Progress Energy 2004 Annual Report Download - page 33

production, coupled with higher gas prices in 2004,
contributed to the increased earnings in 2004 as
compared to 2003. Production levels increased resulting
from the acquisition of North Texas Gas in late February
2003 and increased drilling in 2004. Volume and prices
have increased 21% and 16%, respectively, for 2004
compared to 2003.
Natural gas profits increased to $34 million in 2003
compared to $10 million in 2002. The increase in production
and price resulting from the acquisitions of Westchester in
2002 (renamed Winchester Energy in 2004) and North Texas
Gas in the first quarter of 2003 drove increased revenue and
earnings in 2003 compared to 2002. In October 2003, the
Company completed the sale of certain gas-producing
properties owned by Mesa Hydrocarbons, LLC (Mesa). See
Notes 5B and 4D to the Progress Energy Consolidated
Financial Statements for discussions of the North Texas
Gas acquisitions and the Mesa disposition.
The following table summarizes the production and
revenues of the natural gas operations by location:
COAL FUEL AND OTHER OPERATIONS
Coal fuel and other operations generated profits of
$4 million, losses of $4 million and profits of $10 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. The increase in profits for 2004 is primarily
due to higher volumes and margins for coal fuel
operations of $16 million after-tax. In addition, coal
results in 2003 included the recording of an impairment of
certain assets at the Kentucky May coal mine totaling
$11 million after-tax. This favorability was offset by a
reduction in profits of $7 million after-tax for fuel
transportation operations related to the waterborne
transportation ruling by the FPSC (See Note 8C). Profits
were also negatively impacted by higher corporate costs
of $10 million in 2004. Corporate costs in the prior year
included $4 million of favorability related to the reduction
of an environmental reserve (See Note 22). The remaining
unfavorability in corporate costs is attributable to
increased interest expense related to unresolved tax
matters and higher professional fees.
Coal fuel and other operations’ profits decreased
$9 million from 2002 to 2003. The decrease is due primarily
to the recording of an impairment of certain assets at the
Kentucky May coal mine totaling $11 million after-tax. The
decrease in profits is also due to the impact of the
retroactive Service Company allocation in 2003.
The Company is exploring strategic alternatives regarding
the Fuels’ coal mining business, which could include
divesting these assets. As of December 31, 2004, the
carrying value of long-lived assets of the coal mining
business was $66 million. The Company cannot currently
predict the outcome of this matter.
Competitive Commercial Operations
CCO generates and sells electricity to the wholesale
market from nonregulated plants. These operations also
include marketing activities. The following summarizes
the annual revenues, gross margin and segment profits
from the CCO plants:
CCO’s operations generated segment losses of $4 million in
2004 compared to segment profits of $20 million in 2003.
Results for 2004 were favorably impacted by increased
gross margin, which was more than offset by higher fixed
costs and costs associated with the extinguishment of
debt. Revenues increased for 2004 due to increased
revenues from marketing and tolling contracts offset by a
termination payment received on a marketing contract in
2003. Expenses for the cost of fuel and purchased power to
supply marketing contracts partially offset the increased
revenues netting to an increase in gross margin for 2004 as
compared to 2003. Fixed costs increased $16 million
pre-tax from additional depreciation and amortization on
plants placed into service in 2003 and from an increase in
interest expense of $13 million pre-tax due primarily to
interest no longer being capitalized due to the completion
of construction in the prior year. In addition, plant
operating expenses increased $12 million pre-tax primarily
31
Progress Energy Annual Report 2004
2004 2003 2002
Production in Bcf equivalent
East Texas/LA gas operations 20 13 6
North Texas gas operations 10 7–
Mesa –57
Total production 30 25 13
Revenues in millions
East Texas/LA gas operations $110 $65 $24
North Texas gas operations 52 38 –
Mesa – 13 15
Total revenues $162 $116 $39
Gross margin
In millions of $ $126 $91 $29
As a % of revenues 78% 78% 74%
(in millions) 2004 2003 2002
Total revenues $240 $170 $92
Gross margin
In millions of $ $158 $141 $83
As a % of revenues 66% 83% 90%
Segment profits (losses) $(4) $20 $27