liabilities
    304       306  
Total current liabilities
    4,762       4,085  
Deferred credits and other liabilities
               
Noncurrent income tax liabilities
    2,637       2,355  
Accumulated deferred investment tax credits
    101       103  
Regulatory liabilities
    2,684       2,700  
Asset retirement obligations
    1,282       1,265  
Accrued pension and other benefits
    1,611       1,625  
Derivative liabilities
    364       352  
Other liabilities and deferred credits
    415       465  
Total deferred credits and other liabilities
    9,094       8,865  
Commitments and contingencies (Notes 13 and 14)
               
Total capitalization and liabilities
  $ 35,975     $ 35,059  
 
See Notes to Progress Energy, Inc. Unaudited Condensed Consolidated Interim Financial Statements.
 

 
8

 

PROGRESS ENERGY, INC.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
 
(in millions)
 
 
   
 
 
Three months ended March 31
 
2012
   
2011
 
Operating activities
 
 
   
 
 
Net income
  $ 152     $ 185  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation, amortization and accretion
    200       199  
Deferred income taxes and investment tax credits, net
    107       101  
Deferred fuel (credit) cost
    (6 )     70  
Allowance for equity funds used during construction
    (24 )     (29 )
Other adjustments to net income
    (7 )     56  
Cash provided (used) by changes in operating assets and liabilities
               
Receivables
    78       163  
Inventory
    (10 )     (49 )
Other assets
    (48 )     7  
Income taxes, net
    (7 )     57  
Accounts payable
    23       (89 )
Accrued pension and other benefits
    (33 )     (224 )
Other liabilities
    (69 )     (1 )
Net cash provided by operating activities
    356       446  
Investing activities
               
Gross property additions
    (562 )     (501 )
Nuclear fuel additions
    (51 )     (57 )
Purchases of available-for-sale securities and other investments
    (363 )     (1,817 )
Proceeds from available-for-sale securities and other investments
    359       1,809  
Other investing activities
    65       46  
Net cash used by investing activities
    (552 )     (520 )
Financing activities
               
Issuance of common stock, net
    3       8  
Dividends paid on common stock
    (260 )     (183 )
Proceeds from issuance of short-term debt with original maturities greater than 90 days
    65       -  
Net increase in short-term debt
    320       79  
Proceeds from issuance of long-term debt, net
    444       494  
Retirement of long-term debt
    -       (700 )
Other financing activities
    (41 )     (63 )
Net cash provided (used) by financing activities
    531       (365 )
Net increase (decrease) in cash and cash equivalents
    335       (439 )
Cash and cash equivalents at beginning of period
    230       611  
Cash and cash equivalents at end of period
  $ 565     $ 172  
Supplemental disclosures
               
Significant noncash transactions
               
Accrued property additions
  $ 225     $ 178  
 
 
See Notes to Progress Energy, Inc. Unaudited Condensed Consolidated Interim Financial Statements.
 

 
9

 

CAROLINA POWER & LIGHT COMPANY
d/b/a PROGRESS ENERGY CAROLINAS, INC.
UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2012
 
 
 
   
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS of COMPREHENSIVE INCOME
 
(in millions)
 
 
   
 
 
Three months ended March 31
 
2012
   
2011
 
Operating revenues
  $ 1,085     $ 1,133  
Operating expenses
               
Fuel used in electric generation
    349       363  
Purchased power
    65       67  
Operation and maintenance
    374       295  
Depreciation, amortization and accretion
    134       124  
Taxes other than on income
    56       56  
Other
    (1 )     -  
Total operating expenses
    977       905  
Operating income
    108       228  
Other income (expense)
               
Allowance for equity funds used during construction
    15       20  
Other, net
    4       (2 )
Total other income, net
    19       18  
Interest charges
               
Interest charges
    56       50  
Allowance for borrowed funds used during construction
    (5 )     (5 )
Total interest charges, net
    51       45  
Income before income tax
    76       201  
Income tax expense
    24       70  
Net income
    52       131  
Preferred stock dividend requirement
    (1 )     (1 )
Net income available to parent
  $ 51     $ 130  
Comprehensive income
  $ 57     $ 133  
 
 
See Notes to Progress Energy Carolinas, Inc. Unaudited Condensed Consolidated Interim Financial Statements.
 

 
10

 

CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC.
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
(in millions)
 
March 31, 2012
   
December 31, 2011
 
ASSETS
 
 
   
 
 
Utility plant
 
 
   
 
 
Utility plant in service
  $ 17,613     $ 17,439  
Accumulated depreciation
    (7,628 )     (7,567 )
Utility plant in service, net
    9,985       9,872  
Other utility plant, net
    181       181  
Construction work in progress
    1,439       1,294  
Nuclear fuel, net of amortization
    519       540  
Total utility plant, net
    12,124       11,887  
Current assets
               
Cash and cash equivalents
    21       20  
Receivables, net
    400       492  
Receivables from affiliated companies
    21       13  
Inventory, net
    779       775  
Deferred fuel cost
    25       31  
Deferred tax assets
    166       142  
Prepayments and other current assets
    99       76  
Total current assets
    1,511       1,549  
Deferred debits and other assets
               
Regulatory assets
    1,352       1,310  
Nuclear decommissioning trust funds
    1,163       1,088  
Miscellaneous other property and investments
    187       188  
Other assets and deferred debits
    87       80  
Total deferred debits and other assets
    2,789       2,666  
Total assets
  $ 16,424     $ 16,102  
CAPITALIZATION AND LIABILITIES
               
Common stock equity
               
Common stock without par value, 200 million shares authorized, 160
  million shares issued and outstanding
  $ 2,155     $ 2,148  
Accumulated other comprehensive loss
    (66 )     (71 )
Retained earnings
    2,884       3,011  
Total common stock equity
    4,973       5,088  
Preferred stock
    59       59  
Long-term debt, net
    3,693       3,693  
Total capitalization
    8,725       8,840  
Current liabilities
               
Current portion of long-term debt
    500       500  
Short-term debt
    441       188  
Notes payable to affiliated companies
    42       31  
Accounts payable
    520       527  
Payables to affiliated companies
    64       41  
Interest accrued
    64       77  
Customer deposits
    120       116  
Derivative liabilities
    149       130  
Accrued compensation and other benefits
    76       110  
Other current liabilities
    118       85  
Total current liabilities
    2,094       1,805  
Deferred credits and other liabilities
               
Noncurrent income tax liabilities
    2,062       1,976  
Accumulated deferred investment tax credits
    97       98  
Regulatory liabilities
    1,632       1,543  
Asset retirement obligations
    908       896  
Accrued pension and other benefits
    677       687  
Other liabilities and deferred credits
    229       257  
Total deferred credits and other liabilities
    5,605       5,457  
Commitments and contingencies (Notes 13 and 14)
               
Total capitalization and liabilities
  $ 16,424     $ 16,102  
 
 
 
See Notes to Progress Energy Carolinas, Inc. Unaudited Condensed Consolidated Interim Financial Statements.
 

