Duke Energy and Progress Energy will offer transmission system upgrades and wholesale power sales in a revised merger plan to be filed with state regulators next week.

The plan is intended to satisfy the Federal Energy Regulatory Commission's objections to the merger's effect on competition for wholesale power in the utilities' Carolinas territory. But it also must balance state regulators' concern for the impact on retail customers.

"We've been rejected twice (by FERC), and we're trying to find the place between federal requirements and state regulations - there's a thread-the-needle aspect of that," Duke CEO Jim Rogers said. "We did a lot of complex analysis. We want to be third time's the charm and not three strikes and you're out."

Rogers discussed the merger Thursday as Duke reported its fourth-quarter and 2011 earnings. Quarterly earnings fell 33 percent as mild weather softened electricity sales, but the company's full-year results beat its expectations and 2010 earnings.

In an interview, Rogers said FERC's policy on mergers appears to have changed to be biased against large combinations. Duke and Progress would form the largest U.S. utility with 7.1 million customers in six states.

In rejecting a previous merger plan, the federal agency said Duke and Progress could join a regional transmission organization, or RTO, to ease competition concerns.

RTOs are supposed to be a more efficient means of moving electricity, lowering costs for customers. But utilities commissions in the Carolinas have resisted RTOs. The collaborative approach can backfire, they say, such as by imposing higher rates on consumers for regional transmission projects that don't benefit North Carolina customers. State utility commissions also would lose some authority if Duke and Progress joined an RTO.

Rogers said he personally met with consumer advocacy agencies, North Carolina's Public Staff and the S.C. Office of Regulatory Staff to gauge their positions. "It was pretty strong" against RTOs, he said.

"We pretty much discouraged it. We told them we couldn't support it," said Gisele Rankin, an attorney for the N.C. Public Staff. "They don't really deliver what they're supposed to deliver."

Duke and Progress instead will offer FERC short- and long-term solutions to the competition question.

Short term, they would offer "firm" sales of wholesale power, backed by capacity at specific power plants in the Carolinas. FERC objected to the utilities' previous plan because the power offered for sale was on short terms and could be interrupted if Duke needed the power.

Long term, they will offer to spend about $100 million on new and upgraded transmission lines, making it easier for third parties to bring power into the Carolinas.

Rankin said the Public Staff would agree to the options only if they don't shift costs to retail customers.

The plan will be filed with the N.C. Utilities Commission, which will have 30 days to review it before it is filed with the federal agency.

Rogers said FERC's objections don't reduce his commitment to closing the merger. But he told analysts Thursday that it's likely to be May before FERC rules, and state commissions would have to act after that. Duke and Progress previously moved a deadline to terminate the deal to July.

Earnings comparisons

Duke's earnings per share for the fourth quarter of 22 cents dropped from the 32 cents of the same quarter in 2010. Net income fell from $427 million to $288 million on $3.4 billion in revenue.

Adjusted for one-time items, quarterly earnings rose to 24 cents from 21 cents in 2010.

For the full year, Duke reported earnings of $1.28 a share and $1.7 billion in income, compared with $1 a share and $1.3 billion in income in 2010. Adjusted earnings of $1.46 compared with $1.43 in 2010.

Duke attributed the year's results, in part, to new income as it brings new power plants online and passes their costs to customers. That offset lower sales due to mild weather and high storm-repair costs.

Duke won rate increases in both Carolinas last month and brought online a new natural gas-fired power plant in Rowan County. This year it plans to start up two new coal-fired plants, in North Carolina and Indiana, and a second gas-fired plant in North Carolina.

It also saw a 38 percent earnings jump from its international business unit, which operates in South America.

Duke's 2012 guidance calls for earnings of $1.40 to $1.45 a share, the same range as 2011. The company reaffirmed long-term earnings growth of 4 percent to 6 percent a year.

"Our major industrial customers are feeling more confident about 2012 and, given returning consumer confidence, we are cautiously optimistic about 2012," chief financial officer Lynn Good told analysts.