Progress Energy 2004 Annual Report Download - page 23

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Progress Energy Annual Report 2004
addition, Fuels contributed $180 million of net income, of
which $91 million represented synthetic fuel net income.
Partially offsetting the net income contribution provided
by the regulated utilities and Fuels was a loss of
$236 million recorded at Corporate and Other, primarily
related to interest expense on holding company debt.
While the Company’s synthetic fuel operations currently
provide significant earnings that are scheduled to expire
at the end of 2007, the associated cash flow benefits from
synthetic fuels are expected to come in the future when
deferred tax credits are ultimately utilized. Credits that
have been generated but not yet utilized are carried
forward indefinitely as alternative minimum tax credits
and will provide positive cash flow when utilized. At
December 31, 2004, deferred credits were $745 million.
See Note 23E for additional information on the Company’s
synthetic fuel operations and its ability to utilize its
current and future tax credits.
Progress Energy reduced its debt to total capitalization
ratio to 57.6% at the end of 2004 as compared to 58.8% at
the end of 2003. The Company seeks to continue to
improve this ratio as it plans to reduce total debt with
proceeds from asset sales, free cash flow (defined as cash
from operations less capital expenditures and common
dividends) and growth in equity from retained earnings
and ongoing equity issuances. The Company expects total
capital expenditures to be approximately $1.3 billion in
both 2005 and 2006.
Progress Energy’s ratings outlook was changed to
“negative” from “stable” in 2004 by both Moody’s and
Standard & Poor’s (S&P). Both these ratings agencies
cited the uncertainty around the timing of storm
cost recovery, potential delays in the Company’s
de-leveraging plan, uncertainty about the upcoming rate
case in Florida and uncertainty about the IRS audit of the
Company’s synthetic fuel partnerships in their ratings
actions. The change in outlook has not materially affected
Progress Energy’s access to liquidity or the cost of its
short-term borrowings. If Standard & Poor’s lowers
Progress Energy’s senior unsecured rating one ratings
category to BB+ from its current rating, it would be a non-
investment grade rating. The effect of a noninvestment
grade rating would primarily be to increase borrowing
costs. The Company’s liquidity would essentially remain
unchanged as the Company believes it could borrow
under its revolving credit facilities instead of issuing
commercial paper for its short-term borrowing needs.
However, there would be additional funding requirements
of approximately $450 million due to ratings triggers
embedded in various contracts. See “Guarantees”
Section under FUTURE LIQUIDITY AND CAPITAL
RESOURCES below for more information regarding the
potential impact on the Company’s financial condition
and results of operations resulting from a ratings
downgrade.
REGULATED UTILITIES
The regulated utilities earnings and operating cash flows
are heavily influenced by weather, including related
storm damage, the economy, demand for electricity
related to customer growth, actions of regulatory
agencies and cost controls.
Both PEC Electric and PEF operate in retail service
territories that are forecasted to have income and
population growth higher than the U.S. average. In recent
years, lower industrial sales mainly related to weakness in
the textile sector at PEC Electric have negatively impacted
earnings growth. The Company does not expect any
significant improvement in industrial sales in the near
term. These combined factors under normal weather
conditions are expected to contribute approximately
2% annual retail kilowatt-hour (KWh) sales growth at PEC
Electric and approximately 3% annual retail kilowatt-hour
(KWh) sales growth at PEF through at least 2007. The
utilities must continue to invest significant capital in new
generation, transmission and distribution facilities to
support this load growth. Subject to regulatory approval,
these investments are expected to increase the utilities’
rate base, upon which additional return can be realized
that creates the basis for long-term financial growth in the
utilities. The Company will meet this load growth through
the two previously planned approximately 500 MW
combined-cycle units at PEF’s Hines Energy Complex in
2005 and 2007. The contribution from the utilities’ regulated
wholesale business is expected to increase slightly in 2005
and be relatively flat over the following few years.
While the two utilities expect retail sales growth in the
future, they are facing rising costs. The Company began
a cost-management initiative in late 2004 to permanently
reduce by $75 million to $100 million the projected growth
in the Company’s annual nonfuel O&M costs by the end of
2007. See “Cost-Management Initiative” under RESULTS
OF OPERATIONS for more information. The utilities
expect capital expenditures to be approximately $1.1
billion in both 2005 and 2006. The Company will continue
an approximate $900 million program of installing new
emission-control equipment at PEC’s coal-fired power
plants in North Carolina. Operating cash flows are
expected to be sufficient to fund capital spending in 2005
and in 2006.