 
11

 

CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
 
(in millions)
 
 
   
 
 
Three months ended March 31
 
2012
   
2011
 
Operating activities
 
 
   
 
 
Net income
  $ 52     $ 131  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation, amortization and accretion
    162       161  
Deferred income taxes and investment tax credits, net
    46       69  
Deferred fuel cost
    7       29  
Allowance for equity funds used during construction
    (15 )     (20 )
Other adjustments to net income
    23       12  
Cash provided (used) by changes in operating assets and liabilities
               
Receivables
    50       102  
Receivables from affiliated companies
    (8 )     11  
Inventory
    (5 )     (45 )
Other assets
    (18 )     (8 )
Income taxes, net
    (38 )     81  
Accounts payable
    11       (48 )
Payables to affiliated companies
    23       (24 )
Accrued pension and other benefits
    (17 )     (147 )
Other liabilities
    (27 )     13  
Net cash provided by operating activities
    246       317  
Investing activities
               
Gross property additions
    (356 )     (279 )
Nuclear fuel additions
    (38 )     (50 )
Purchases of available-for-sale securities and other investments
    (138 )     (149 )
Proceeds from available-for-sale securities and other investments
    133       141  
Changes in advances to affiliated companies
    -       (1 )
Other investing activities
    64       5  
Net cash used by investing activities
    (335 )     (333 )
Financing activities
               
Dividends paid on preferred stock
    (1 )     (1 )
Dividends paid to parent
    (175 )     (100 )
Net increase in short-term debt
    253       -  
Changes in advances from affiliated companies
    11       -  
Other financing activities
    2       -  
Net cash provided (used) by financing activities
    90       (101 )
Net increase (decrease) in cash and cash equivalents
    1       (117 )
Cash and cash equivalents at beginning of period
    20       230  
Cash and cash equivalents at end of period
  $ 21     $ 113  
Supplemental disclosures
               
Significant noncash transactions
               
Accrued property additions
  $ 162     $ 98  
 
 
See Notes to Progress Energy Carolinas, Inc. Unaudited Condensed Consolidated Interim Financial Statements.
 

 
12

 

FLORIDA POWER CORPORATION
 
d/b/a PROGRESS ENERGY FLORIDA, INC.
 
UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
 
March 31, 2012
 
 
 
 
   
 
 
UNAUDITED CONDENSED STATEMENTS of COMPREHENSIVE INCOME
 
 
   
 
 
(in millions)
 
 
   
 
 
Three months ended March 31
 
2012
   
2011
 
Operating revenues
  $ 1,005     $ 1,032  
Operating expenses
               
Fuel used in electric generation
    336       355  
Purchased power
    145       153  
Operation and maintenance
    160       210  
Depreciation, amortization and accretion
    27       25  
Taxes other than on income
    82       85  
Other
    -       (12 )
Total operating expenses
    750       816  
Operating income
    255       216  
Other income
               
Allowance for equity funds used during construction
    9       9  
Other, net
    -       3  
Total other income, net
    9       12  
Interest charges
               
Interest charges
    67       69  
Allowance for borrowed funds used during construction
    (4 )     (4 )
Total interest charges, net
    63       65  
Income before income tax
    201       163  
Income tax expense
    73       61  
Net income
    128       102  
Preferred stock dividend requirement
    (1 )     (1 )
Net income available to parent
  $ 127     $ 101  
Comprehensive income
  $ 129     $ 102  
 
               
See Notes to Progress Energy Florida, Inc. Unaudited Condensed Interim Financial Statements.
 

 
13

 

FLORIDA POWER CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC.
 
UNAUDITED CONDENSED BALANCE SHEETS
 
(in millions)
 
March 31, 2012
   
December 31, 2011
 
ASSETS
 
 
   
 
 
Utility plant
 
 
   
 
 
Utility plant in service
  $ 13,506     $ 13,461  
Accumulated depreciation
    (4,433 )     (4,356 )
Utility plant in service, net
    9,073       9,105  
Held for future use
    36       36  
Construction work in progress
    1,259       1,155  
Nuclear fuel, net of amortization
    228       227  
Total utility plant, net
    10,596       10,523  
Current assets
               
Cash and cash equivalents
    18       16  
Receivables, net
    345       372  
Receivables from affiliated companies
    32       19  
Notes receivable from affiliated companies
    6       -  
Inventory, net
    669       663  
Regulatory assets
    225       244  
Derivative collateral posted
    136       123  
Deferred tax assets
    223       138  
Prepayments and other current assets
    25       39  
Total current assets
    1,679       1,614  
Deferred debits and other assets
               
Regulatory assets
    1,659       1,602  
Nuclear decommissioning trust funds
    599       559  
Other assets and deferred debits
    199       186  
Total deferred debits and other assets
    2,457       2,347  
Total assets
  $ 14,732     $ 14,484  
CAPITALIZATION AND LIABILITIES
               
Common stock equity
               
Common stock without par value, 60 million shares authorized,
  100 shares issued and outstanding
  $ 1,760     $ 1,757  
Accumulated other comprehensive loss
    (26 )     (27 )
Retained earnings
    2,966       2,945  
Total common stock equity
    4,700       4,675  
Preferred stock
    34       34  
Long-term debt, net
    4,057       4,482  
Total capitalization
    8,791       9,191  
Current liabilities
               
Current portion of long-term debt
    425       -  
Short-term debt
    360       233  
Notes payable to affiliated companies
    -       8  
Accounts payable
    336       358  
Payables to affiliated companies
    38       25  
Interest accrued
    66       54  
Customer deposits
    223       224  
Derivative liabilities
    335       268  
Accrued compensation and other benefits
    30       53  
Other current liabilities
    129       112  
Total current liabilities
    1,942       1,335  
Deferred credits and other liabilities
               
Noncurrent income tax liabilities
    1,553       1,405  
Regulatory liabilities
    967       1,071  
Asset retirement obligations
    374       369  
Accrued pension and other benefits
    591       598  
Capital lease obligations
    188       189  
Derivative liabilities
    234       231  
Other liabilities and deferred credits
    92       95  
Total deferred credits and other liabilities
    3,999       3,958  
Commitments and contingencies (Notes 13 and 14)
               
Total capitalization and liabilities
  $ 14,732     $ 14,484  
 
 
 
See Notes to Progress Energy Florida, Inc. Unaudited Condensed Interim Financial Statements.
 

 
14

 

FLORIDA POWER CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC.
 
