Progress Energy 2004 Annual Report Download - page 34

due to higher gas transportation service charges, which
increased over prior year due to a full period of expenses
being reflected in current year results. CCO results for 2004
also include losses of $15 million pre-tax associated with
the extinguishment of a debt obligation. CCO terminated
the Genco financing arrangement in December 2004. The
$15 million pre-tax loss is comprised of a $9 million write-
off of remaining unamortized debt issuance costs and a
$6 million realized loss on exiting the related interest rate
hedge. Expenses were favorably impacted by a reduction
in Service Company allocations. Results for 2003 were
negatively impacted by the retroactive reallocation of
Service Company costs of $3 million ($2 million after-tax).
CCO’s operations generated segment profits of $20 million
in 2003 compared to segment profits of $27 million in 2002.
The increase in revenue for 2003 when compared to 2002
is primarily due to increased contracted capacity on
newly constructed plants, energy revenue from a new,
full-requirements power supply contract and a tolling
agreement termination payment received during the first
quarter. Generating capacity increased from 1,554 MW at
December 31, 2002, to 3,100 MW at December 31, 2003,
with the Effingham, Rowan Phase 2 and Washington
plants being placed in service in 2003. In the second
quarter of 2003, PVI acquired from Williams Energy
Marketing and Trading a full-requirements power supply
agreement with Jackson Electric Membership
Corporation in Georgia for $188 million, which resulted in
additional revenues of $21 million when compared to the
same periods in 2002. The revenue increases related to
higher volumes were partially offset by higher
depreciation costs of $22 million, increased interest
charges of $16 million and other fixed charges.
The Company has contracts for its planned production
capacity, which includes callable resources from the
cooperatives, of approximately 77% for 2005,
approximately 81% for 2006 and approximately 75% for
2007. The Company continues to seek opportunities to
optimize its nonregulated generation portfolio.
Rail Services
Rail Services’ (Rail) operations represent the activities of
Progress Rail and include railcar and locomotive repair,
track-work, rail parts reconditioning and sales, scrap metal
recycling, railcar leasing and other rail-related services.
Rail contributed segment profits of $16 million for 2004
compared with segment losses of $1 million and
$42 million for the years ended December 31, 2003, and
2002, respectively. Results in 2004 were favorably
impacted by the strong scrap metal market in 2004.
Revenues were $1.131 billion in 2004, which represents
an increase of $284 million compared to prior year. This
increase is due primarily to increased volumes and
higher prices in recycling operations and in part to
increased production and sales in locomotive and railcar
services and engineering and track services. Tonnage for
recycling operations is up approximately 35% on an
annualized basis compared to 2003. The increase in
tonnage, coupled with an increase in the average index
price of approximately 80%, accounts for the significant
increase in revenues year over year. The American Metal
Market index price for #1 railroad heavy melt (which is
used as the index for buying and selling of railcars) has
increased to $191 as of December 31, 2004, from $106 as
of December 31, 2003. Cost of goods sold was $990 million
in 2004, which represents an increase of $252 million
compared to the prior year. The increase in costs of
goods sold is due to increased costs for inventory, labor
and operations as a result of the increased volume in the
recycling operations, locomotive and railcar services and
engineering and track services. In addition, results in
2003 were negatively impacted by the retroactive
reallocation of Service Company costs of $3 million after-
tax. The favorability related to the reallocation was offset
by an increase in general and administrative costs in 2004
related primarily to higher professional fees associated
with divestiture efforts. See discussion below.
Rail’s operations generated segment losses of $1 million
in 2003 compared to segment losses of $42 million in 2002.
The reduction in losses in 2003 compared to 2002 is due
primarily to an impairment charge recorded in 2002. The
net loss in 2002 includes a $40 million after-tax estimated
impairment of assets held for sale related to Railcar Ltd.,
a leasing subsidiary of Progress Rail (See Note 4D).
Excluding the impairment recorded in 2002, profits for Rail
were flat year over year 2003 compared to 2002.
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.
Corporate & Other
Corporate and Other consists of the operations of
Progress Energy Holding Company (the holding
company), Progress Energy Service Company and other
consolidating and nonoperating entities. Corporate and
Other also includes other nonregulated business
areas including the operations of SRS and the
telecommunication operations.
32
Management’s Discussion and Analysis