Progress Energy 2004 Annual Report Download - page 32

Download and view the complete annual report

Please find page 32 of the 2004 Progress Energy annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

The following summarizes Fuels’ segment profits:
SYNTHETIC FUEL OPERATIONS
The production and sale of synthetic fuel generate
operating losses, but qualify for tax credits under Section
29 of the Code, which more than offset the effect of such
losses (See Note 23E).
The operations resulted in the following losses (prior to
tax credits):
The Company’s synthetic fuel production levels and the
amount of tax credits it can claim each year are a function
of the Company’s projected consolidated regular federal
income tax liability. Synthetic fuel operations’ net profits
decreased in 2004 as compared to 2003 due primarily to a
decrease in synthetic fuel production and an increase in
operating expenses in 2004. The Company’s total synthetic
fuel production of approximately eight million tons in 2004
is down compared to 2003 production levels of
approximately 12 million tons as a result of hurricane
costs, which reduced the Company’s projected 2004
regular tax liability and its corresponding ability to record
tax credits from its synthetic fuel production. In addition,
earnings in 2003 include a $13 million favorable tax credit
true-up related to 2002.
As of September 30, 2004, the Company anticipated an
ability to record approximately five million tons of synthetic
fuel production based on the Company’s projected regular
tax liability for 2004. This estimate was based upon the
Company’s projected casualty loss as a result of the
storms. Therefore, the Company recorded a charge of
$79 million in the third quarter for tax credits associated
with approximately 2.7 million tons sold during the year
that the Company anticipated it would not be able to use.
On November 2, 2004, PEF filed a petition with the FPSC to
recover $252 million of storm costs plus interest from
customers over a two-year period. Based on a reasonable
expectation at December 31, 2004, that the FPSC will grant
the requested recovery of the storm costs, the Company’s
loss from the casualty is less than originally anticipated.
Accordingly, as of December 31, 2004, the Company’s
anticipated 2004 tax liability supported credits on
approximately eight million tons. Therefore, the Company
recorded tax credits of $90 million for the quarter ended
December 31, 2004, for tax credits associated with
approximately three million tons sold during the year that
the Company now anticipates can be used. As of
December 31, 2004, the Company anticipates that
approximately $7 million of tax credits associated with
approximately 0.2 million tons sold during the year could
not be used (See Note 23E). The Company ceased
operations at its Earthco facilities for the last three
months of 2004 due to the decrease in the Company’s
projected 2004 tax liability, and these facilities were
restarted in January 2005.
The Company believes its right to recover storm costs is
well established; however, the Company cannot predict
the timing or outcome of this matter. If the FPSC should
deny PEF’s petition for the recovery of storm costs in
2005, there could be a material impact on the amount of
2005 synthetic fuel production and results of operations.
Synthetic fuels’ net profits for 2003 increased as
compared to 2002 due to higher sales, improved margins
and a higher tax credit per ton. The 2003 tax credits also
include a $13 million favorable true-up from 2002.
Additionally, synthetic fuels’ results in 2003 include
13 months of operations for some facilities. Prior to the
fourth quarter of 2003, results of these synthetic fuels’
operations had been recognized one month in arrears.
The net impact of this action increased net income by
$2 million for the year.
NATURAL GAS OPERATIONS
Natural gas operations generated profits of $85 million,
$34 million and $10 million for the years ended December
31, 2004, 2003 and 2002, respectively. Natural gas profits
increased $51 million in 2004 compared to 2003. This
increase is attributable primarily to the gain recognized
on the sale of gas assets during the year. In December
2004, the Company sold certain gas-producing
properties and related assets owned by Winchester
Production Company, Ltd. (North Texas gas operations).
Because the sale significantly altered the ongoing
relationship between capitalized costs and remaining
proved reserves, under the full-cost method of
accounting the pre-tax gain of $56 million ($31 million net
of taxes) was recognized in earnings rather than as a
reduction of the basis of the Company’s remaining oil
and gas properties. In addition, an increase in
30
Management’s Discussion and Analysis
(in millions)
2004 2003 2002
Tons sold 8.3 12.4 11.2
After-tax losses
(excluding tax credits) $(124) $(141) $(135)
Tax credits 215 346 291
Net profit $91 $205 $156
(in millions)
2004 2003 2002
Synthetic fuel operations $91 $205 $156
Natural gas operations 85 34 10
Coal fuel and other operations 4(4) 10
Segment profits $180 $235 $176