UNAUDITED CONDENSED STATEMENTS of CASH FLOWS
 
(in millions)
 
 
   
 
 
Three months ended March 31
 
2012
   
2011
 
Operating activities
 
 
   
 
 
Net income
  $ 128     $ 102  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation, amortization and accretion
    31       29  
Deferred income taxes and investment tax credits, net
    53       60  
Deferred fuel (credit) cost
    (13 )     41  
Allowance for equity funds used during construction
    (9 )     (9 )
Other adjustments to net income
    (20 )     35  
Cash provided (used) by changes in operating assets and liabilities
               
Receivables
    15       72  
Receivables from affiliated companies
    (13 )     (7 )
Inventory
    (6 )     (5 )
Other assets
    (27 )     19  
Income taxes, net
    22       63  
Accounts payable
    14       (45 )
Payables to affiliated companies
    13       (6 )
Accrued pension and other benefits
    (14 )     (74 )
Other liabilities
    15       26  
Net cash provided by operating activities
    189       301  
Investing activities
               
Gross property additions
    (197 )     (218 )
Nuclear fuel additions
    (13 )     (7 )
Purchases of available-for-sale securities and other investments
    (225 )     (1,659 )
Proceeds from available-for-sale securities and other investments
    225       1,659  
Changes in advances to affiliated companies
    (6 )     -  
Other investing activities
    16       42  
Net cash used by investing activities
    (200 )     (183 )
Financing activities
               
Dividends paid on preferred stock
    (1 )     (1 )
Dividends paid to parent
    (105 )     (325 )
Proceeds from issuance of short-term debt with original maturities greater than 90 days
    65       -  
Net increase in short-term debt
    62       -  
Changes in advances from affiliated companies
    (8 )     (2 )
Net cash provided (used) by financing activities
    13       (328 )
Net increase (decrease) in cash and cash equivalents
    2       (210 )
Cash and cash equivalents at beginning of period
    16       249  
Cash and cash equivalents at end of period
  $ 18     $ 39  
Supplemental disclosures
               
Significant noncash transactions
               
Accrued property additions
  $ 60     $ 78  
 
 
See Notes to Progress Energy Florida, Inc. Unaudited Condensed Interim Financial Statements.
 

 
15

 

PROGRESS ENERGY, INC.
CAROLINA POWER & LIGHT COMPANY d/b/a/ PROGRESS ENERGY CAROLINAS, INC.
FLORIDA POWER CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC.
COMBINED NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS

INDEX TO APPLICABLE COMBINED NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS BY REGISTRANT

Each of the following combined notes to the unaudited condensed interim financial statements of the Progress Registrants are applicable to Progress Energy, Inc. but not to each of PEC and PEF. The following table sets forth which notes are applicable to each of PEC and PEF. The notes that are not listed below for PEC or PEF are not, and shall not be deemed to be, part of PEC’s or PEF’s financial statements contained herein.
 
Registrant
Applicable Notes
   
PEC
1 through 3, 5 through 11, 13 and 14
   
PEF
1 through 3, 5 through 11, 13 and 14


 
16

 

PROGRESS ENERGY, INC.
CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC.
FLORIDA POWER CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC.
COMBINED NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
 
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   
A. ORGANIZATION
 
In this report, Progress Energy, which includes Progress Energy, Inc. holding company (the Parent) and its regulated and nonregulated subsidiaries on a consolidated basis, is at times referred to as “we,” “us” or “our.” When discussing Progress Energy’s financial information, it necessarily includes the results of Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. (PEC) and Florida Power Corporation d/b/a Progress Energy Florida, Inc. (PEF) (collectively, the Utilities). The term “Progress Registrants” refers to each of the three separate registrants: Progress Energy, PEC and PEF. The information in these combined notes relates to each of the Progress Registrants as noted in the Index to these Combined Notes. However, neither of the Utilities makes any representation as to information related solely to Progress Energy or the subsidiaries of Progress Energy other than itself.
 
PROGRESS ENERGY
 
The Parent is a holding company headquartered in Raleigh, N.C., subject to regulation by the Federal Energy Regulatory Commission (FERC).
 
Our reportable segments are PEC and PEF, both of which are primarily engaged in the generation, transmission, distribution and sale of electricity. The Corporate and Other segment primarily includes amounts applicable to the activities of the Parent and Progress Energy Service Company, LLC (PESC) and other miscellaneous nonregulated businesses (Corporate and Other) that do not separately meet the quantitative disclosure requirements as a reportable business segment. See Note 12 for further information about our segments.
 
PEC
 
PEC is a regulated public utility primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina and South Carolina. PEC’s subsidiaries are involved in insignificant nonregulated business activities. PEC is subject to the regulatory jurisdiction of the North Carolina Utilities Commission (NCUC), Public Service Commission of South Carolina (SCPSC), the United States Nuclear Regulatory Commission (NRC) and the FERC.
 
PEF
 
PEF is a regulated public utility primarily engaged in the generation, transmission, distribution and sale of electricity in west central Florida. PEF is subject to the regulatory jurisdiction of the Florida Public Service Commission (FPSC), the NRC and the FERC.
 
B. BASIS OF PRESENTATION
 
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. The December 31, 2011 condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. Because the accompanying interim financial statements do not include all of the information and footnotes required by GAAP for annual financial statements, they should be read in conjunction with the audited financial statements and notes thereto included in the Progress Registrants’ annual report on Form 10-K for the fiscal year ended December 31, 2011 (2011 Form 10-K).
 
 
17

 
 
The amounts included in these financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present the Progress Registrants’ financial position and results of operations for the interim periods. Unless otherwise noted, all adjustments are normal and recurring in nature. Due to seasonal weather variations, the impact of regulatory orders received, and the timing of outages of electric generating units, especially nuclear-fueled units, the results of operations for interim periods are not necessarily indicative of amounts expected for the entire year or future periods.
 
In preparing financial statements that conform to GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
 
Certain amounts for 2011 have been reclassified to conform to the 2012 presentation.
 
The Utilities collect from customers certain excise taxes levied by the state or local government upon the customers. The Utilities account for sales and use tax on a net basis and gross receipts tax, franchise taxes and other excise taxes on a gross basis.
 
The amount of gross receipts tax, franchise taxes and other excise taxes included in operating revenues and taxes other than on income in the statements of comprehensive income were as follows:
 
 
 
Three months ended March 31
 
(in millions)
 
2012
   
2011
 
Progress Energy
  $ 69     $ 73  
PEC
    26       28  
PEF
    43       45  
 
C.  CONSOLIDATION OF VARIABLE INTEREST ENTITIES
 
We consolidate all voting interest entities in which we own a majority voting interest and all variable interest entities (VIEs) for which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIE’s variable interests issued and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign of the entity.
 
PROGRESS ENERGY
 
Progress Energy, through its subsidiary PEC, is the primary beneficiary of, and consolidates an entity that qualifies for rehabilitation tax credits under Section 47 of the Internal Revenue Code. Our variable interests are debt and equity investments in the VIE. There were no changes to our assessment of the primary beneficiary for this VIE during 2011 or for the period ended March 31, 2012. No financial or other support has been provided to the VIE during the periods presented.
 
The following table sets forth the carrying amount and classification of our investment in the VIE as reflected in the Consolidated Balance Sheets:
 
(in millions)
 
March 31, 2012
   
December 31, 2011
 
Miscellaneous other property and investments
  $ 12     $ 12  
Cash and cash equivalents
    1       1  
 
 
18

 
 
The assets of the VIE are collateral for, and can only be used to settle, its obligations. The creditors of the VIE do not have recourse to our general credit or the general credit of PEC, and there are no other arrangements that could expose us to losses.
 
