Progress Energy 2004 Annual Report Download - page 24

The costs associated with the unprecedented series of
major hurricanes that impacted the Company’s service
territories significantly impacted the utility operations in
2004. Restoration of the Company’s systems from
hurricane-related damage cost almost $400 million.
Although PEF has filed for recovery of approximately
$252 million of these storm costs, the timing of recovery is
not certain at this time. See OTHER MATTERS below for
more information on storm costs incurred during 2004.
PEC Electric and PEF continue to monitor progress
toward a more competitive environment. No retail
electric restructuring legislation has been introduced in
the jurisdictions in which PEC Electric and PEF operate.
As part of the Clean Smokestacks bill in North Carolina
and an agreement with the Public Service Commission
of South Carolina (SCPSC), PEC Electric is operating
under a rate freeze in North Carolina through 2007 and
an agreement not to seek a base retail electric rate
increase in South Carolina through 2005. PEF is
operating under a retail rate agreement in Florida
through 2005. PEF has initiated a rate proceeding in 2005
regarding its future base rates. See Note 8 for further
discussion of the utilities’ retail rates.
NONREGULATED BUSINESSES
The Company’s primary nonregulated businesses are
CCO, Fuels and Progress Rail.
Cash flows and earnings of the nonregulated businesses
are impacted largely by the ability to obtain additional
term contracts or sell energy on the spot market at
favorable terms, the volume of synthetic fuel produced
and tax credits utilized, and volumes and prices of both
coal and natural gas sales.
Progress Energy expects an excess of supply in the
wholesale electric energy market for the next several
years. During 2004, CCO entered into additional
wholesale power contracts with cooperatives in Georgia
and will serve approximately one-third of the Georgia
cooperative market starting in 2005. CCO completed the
build out of its nonregulated generation assets in 2003
and currently has total capacity of 3,100 MW. The
Company has no current plans to expand its portfolio of
nonregulated generating plants. CCO short-term
challenges include absorbing the fixed costs associated
with these plants and the general weakness in wholesale
power markets. Three above-market tolling agreements
for approximately 1,200 MW of capacity expired at the
end of 2004. CCO has replaced the expired agreements
with the increased cooperative load in Georgia. The
increased cooperative load in Georgia will significantly
increase CCO’s revenue and cost of sales from 2004 to
2005 with lower margins expected. Currently CCO has
contracts for its planned production capacity, which
includes callable resources from the cooperatives, of
approximately 77% for 2005, 81% for 2006 and 75% for
2007. CCO will continue its optimization strategy for the
nonregulated generation portfolio.
Fuels will continue to develop its natural gas production
asset base both as a long-term economic hedge for the
Company’s nonregulated generation fuel needs and
to continue its presence in natural gas markets that
will allow it to provide attractive returns for the
Company’s shareholders.
The Company has begun exploring strategic alternatives
regarding the Fuels’ coal mining business, which could
include divesting assets. As of December 31, 2004, the
carrying value of long-lived assets of the coal mining
business was $66 million.
The Company, through its subsidiaries, is a majority
owner in five entities and a minority owner in one entity
that owns facilities that produce synthetic fuel as defined
under the Internal Revenue Code. The production and
sale of the synthetic fuel from these facilities qualifies for
tax credits under Section 29 if certain requirements are
satisfied. These facilities have private letter rulings
(PLRs) from the IRS with respect to their synthetic fuel
operations. However, these PLRs do not address placed-
in-service date requirements. The Company has resolved
certain synthetic fuel tax credit issues with the IRS and is
continuing to work with the IRS to resolve any remaining
issues. The Company cannot predict the final resolution
of any outstanding matters. The Company has no current
plans to alter its synthetic fuel production schedule as a
result of these matters. The Company plans to produce
approximately 8 million to 12 million tons of synthetic fuel
in 2005. Through December 31, 2004, the Company had
generated approximately $1.5 billion of synthetic fuel tax
credits to date (including FPC prior to the acquisition by
the Company). See additional discussion of synthetic fuel
tax credits in Note 23E.
In February 2005, Progress Energy signed a definitive
agreement to sell its Progress Rail subsidiary to
subsidiaries of One Equity Partners LLC for a sales price
of $405 million. Proceeds from the sale are expected to be
used to reduce debt. See Note 24 for more information.
Progress Energy and its consolidated subsidiaries are
subject to various risks. For a complete discussion of
these risks, see the Company’s filings with the SEC.
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Management’s Discussion and Analysis