Progress Energy 2004 Annual Report Download - page 26

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operations, primarily synthetic fuel facilities, one month in
arrears. As a result, earnings for the year ended December
31, 2003, included 13 months of operations, resulting in a
net income increase of $2 million for the year.
The Company’s segments contributed the following profit
or loss from continuing operations:
In March 2003, the SEC completed an audit of Progress
Energy Service Company, LLC (Service Company), and
recommended that the Company change its cost allocation
methodology for allocating Service Company costs. As
part of the audit process, the Company was required to
change the cost allocation methodology for 2003 and
record retroactive reallocations between its affiliates in the
first quarter of 2003 for allocations originally made in 2001
and 2002. This change in allocation methodology and the
related retroactive adjustments have no impact on
consolidated expense or earnings. The new allocation
methodology, as compared to the previous allocation
methodology, generally decreases expenses in the
regulated utilities and increases expenses in the
nonregulated businesses. The regulated utilities’
reallocations are within O&M expense, while the
diversified businesses’ reallocations are generally within
diversified business expenses. The impact on the individual
lines of business is included in the following discussions.
Cost-Management Initiative
On February 28, 2005, as part of a previously announced
cost-management initiative, the executive officers of the
Company approved a workforce restructuring. The
restructuring will result in a reduction of approximately 450
positions and is expected to be completed in September of
2005. The cost-management initiative is designed to
permanently reduce by $75 million to $100 million the
projected growth in the Company’s annual operation and
maintenance expenses by the end of 2007. In addition to the
workforce restructuring, the cost-management initiative
includes a voluntary enhanced retirement program.
In connection with the cost-management initiative, the
Company expects to incur one-time pre-tax charges of
approximately $130 million. Approximately $30 million of
that amount relates to payments for severance benefits,
and will be recognized in the first quarter of 2005 and paid
over time. The remaining approximately $100 million will
be recognized in the second quarter of 2005 and relates
primarily to postretirement benefits that will be paid over
time to those eligible employees who elect to participate
in the voluntary enhanced retirement program.
Approximately 3,500 of the Company’s 15,700 employees
are eligible to participate in the voluntary enhanced
retirement program. The total cost-management initiative
charges could change significantly depending upon how
many eligible employees elect early retirement under the
voluntary enhanced retirement program and the salary,
service years and age of such employees (See Note 24).
Energy Delivery Capitalization Practice
The Company has reviewed its capitalization policies for
its Energy Delivery business units in PEC and PEF. That
review indicated that in the areas of outage and
emergency work not associated with major storms and
allocation of indirect costs, both PEC and PEF should
revise the way that they estimate the amount of capital
costs associated with such work. The Company has
implemented such changes effective January 1, 2005,
which include more detailed classification of outage and
emergency work and result in more precise estimation
and a process of retesting accounting estimates on an
annual basis. As a result of the changes in accounting
estimates for the outage and emergency work and
indirect costs, a lesser proportion of PEC’s and PEF’s
costs will be capitalized on a prospective basis. The
Company estimates that the combined impact for both
utilities in 2005 will be that approximately $55 million of
costs that would have been capitalized under the
previous policies will be expensed. Pursuant to SFAS No.
71, PEC and PEF have informed the state regulators
having jurisdiction over them of this change and that the
new estimation process will be implemented effective
January 1, 2005. The Company has also requested a
method change from the IRS.
24
Management’s Discussion and Analysis
(in millions)
2004 Change 2003 Change 2002
PEC Electric $464 $(51) $515 $2 $513
PEF 333 38 295 (28) 323
Fuels 180 (55) 235 59 176
CCO (4) (24) 20 (7) 27
Rail services 16 17 (1) 41 (42)
Total segment
profit (loss) 989 (75) 1,064 67 997
Corporate and other (236) 17 (253) 192 (445)
Total income from
continuing operations 753 (58) 811 259 552
Discontinued operations,
net of tax 614 (8) 16 (24)
Cumulative effect of
changes in
accounting principles –21 (21) (21) –
Net income $759 $(23) $ 782 $254 $528