Progress Energy, through its subsidiary PEC, is the primary beneficiary of two VIEs that were established to lease buildings to PEC under capital lease agreements. Our maximum exposure to loss from these leases is a $7.5 million mandatory fixed price purchase option for one of the buildings. Total lease payments to these counterparties under the lease agreements were $1 million for each of the three months ended March 31, 2012 and 2011. We have requested the necessary information to consolidate these entities; both entities from which the necessary financial information was requested declined to provide the information to us, and, accordingly, we have applied the information scope exception provided by GAAP to the entities. We believe the effect of consolidating the entities would have an insignificant impact on our common stock equity, net earnings or cash flows. However, because we have not received any financial information from the counterparties, the impact cannot be determined at this time.
 
PEC
 
See discussion of PEC’s variable interests within the Progress Energy section.
 
PEF
 
PEF has no significant variable interests in VIEs.
      
2. MERGER AGREEMENT
 
On January 8, 2011, Duke Energy Corporation (Duke Energy) and Progress Energy entered into an Agreement and Plan of Merger (the Merger Agreement). Pursuant to the Merger Agreement, Progress Energy will be acquired by Duke Energy in a stock-for-stock transaction and become a wholly owned subsidiary of Duke Energy. The Merger Agreement originally had a termination date of January 8, 2012, which has been extended to July 8, 2012. The Merger Agreement can be extended past July 8, 2012, only by mutual agreement of Progress Energy and Duke Energy.
 
Under the terms of the Merger Agreement, each share of Progress Energy common stock will be cancelled and converted into the right to receive 2.6125 shares of Duke Energy common stock. Each outstanding option to acquire, and each outstanding equity award relating to, one share of Progress Energy common stock will be converted into an option to acquire, or an equity award relating to, 2.6125 shares of Duke Energy common stock. The board of directors of Duke Energy approved a reverse stock split, at a ratio of 1-for-3, subject to completion of the merger. Accordingly, the adjusted exchange ratio is expected to be 0.87083 of a share of Duke Energy common stock, options and equity awards for each Progress Energy common share, option and equity award.
 
The combined company, to be called Duke Energy, will have an 18-member board of directors. The board will be comprised of, subject to their ability and willingness to serve, all 11 current directors of Duke Energy and seven current directors of Progress Energy. At the time of the merger, William D. Johnson, Chairman, President and CEO of Progress Energy, will be President and CEO of Duke Energy, and James E. Rogers, Chairman, President and CEO of Duke Energy, will be the Executive Chairman of the board of directors of Duke Energy, subject to their ability and willingness to serve.
 
Consummation of the merger is subject to customary conditions, including, among others things, approval by the shareholders of each company, expiration or termination of the applicable Hart-Scott-Rodino Act waiting period, and receipt of approvals, to the extent required, from the FERC, the Federal Communications Commission, the NRC, the NCUC, the Kentucky Public Service Commission and the SCPSC. Although there are no merger-specific regulatory approvals required in Indiana, Ohio or Florida, the companies will continue to update the public service commissions in those states on the merger, as applicable and as required. The status of these matters is as follows, and we cannot predict the outcome of pending approvals:
 
Shareholder Approval
·  
On August 23, 2011, the merger was approved by the shareholders of Progress Energy and Duke Energy.
 
 
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Federal Regulatory Approvals
·  
Progress Energy and Duke Energy met their obligations under the Hart-Scott-Rodino Act with their March 28, 2011 filing with the U.S. Department of Justice (DOJ) for review under U.S. antitrust laws. Because the merger was not anticipated to close before the April 26, 2012 expiration of the original filing, Progress Energy and Duke Energy filed a new Hart-Scott-Rodino filing on March 22, 2012, in order to be able to close the merger and continue to meet their obligations under the Hart-Scott-Rodino Act. The 30-day waiting period required by the Hart-Scott-Rodino Act expired without Progress Energy or Duke Energy having received requests for additional information. Progress Energy and Duke Energy have met their obligations under the Hart-Scott-Rodino Act.
·  
On January 5, 2012, the Federal Communications Commission extended its approval of the Assignment of Authorization filings to transfer control of certain licenses. The extended approval expires on July 12, 2012.
·  
On September 30, 2011, the FERC, which assesses market power-related issues, conditionally approved the merger application filed by Progress Energy and Duke Energy. The approval is subject to the FERC’s acceptance of market power mitigation measures to address the FERC’s finding that the combined company could have an adverse effect on competition in the North Carolina and South Carolina wholesale power markets. Progress Energy and Duke Energy filed a market power mitigation plan with the FERC on October 17, 2011, that proposed a “virtual divestiture” under which power up to a certain amount would have been offered into the wholesale market rather than the sale or divestiture of physical assets. A virtual divestiture is one option the FERC indicated could be used to mitigate its market power concerns. On December 14, 2011, the FERC affirmed its conditional approval of the merger, but the FERC rejected the proposed market power mitigation plan. On March 26, 2012, Progress Energy and Duke Energy filed a second market power mitigation plan with the FERC. The revised mitigation plan consists of both interim and permanent components. The two- to three-year interim component consists of several power purchase agreements whereby the companies propose to sell capacity and firm energy during the summer (June – August) and winter (December – February) to new market participants. Together, the companies would sell 800 megawatts (MWs) during summer off-peak hours, 475 MWs during summer peak hours, 225 MWs during winter off-peak hours, and 25 MWs during winter peak hours. The agreements have been executed, contingent on the closing of the merger, and will be in effect upon the closing of the merger and remain in effect until the permanent component is operational. The permanent component consists of seven transmission projects to be constructed, estimated to cost approximately $110 million. The transmission projects significantly increase power import capabilities into the PEC and Duke Energy Carolinas service territories and enhance competitive power supply options for the region. Progress Energy and Duke Energy have requested that the FERC issue orders approving the revised mitigation plan within 60 days of the filing date, but no later than June 8, 2012. There is no statutory requirement that the FERC act within a specified timeframe. On April 10, 2012, Progress Energy and Duke Energy received a request from the FERC for additional information on the transmission-related models provided by Progress Energy and Duke Energy in the revised mitigation plan. On April 13, 2012, Progress Energy and Duke Energy responded to the FERC’s request. In the response, the companies reaffirmed their request that the FERC approve the revised mitigation plan within 60 days of the original filing date, but no later than June 8, 2012. Four participants to the proceedings filed comments before the April 25, 2012 filing deadline. On May 1, 2012, the companies filed a response to the comments with the FERC. The companies are working with the North Carolina Public Staff and the South Carolina Office of Regulatory Staff (ORS) on appropriate state ratemaking treatment associated with the measures in the revised market mitigation plan and other merger-related issues. The companies’ decision to close the merger will be subject to the companies obtaining acceptable resolution of various state ratemaking issues.
 
