Progress Energy 2007 Annual Report Download - page 23

Progress Energy Annual Report 2007
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costs. The Utilities remain committed to minimizing the
expected growth in operation and maintenance (O&M)
expenses by effectively managing costs. The Utilities
are allowed to recover prudently incurred fuel costs
through the fuel portion of our rates, which are adjusted
annually in each state. We are focused on mitigating the
impact of rising fuel prices as the under-recovery of fuel
costs impacts our cash flows, interest and leverage, and
rising fuel costs and higher rates also impact customer
satisfaction. Our efforts to mitigate these high fuel costs
include our diverse generation mix, staggered fuel
contracts and hedging, and supplier and transportation
diversity.
We expect total capital expenditures (including
expenditures for environmental compliance) for 2008, 2009
and 2010 to be approximately $2.8 billion, $2.9 billion and
$2.8 billion, respectively. Subject to regulatory approval,
applicable capital investments to support load growth
and comply with environmental regulations increase the
Utilities’ “rate base” or investment in utility plant, upon
which additional return can be realized, and create the
basis for long-term earnings growth in the Utilities.
We expect to fund our business plans and new generation
through operating cash flows and a combination of long-
term debt, preferred stock and common equity, all of
which are dependent on our ability to successfully access
capital markets. We may also pursue joint ventures or
similar arrangements with third parties in order to share
some of the financing and operational risks associated
with new baseload generation.
Our synthetic fuels operations have historically provided
significant net earnings driven by the Section 29/45K
tax credit program, which expired at the end of 2007. In
accordance with our decision to permanently cease
production of synthetic fuels, we abandoned our majority-
owned facilities in the fourth quarter of 2007. The operations
of our synthetic fuels businesses were reclassified to
discontinued operations in 2007. However, the associated
cash flow benefits from synthetic fuels are expected to
come in the future when deferred Section 29/45K tax credits
generated through December 31, 2007, but not yet utilized,
are ultimately utilized. At December 31, 2007, the amount of
these deferred tax credits carried forward was $830 million.
See “Other Matters – Synthetic Fuels Tax Credits” below
and Note 22D for additional information on our synthetic
fuels tax credits and other matters.
As discussed more fully in Note 3 and “Results of
Operations – Discontinued Operations,” in accordance
with our business strategy to reduce our business risk
and to focus on the core operations of the Utilities, the
majority of our nonregulated business operations have
been divested or are in the process of being divested.
These operations have been classified as discontinued
operations in the accompanying financial statements.
Consequently, the composition of other continuing
segments has been impacted by these divestitures.
RESULTS OF OPERATIONS
In this section, earnings and the factors affecting earnings
are discussed. The discussion begins with a summarized
overview of our consolidated earnings, which is followed
by a more detailed discussion and analysis by business
segment.
Overview
FOR 2007 AS COMPARED TO 2006 AND 2006 AS COMPARED
TO 2005
For the year ended December 31, 2007, our net income was
$504 million or $1.97 per share compared to $571 million or
$2.28 per share for the same period in 2006. For the year
ended December 31, 2007, our income from continuing
operations was $693 million compared to $551 million for
the same period in 2006. The increase in income from
continuing operations as compared to prior year was due
primarily to:
•฀ lower฀Clean฀Smokestacks฀Act฀amortization฀expense฀at฀
PEC;
•฀ lower฀interest฀expense฀at฀the฀Parent฀due฀to฀reducing฀
debt in late 2006;
•฀ the฀cost฀incurred฀to฀redeem฀debt฀at฀the฀Parent฀in฀2006;
•฀ favorable฀weather฀at฀PEC;
•฀ lower฀allocations฀of฀corporate฀overhead฀to฀continuing฀
operations as a result of the 2006 divestitures;
•฀ unrealized฀ losses฀ recorded฀ on฀ contingent฀ value฀
obligations (CVOs) during 2006;
•฀ favorable฀allowance฀for฀funds฀used฀during฀construction฀
(AFUDC) equity at the Utilities;
•฀ favorable฀growth฀and฀usage฀at฀the฀Utilities;฀and
•฀ higher฀wholesale฀sales฀at฀PEF.
Partially offsetting these items were:
•฀ higher฀ O&M฀ expenses฀ at฀ the฀ Utilities฀ primarily฀ due฀
to higher outage and maintenance costs and higher
employee benefits;
•฀ additional฀ depreciation฀ expense฀ associated฀ with฀
PEC’s accelerated cost-recovery program for nuclear
generation assets (See Note 7B);