Progress Energy 2004 Annual Report Download - page 28

declining trend leveled out in 2004 as industrial sales
increased in the primary and fabricated metal, chemicals,
lumber and food industries. Industrial sales growth is
expected to be flat or very low as expired textile quotas
are expected to lower textile sales and balance gains in
other industries.
EXPENSES
Fuel and Purchased Power
Fuel and purchased power costs represent the costs of
generation, which include fuel purchases for generation,
as well as energy purchased in the market to meet
customer load. Fuel and purchased power expenses are
recovered primarily through cost recovery clauses, and,
as such, changes in these expenses do not have a
material impact on earnings. The difference between fuel
and purchased power costs incurred and associated fuel
revenues that are subject to recovery is deferred for
future collection or refund to customers.
Fuel and purchased power expenses were $1.137 billion for
2004, which represents a $16 million increase compared to
the same period in the prior year. Fuel used in electric
generation increased $11 million to $836 million compared
to the prior year. This increase is due to an increase in fuel
used in generation of $78 million due to higher fuel costs
and a change in generation mix. Higher fuel costs are being
driven primarily by an increase in coal prices. Outages at
several nuclear facilities during the year resulted in
increased combustion turbine generation, which has a
higher average fuel cost. The increase in fuel used in
generation is offset by a reduction in deferred fuel expense
as a result of the underrecovery of current period fuel
costs. Purchased power expenses increased $5 million to
$301 million compared to prior year. The increase in
purchased power is due primarily to an increase in price.
Fuel and purchased power expenses were $1.121 billion for
2003, which represents a $22 million increase compared to
the same period in the prior year. Fuel used in electric
generation increased $73 million in 2003, compared to prior
year, primarily due to higher prices incurred for coal, oil and
natural gas used during generation. Costs for fuel per Btu
increased for all three commodities during the year.
Purchased power expense decreased $51 million in 2003,
compared to $347 million in 2002, mainly due to a decrease
in the volume purchased as milder weather reduced system
requirements and due to the renegotiation at more favorable
terms of two contracts that expired during the year.
Operations and Maintenance (O&M)
O&M expenses were $871 million for 2004, which
represents an $89 million increase compared to 2003.
This increase is driven primarily by higher outage costs
and storm costs in 2004 than in the prior year. Outages
increased O&M costs by $29 million primarily due to an
increase in the number and scope of nuclear plant
outages in 2004. In addition, costs associated with
restoration efforts after severe storms increased O&M
expense $18 million. Storm costs for 2004 included costs
related to an ice storm and Hurricanes Charley and Ivan
in the North Carolina service territory. PEC Electric also
incurred storm costs in 2003; however, the Company
requested and the NCUC approved deferral of these
costs. The Company did not seek to defer costs
associated with the ice storm, which hit the North
Carolina service territory, and Hurricanes Charley and
Ivan. O&M expenses also increased $9 million due to
higher salary- and benefit-related expenditures. In
addition, O&M charges in the prior year were favorably
impacted by $16 million related to the retroactive
reallocation of Service Company costs.
O&M expenses were $782 million in 2003, which
represents a $20 million decrease compared to 2002.
O&M expense in 2002 included severe storm costs of
$27 million. Those costs, along with lower 2003 Service
Company allocations of $16 million, due to the change in
allocation methodology as required by the SEC in early
2003, are the primary reasons for decreased O&M
expenses. This decrease was partially offset by higher
benefit-related costs of $21 million. PEC Electric incurred
O&M costs of $25 million related to three severe storms in
2003. The NCUC allowed deferral of $24 million of these
storm costs. These costs are being amortized over a five-
year period, beginning in the months the expenses were
incurred. PEC Electric amortized $3 million of these costs
in 2003, which is included in depreciation and amortization
expense on the Consolidated Income Statement.
Depreciation and Amortization
Depreciation and amortization expense was $570 million
for 2004, which represents an $8 million increase
compared to 2003. This increase is attributable primarily
to the impact of the NC Clean Air legislation. PEC Electric
recorded the maximum amortization allowed under the
legislation in 2004. NC Clean Air amortization increased
$100 million to $174 million in 2004 compared to $74 million
in 2003. Depreciation expense also increased $9 million
for assets placed in service. These increases were
partially offset by a reduction in depreciation expense
related to depreciation studies filed during the year.
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Management’s Discussion and Analysis