 
 
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·  
On April 4, 2011, Progress Energy and Duke Energy made two additional filings with the FERC. The first filing is a joint dispatch agreement, pursuant to which PEC and Duke Energy Carolinas will agree to jointly dispatch their generation facilities in order to achieve certain of the operating efficiencies expected to result from the merger. The second filing is a joint open access transmission tariff (OATT) pursuant to which PEC and Duke Energy Carolinas will agree to provide transmission service over their transmission facilities under a single transmission rate. On December 14, 2011, in conjunction with the aforementioned decision on the proposed market power mitigation plan, the FERC dismissed the applications for approval of the joint dispatch agreement and the joint OATT without prejudice. As allowed under the FERC’s December 14, 2011 order, Progress Energy and Duke Energy refiled the joint dispatch agreement and OATT with the FERC on March 26, 2012.
·  
On December 2, 2011, the NRC approved the filing requesting an indirect transfer of control of licenses for Progress Energy’s nuclear facilities to include Duke Energy as the ultimate parent corporation on these licenses.
 
State Regulatory Approvals
·  
On April 4, 2011, Progress Energy and Duke Energy filed a merger approval application and an application for approval of a joint dispatch agreement between PEC and Duke Energy Carolinas with the NCUC. On September 2, 2011, the North Carolina Public Staff filed a settlement agreement with the NCUC. On September 6, 2011, Progress Energy and Duke Energy signed a settlement with the ORS, a party to the North Carolina proceedings to resolve the ORS’s issues in the North Carolina proceeding. Under the settlement agreement with the North Carolina Public Staff, Progress Energy and Duke Energy will provide $650 million in system fuel cost savings for customers in North Carolina and South Carolina over the five years following the close of the merger, maintain their current level of community support in North Carolina for the next four years, and provide $15 million for low-income energy assistance and workforce development in North Carolina. The settlement agreement also provides that direct merger-related expenses will not be recovered from customers; however, PEC may request recovery of costs incurred to create operational savings. The NCUC held hearings regarding the application on September 20-22, 2011. On November 23, 2011, Progress Energy and Duke Energy filed proposed orders and briefs with the NCUC. The docket will remain open pending the FERC’s issuance of its final orders on the merger-related actions before the FERC.
·  
On April 25, 2011, Progress Energy and Duke Energy filed an application for approval of the merger of PEC and Duke Energy Carolinas and an application for approval of a joint dispatch agreement between PEC and Duke Energy Carolinas with the SCPSC. On September 13, 2011, Progress Energy and Duke Energy withdrew the application of the merger of PEC and Duke Energy Carolinas, as the merger of these entities is not likely to occur for several years after the close of the merger. The SCPSC held hearings regarding the application for approval of the joint dispatch agreement on December 12, 2011. During the hearing, PEC, Duke Energy Carolinas and the ORS agreed to terminate the settlement agreement, which resolved the ORS’s issues in the NCUC merger proceeding, and replaced it with a commitment by PEC and Duke Energy Carolinas to provide PEC’s and Duke Energy Carolinas’ retail customers in South Carolina pro rata benefits equivalent to those approved by the NCUC in its order ruling upon PEC’s and Duke Energy Carolinas’ merger application. The docket will remain open pending the FERC’s issuance of its final orders on the merger-related actions before the FERC.
·  
On October 28, 2011, the Kentucky Public Service Commission approved Progress Energy’s and Duke Energy’s merger-related settlement agreement with the Attorney General of the Commonwealth of Kentucky.
 
The Merger Agreement includes certain restrictions, limitations and prohibitions as to actions we may or may not take in the period prior to consummation of the merger. Among other restrictions, the Merger Agreement limits our total capital spending, limits the extent to which we can obtain financing through long-term debt and equity, and we may not, without the prior approval of Duke Energy, increase our quarterly common stock dividend of $0.62 per share. In the fourth quarter of 2011, our board of directors aligned Progress Energy’s dividend payment schedule with that of Duke Energy such that following the closing of the merger, all stockholders of the combined company would receive dividends under the Duke Energy dividend schedule.
 
 
 
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Certain substantial changes in ownership of Progress Energy, including the merger, can impact the timing of the utilization of tax credit carry forwards and net operating loss carry forwards (See Note 15 in the 2011 Form 10-K).
 
The Merger Agreement contains certain termination rights for both companies; under specified circumstances we may be required to pay Duke Energy $400 million and Duke Energy may be required to pay us $675 million. In addition, under specified circumstances each party may be required to reimburse the other party for up to $30 million of merger-related expenses.
 
In connection with the merger, we established an employee retention plan for certain eligible employees. Payments under the plan are contingent upon the consummation of the merger and the employees’ continued employment through a specified time period following the merger. These payments will be recorded as compensation expense following consummation of the merger. We estimate the costs of the retention plan to be $14 million.
 
In connection with the merger, we offered a voluntary severance plan (VSP) to certain eligible employees. Payments under the plan are contingent upon the consummation of the merger. Approximately 650 employees requested and were approved for separation under the VSP in 2011. The cost of the VSP is estimated to be between $90 million to $100 million, including $65 million to $70 million for PEC and $25 million to $30 million for PEF. If the employee is not required to work for a significant period after the consummation of the merger, the costs of any benefits paid under the VSP will be measured and recorded upon consummation of the merger. If a significant retention period exists, the costs of benefits equal to what would be paid under our existing severance plan will be measured and recorded upon consummation of the merger. Any additional benefits paid under the VSP will be recorded ratably over the remaining service periods of the affected employees.
 
In addition, we evaluated our business needs for office space after the merger and formulated an exit plan to vacate one of our corporate headquarters buildings. We have begun to gradually vacate the premises and will be fully vacated by January 1, 2013. In December 2011, we executed an agreement with a third party to sublease the building until 2035. The estimated exit cost liability associated with this exit plan is $17 million for us, of which $12 million of expense is attributable to PEC and $5 million to PEF. The exit cost liability will be recognized proportionately as we vacate the premises, which began in the fourth quarter of 2011. During the first quarter of 2012, we recorded exit cost liabilities of $3 million for us, of which $2 million of expense is attributable to PEC and $1 million to PEF. At March 31, 2012, the total exit cost liability recorded by us is $8 million, of which $6 million of expense is attributable to PEC and $2 million of expense is attributable to PEF. These costs are included in merger and integration-related costs.
 
We incurred merger and integration-related costs of $5 million, net of tax, including $3 million, net of tax, and $2 million, net of tax, at PEC and PEF, respectively, during the quarter ended March 31, 2012. We incurred merger and integration-related costs of $14 million, net of tax, including $7 million, net of tax, and $7 million, net of tax, at PEC and PEF, respectively, during the quarter ended March 31, 2011. These costs are included in operations and maintenance (O&M) expense in our Consolidated Statements of Comprehensive Income.
 
