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RESULTS OF OPERATIONS
For 2004 as compared to 2003 and 2003 as compared to 2002
In this section, earnings and the factors affecting
earnings are discussed. The discussion begins with a
summarized overview of the Company’s consolidated
earnings, which is followed by a more detailed
discussion and analysis by business segment.
Overview
For the year ended December 31, 2004, Progress Energy’s
net income was $759 million or $3.13 per share compared
to $782 million or $3.30 per share for the same period in
2003. The decrease in net income as compared to prior
year was due primarily to:
•Reduction in synthetic fuel earnings due to lower
synthetic fuel sales due to the impact of hurricanes
during the year.
•Lower off-system wholesale sales, primarily at
PEC Electric.
•Higher O&M expenses at PEC Electric.
•Recording of litigation settlement reached in the civil
suit by Strategic Resource Solutions (SRS).
•Decreased nonregulated generation earnings due to
receipt of a contract termination payment on a tolling
agreement in 2003, loss recognized on early
extinguishment of debt in 2004 and higher fixed costs
and interest charges in 2004.
•Reduction in revenues due to customer outages in
Florida associated with the hurricanes.
•Increased interest charges due to the reversal of
interest expense for resolved tax matters in 2003.
Partially offsetting these items were:
•Favorable weather in the Carolinas.
•Reduction in revenue sharing provisions in Florida.
•Favorable customer growth in both the Carolinas
and Florida.
•Increased margins as a result of the allowed return on
the Hines Unit 2 in Florida.
•Increased earnings for natural gas operations, which
include the gain recorded on the disposition of certain
Winchester Production Company assets.
•Increased earnings for Rail operations.
•Unrealized gains recorded on contingent value
obligations (CVOs).
•Reduction in impairments recorded for an investment
portfolio and long-lived assets.
•Reduction in losses recorded for discontinued operations.
•Reduction in losses recorded for changes in
accounting principles.
For the year ended December 31, 2003, Progress Energy’s
net income was $782 million, or $3.30 per share, compared
to $528 million, or $2.43 per share, for the same period in
2002. Income from continuing operations before the
cumulative effect of changes in accounting principles and
discontinued operations was $811 million in 2003, a 47%
increase from $552 million in 2002. Net income for 2003
increased compared to 2002 primarily due to the inclusion
in 2002 of an impairment of $265 million after-tax related to
assets in the telecommunications and rail businesses.
The Company recorded impairments of $23 million after-
tax in 2003 on an investment portfolio and on long-lived
assets. The increase in net income in 2003 of $12 million,
excluding the impairments, is primarily due to:
•Increase in retail customer growth at the utilities.
•Growth in natural gas production and sales.
•Higher synthetic fuel sales.
•Absence of severe storm costs incurred in 2002 in
the Carolinas.
•Lower loss recorded in 2003 related to the sale of North
Carolina Natural Gas Company (NCNG), with the
majority of the loss on the sale being recorded in 2002.
•Lower interest charges in 2003.
Partially offsetting these items were the:
•Net impact of the 2002 Florida Rate settlement.
•Impact of the change in the fair value of the CVOs.
•Milder weather in 2003 as compared to 2002.
•Increased benefit-related costs.
•Higher depreciation expense at both utilities and the
Fuels and CCO segments.
•The impact of changes in accounting principles in 2003.
Basic earnings per share decreased in 2004 and increased
in 2003 due in part to the factors outlined above. Dilution
related to issuances under the Company’s Investor Plus
and employee benefit programs in 2004 also reduced basic
earnings per share by $0.06 in 2004. Dilution related to a
November 2002 equity issuance of 14.7 million shares and
issuances under the Company’s Investor Plus and
employee benefit programs in 2002 and 2003 also reduced
basic earnings per share by $0.33 in 2003.
Beginning in the fourth quarter of 2003, the Company
ceased recording portions of the Fuels segment’s
23
Progress Energy Annual Report 2004