 
3. NEW ACCOUNTING STANDARDS
 
FAIR VALUE MEASUREMENT AND DISCLOSURES
 
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends Accounting Standards Codification (ASC) 820 to develop a single, converged fair value framework between GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 was effective prospectively for us on January 1, 2012. The adoption of ASU 2011-04 resulted in additional disclosures in the notes to the financial statements but did not have an impact on our or the Utilities’ financial position, results of operations or cash flows.
 
GOODWILL IMPAIRMENT TESTING
 
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment,” which amends the guidance in ASC 350 on testing goodwill for impairment. Under the revised guidance, we have the option of
 
 
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performing a qualitative assessment before calculating the fair value of our reporting units. If it were determined in the qualitative assessment that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we would proceed to the two-step goodwill impairment test. Otherwise, no further impairment testing would be required. ASU 2011-08 was effective for us on January 1, 2012 for both prospective interim and annual goodwill tests and will give us the option to perform the qualitative assessment to determine the need for a two-step goodwill impairment test. The prospective impact of the adoption is not expected to be significant to our or the Utilities’ financial position, results of operations or cash flows.
 
DISCLOSURES ABOUT OFFSETTING ASSETS AND LIABILITIES
 
In December 2011, the FASB issued ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities,” which requires new disclosures to help financial statement users better understand the impact of offsetting arrangements on our balance sheet. The adoption of ASU 2011-11 will add disclosures showing both gross and net information about instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for us on January 1, 2013, and will be retroactively applied.
 
 
4. DIVESTITURES
 
We have completed our business strategy of divesting nonregulated businesses to reduce our business risk and focus on core operations of the Utilities. Included in discontinued operations, net of tax are amounts related to adjustments of our prior sales of diversified businesses. These adjustments are generally due to guarantees and indemnifications provided for certain legal, tax and environmental matters. See Note 14B for further discussion of our guarantees. The ultimate resolution of these matters could result in additional adjustments in future periods.
 
During the three months ended March 31, 2012 and 2011, earnings (loss) from discontinued operations, net of tax was $11 million and $(2) million, respectively. Earnings for the three months ended March 31, 2012, relates primarily to an $18 million pre-tax gain from the reversal of certain environmental indemnification liabilities for which the indemnification period has expired.
 
 
5. REGULATORY MATTERS
      
On January 8, 2011, Progress Energy and Duke Energy entered into the Merger Agreement. See Note 2 for regulatory information related to the merger with Duke Energy.
 
A. PEC RETAIL RATE MATTERS
 
COST RECOVERY FILINGS
 
On March 1, 2012, PEC filed with the SCPSC for a $5 million increase in the demand-side management (DSM) and energy-efficiency (EE) rate, driven by the introduction of new, and the expansion of existing, DSM and EE programs. If approved, the increase will be effective July 1, 2012, and will increase residential electric bills by $1.37 per 1,000 kilowatt-hours (kWh). We cannot predict the outcome of this matter.
 
B. PEF RETAIL RATE MATTERS
 
CR3 OUTAGE
 
In September 2009, Crystal River Nuclear Plant Unit 3 (CR3) began an outage for normal refueling and maintenance as well as an uprate project to increase its generating capability and to replace two steam generators. During preparations to replace the steam generators, workers discovered a delamination (or separation) within the concrete at the periphery of the containment building, which resulted in an extension of the outage. After analysis, PEF determined that the concrete delamination at CR3 was caused by redistribution of stresses in the containment wall that occurred when PEF created an opening to accommodate the replacement of the unit’s steam generators. In March 2011, the work to return the plant to service was suspended after monitoring equipment at the repair site
 
 
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identified a new delamination that occurred in a different section of the outer wall after the repair work was completed and during the late stages of retensioning the containment building. CR3 has remained out of service while PEF conducted an engineering analysis and review of the new delamination and evaluated repair options. Subsequent to March 2011, monitoring equipment has detected additional changes and further damage in the partially tensioned containment building and additional cracking or delaminations could occur during the repair process.
 
PEF analyzed multiple repair options as well as early decommissioning and believes, based on the information and analyses conducted to date, that repairing the unit is the best option. PEF engaged outside engineering consultants to perform the analysis of possible repair options for the containment building. The consultants analyzed 22 potential repair options and ultimately narrowed those to four. PEF, along with other independent consultants, reviewed the four options for technical issues, constructability, and licensing feasibility as well as cost.
 
Based on that initial analysis, PEF selected the best repair option, which would entail systematically removing and replacing concrete in substantial portions of the containment structure walls. The planned option does not include the area where concrete was replaced during the initial repair. The preliminary cost estimate for this repair as filed with the FPSC on June 27, 2011, is between $900 million and $1.3 billion. Engineering design of the repair is under way. PEF will update the current estimate as this work is completed.
 
PEF is moving forward systematically and will perform additional detailed engineering analyses and designs, which could affect any repair plan. This process will lead to more certainty for the cost and schedule of the repair. PEF will continue to refine and assess the plan, and the prudence of continuing to pursue it, based on new developments and analyses as the process moves forward. Under this repair plan, PEF estimates that CR3 will return to service in 2014. The decision related to repairing or decommissioning CR3 is complex and subject to a number of unknown factors, including but not limited to, the cost of repair and the likelihood of obtaining NRC approval to restart CR3 after repair. A number of factors could affect the repair plan, the return-to-service date and costs, including regulatory reviews, final engineering designs, contract negotiations, the ultimate work scope completion, testing, weather, the impact of new information discovered during additional testing and analysis and other developments.
 
PEF maintains insurance coverage against incremental costs of replacement power resulting from prolonged accidental outages at CR3 through Nuclear Electric Insurance Limited (NEIL). NEIL has confirmed that the CR3 initial delamination is a covered accident but has not yet made a determination as to coverage for the second delamination. Following a 12-week deductible period, the NEIL program provided reimbursement for replacement power costs for 52 weeks at $4.5 million per week, through April 9, 2011. An additional 71 weeks of coverage, which runs through August 2012, is provided at $3.6 million per week. Accordingly, the NEIL program provides replacement power coverage of up to $490 million per event. Actual replacement power costs have exceeded the insurance coverage through March 31, 2012. PEF anticipates that future replacement power costs will continue to exceed the insurance coverage. PEF also maintains insurance coverage through NEIL’s accidental property damage program, which provides insurance coverage up to $2.25 billion with a $10 million deductible per claim.
 
PEF is continuing to work with NEIL for recovery of applicable repair costs and associated replacement power costs. PEF has not yet received a definitive determination from NEIL about the insurance coverage related to the second delamination. In addition, no replacement power reimbursements have been received from NEIL since May 2011. These considerations led us to conclude that it was not probable that NEIL will voluntarily pay the full coverage amounts we believe they owe under the applicable insurance policies. Given the circumstances, accounting standards require full recovery to be probable to recognize an insurance receivable. Therefore, PEF has not recorded insurance receivables from NEIL related to the second delamination. Negotiations continue with NEIL regarding coverage associated with the second delamination, and PEF continues to believe that all applicable costs associated with bringing CR3 back into service are covered under all insurance policies.
 
 
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The following table summarizes the CR3 replacement power and repair costs and recovery through March 31, 2012:
 
 (in millions)
 
Replacement
Power Costs
   
Repair Costs
 
 Spent to date
  $ 506     $ 279  
 NEIL proceeds received to date
    (162 )     (143 )
 Insurance receivable at March 31, 2012, net
    (55 )     -  
Balance for recovery(a)
  $ 289     $ 136  
 
(a)
 
See "2012 Settlement Agreement" below for discussion of PEF's ability to recover prudently incurred fuel and purchased power costs and CR3 repair costs.
 
PEF believes the actions taken and costs incurred in response to the CR3 delamination have been prudent and, accordingly, considers replacement power and capital costs not recoverable through insurance to be recoverable through its fuel cost-recovery clause or base rates. Additional replacement power costs and repair and maintenance costs incurred until CR3 is returned to service could be material. Additionally, we cannot be assured that CR3 can be repaired and brought back to service until full engineering and other analyses are completed.
 
2012 SETTLEMENT AGREEMENT
 
On February 22, 2012, the FPSC approved a comprehensive settlement agreement among PEF, the Florida Office of Public Counsel and other consumer advocates. The 2012 settlement agreement will continue through the last billing cycle of December 2016. The agreement addresses three principal matters: PEF’s proposed Levy Nuclear Power Plant (Levy) Nuclear Project cost recovery, the CR3 delamination prudence review then pending before the FPSC, and certain base rate issues. When all of the settlement provisions are factored in, the total increase in 2013 for residential customer bills will be approximately $4.93 per 1,000 kWh, or 4 percent.
 
Levy
 
Under the terms of the 2012 settlement agreement, PEF will set the residential cost-recovery factor of PEF’s proposed two units at Levy (see “Nuclear Cost Recovery – Levy Nuclear”) at $3.45 per 1,000 kWh effective in the first billing cycle of January 2013 and continuing for a five-year period. PEF will not recover any additional Levy costs from customers through the term of the agreement, or file for any additional recovery before March 1, 2017, unless otherwise agreed to by the parties to the agreement. This amount is intended to recover the estimated retail project costs to date plus costs necessary to obtain the combined license (COL) and any engineering, procurement and construction (EPC) cancellation costs, if PEF ultimately chooses to cancel that contract. In addition, the consumer parties will not oppose PEF continuing to pursue a COL for Levy. After the five-year period, PEF will true up any actual costs not recovered under the Levy cost-recovery factor.
 
The 2012 settlement agreement also provides that PEF will treat the allocated wholesale cost of Levy as a retail regulatory asset and include this asset as a component of rate base and amortization expense for regulatory reporting. PEF will have the discretion to accelerate and/or suspend such amortization in full or in part provided that PEF amortizes all of the regulatory asset by December 31, 2016.
 
CR3
 
Under the terms of the 2012 settlement agreement, PEF will be permitted to recover prudently incurred fuel and purchased power costs through the fuel clause without regard for the absence of CR3 for the period from the beginning of the CR3 outage through the earlier of the term of the agreement or the return of CR3 to commercial service. If PEF does not begin repairs of CR3 prior to the end of 2012, PEF will refund replacement power costs on a pro rata basis based on the in-service date of up to $40 million in 2015 and $60 million in 2016. The parties to the agreement waive their right to challenge PEF’s recovery of replacement power costs. The parties to the agreement maintain the right to challenge the prudence and reasonableness of PEF’s fuel acquisition and power purchases, and other fuel prudence issues unrelated to the CR3 outage. All prudence issues from the steam generator project inception through the date of settlement approval by the FPSC are resolved.
 
 
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To the extent that PEF pursues the repair of CR3, PEF will establish an estimated cost and repair schedule with ongoing consultation with the parties to the agreement. The established cost, to be approved by our board of directors, will be the basis for project measurement. If costs exceed the board-approved estimate, overruns will be split evenly between our shareholders and PEF customers up to $400 million. The parties to the agreement agree to discuss the method of recovery of any overruns in excess of $400 million, with final decision by the FPSC if resolution cannot be reached. If the repairs begin prior to the end of 2012, the parties to the agreement waive their rights to challenge PEF’s decision to repair and the repair plan chosen by PEF. In addition, there will be limited rights to challenge recovery of the repair execution costs incurred prior to the final resolution on NEIL coverage. The parties to the agreement will discuss the treatment of any potential gap between NEIL repair coverage and the estimated cost, with final decision by the FPSC if resolution cannot be reached. If the repairs do not begin prior to the end of 2012, the parties to the agreement reserve the right to challenge the prudence of PEF’s repair decision, plan and implementation.
 
PEF also retains sole discretion and flexibility to retire the unit without challenge from the parties to the agreement. If PEF decides to retire CR3, PEF is allowed to recover all remaining CR3 investments and to earn a return on the CR3 investments set at its current authorized overall cost of capital, adjusted to reflect a return on equity (ROE) set at 70 percent of the current FPSC-authorized ROE, no earlier than the first billing cycle of January 2017. Additionally, any NEIL proceeds received after the settlement will be applied first to replacement power costs incurred after December 31, 2012, with the remainder used to write down the remaining CR3 investments.
 
Base Rates, Customer Refund and Other Terms
 
Under the terms of the 2012 settlement agreement, PEF will maintain base rates at the current levels through the last billing cycle of December 2016, except as described as follows. The agreement provides for a $150 million annual increase in revenue requirements effective with the first billing cycle of January 2013, while maintaining the current ROE range of 9.5 percent to 11.5 percent. PEF suspended depreciation expense and reversed certain regulatory liabilities associated with CR3 effective on the February 22, 2012 implementation date of the agreement, resulting in a $47 million benefit for the quarter ended March 31, 2012, which reduced O&M expense. Additionally, rate base associated with CR3 investments will be removed from retail rate base effective with the first billing cycle of January 2013. PEF will accrue, for future rate-setting purposes, a carrying charge at a rate of 7.4 percent on the CR3 investment until CR3 is returned to service and placed back into retail rate base. Upon return of CR3 to commercial service, PEF will be authorized to increase its base rates for the annual revenue requirements of all CR3 investments. The parties to the agreement reserve the right to participate in any hearings challenging the appropriateness of PEF’s CR3 revenue requirements. In the month following CR3’s return to commercial service, PEF’s ROE range will increase to 9.7 percent to 11.7 percent. If PEF’s retail base rate earnings fall below the ROE range, as reported on a FPSC-adjusted or pro-forma basis on a PEF monthly earnings surveillance report, PEF may petition the FPSC to amend its base rates during the term of the agreement.
 
Under the terms of the 2012 settlement agreement, PEF will refund $288 million to customers through the fuel clause. PEF will refund $129 million in each of 2013 and 2014, and an additional $10 million annually to residential and small commercial customers in 2014, 2015 and 2016. At December 31, 2011, a regulatory liability was established for the $288 million to be refunded in future periods. The corresponding charge was recorded as a reduction of 2011 revenues.
 
The cost of pollution control equipment that PEF installed and has in-service at Crystal River Units 4 and 5 (CR4 and CR5) to comply with the Federal Clean Air Interstate Rule (CAIR) is currently recovered under the Environmental Cost Recovery Clause (ECRC). The 2012 settlement agreement provides for PEF to remove those assets from recovery in the ECRC and transfer those assets to base rates effective with the first billing cycle of January 2014. The related base rate increase will be in addition to the $150 million base rate increase effective January 2013. O&M expense associated with those assets will not be included in the base rates and will continue to be recovered through the ECRC.
 
The 2012 settlement agreement provides for PEF to continue to recover carrying costs and other nuclear cost recovery clause-recoverable items related to the CR3 uprate project, but PEF will not seek an in-service recovery until nine months following CR3’s return to commercial service. Carrying costs will be recovered through the nuclear cost recovery clause until base rates have been increased for these assets.
 
 
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The 2012 settlement agreement also allows PEF to continue to reduce amortization expense (cost of removal component) beyond the expiration of the 2010 settlement agreement through the term of the 2012 settlement agreement (see “Cost of Removal Reserve”). Additionally, the 2012 settlement agreement extends PEF’s ability to expedite recovery of the cost of named storms and to maintain a storm reserve at its level as of the implementation date of the agreement, and removed the maximum allowed monthly surcharge established by the 2010 settlement agreement.
 
COST OF REMOVAL RESERVE

The 2012 and 2010 settlement agreements provide PEF the discretion to reduce amortization expense (cost of removal component) by up to the balance in the cost of removal reserve until the earlier of (a) PEF’s applicable cost of removal reserve reaches zero, or (b) the expiration of the 2012 settlement agreement at the end of 2016. For the three months ended March 31, 2012, PEF recognized a $58 million reduction in amortization expense pursuant to the settlement agreements. PEF had eligible cost of removal reserves of $216 million remaining at March 31, 2012, which is impacted by accruals in accordance with PEF’s latest depreciation study, removal costs expended and reductions in amortization expense as permitted by the settlement agreements.
 
NUCLEAR COST RECOVERY
 
Levy Nuclear
 
In 2008, the FPSC granted PEF’s petition for an affirmative Determination of Need and related orders requesting cost recovery under Florida’s nuclear cost-recovery rule for PEF’s proposed Levy project, together with the associated facilities, including transmission lines and substation facilities.
 
On April 30, 2012, as part of PEF’s annual nuclear cost recovery filing (see “Cost Recovery”), PEF updated the Levy project schedule and cost. Due to lower-than-projected customer demand, the lingering economic slowdown, uncertainty regarding potential carbon regulation and current, low natural gas prices, PEF is shifting the in-service date for the first Levy unit to 2024, with the second unit following 18 months later. The revised schedule is consistent with the recovery approach included in the 2012 settlement agreement. Although the scope and overnight cost for Levy – including land acquisition, related transmission work and other required investments – remain essentially unchanged, the shift in schedule will increase escalation and carrying costs and raise the total estimated project cost to between $19 billion and $24 billion.
 
Along with the FPSC’s annual prudence reviews, we will continue to evaluate the project on an ongoing basis based on certain criteria, including, but not limited to, cost; potential carbon regulation; fossil fuel prices; the benefits of fuel diversification; public, regulatory and political support; adequate financial cost-recovery mechanisms; appropriate levels of joint owner participation; customer rate impacts; project feasibility; DSM and EE programs; and availability and terms of capital financing. Taking into account these criteria, we consider Levy to be PEF’s preferred baseload generation option.
 
CR3 Uprate
 
In 2007, the FPSC issued an order approving PEF’s Determination of Need petition related to a multi-stage uprate of CR3 that will increase CR3’s gross output by approximately 180 MW during its next refueling outage. PEF implemented the first-stage design modifications in 2008. The final stage of the uprate required a license amendment to be filed with the NRC, which was filed by PEF in June 2011 and accepted for review by the NRC on November 21, 2011.
 
 
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Cost Recovery
 
On April 30, 2012, PEF filed its annual nuclear cost-recovery filing with the FPSC to recover $152 million, which includes recovery of pre-construction and carrying costs and Capacity Cost-Recovery Clause (CCRC) recoverable O&M expense incurred or anticipated to be incurred during 2013, recovery of $88 million of prior years deferrals in 2013, as well as the estimated actual true-up of 2012 costs associated with the CR3 uprate and Levy projects, as permitted by the 2012 settlement agreement. This results in an increase in the nuclear cost-recovery charge of $2.23 per 1,000 kWh for residential customers, which if approved, would begin with the first January 2013 billing cycle. The FPSC has scheduled hearings in this matter for August 2012, with a decision expected in October 2012. We cannot predict the outcome of this matter.
 
DEMAND-SIDE MANAGEMENT COST RECOVERY
 
On July 26, 2011, the FPSC voted to set PEF’s DSM compliance goals to remain at their current level until the next goal setting docket is initiated. An intervener filed a protest to the FPSC’s Proposed Agency Action order, asserting legal challenges to the order. The parties made legal arguments to the FPSC and the FPSC issued an order denying the protest on December 22, 2011. The intervener then filed a notice of appeal of this order to the Florida Supreme Court on January 17, 2012. We cannot predict the outcome of this matter.
 
OTHER MATTERS
 
On March 29, 2012, PEF announced plans to convert the 1,011-MW Anclote Units 1 and 2 (Anclote) from oil and natural gas fired to 100 percent natural gas fired and requested that the FPSC permit recovery of the estimated $79 million conversion cost through the ECRC. PEF believes this conversion is the most cost-effective alternative for Anclote to achieve and maintain compliance with applicable environmental regulations (see Note 13B). PEF anticipates that both converted units will be placed in service by the end of 2013. We cannot predict the outcome of this matter.
 
 
6. EQUITY
   
A. EARNINGS PER COMMON SHARE
     
There are no material differences between our basic and diluted earnings per share amounts or our basic and diluted weighted-average number of common shares outstanding for the three months ended March 31, 2012 and 2011. The effects of performance share awards and stock options outstanding on diluted earnings per share are immaterial.
 
B.  RECONCILIATION OF TOTAL EQUITY
     
PROGRESS ENERGY
 
The consolidated financial statements include the accounts of the Parent and its majority owned subsidiaries. Noncontrolling interests principally represent minority shareholders’ proportionate share of the equity of a subsidiary and a VIE (See Note 1C).
 
 
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The following table presents changes in total equity for the year to date:
 
 (in millions)
 
Total Common
Stock Equity
   
Noncontrolling
Interests
   
Total Equity
 
 Balance,  December 31, 2011
  $ 10,021     $ 4     $ 10,025  
 Net income(a)
    150       -       150  
 Other comprehensive income
    5       -       5  
 Issuance of shares through offerings and stock-
  based compensation plans (See Note 6C)
    17       -