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ANNUAL REPORT 06
THE ROAD AHEAD
SHIFTING INTO HIGH GEAR

Table of contents

  • Page 1
    ANNUAL REPORT 06 THE ROAD AHEAD SHIFTING INTO HIGH GEAR

  • Page 2
    ... Carolina Power & Light and Florida Progress joined to form Progress Energy, we were a very different company than we are today. Now, just six years later, we are on the road to becoming the country's largest utility focused solely on the regulated electric utility business. We have a strong balance...

  • Page 3
    TA B L E O F C O N T E N T S FINANCIAL HIGHLIGHTS LETTER TO SHAREHOLDERS PROGRESS ENERGY'S LONG-TERM PLAN 2 3 6 KEY FACTS 12 BOARD OF DIRECTORS 14 KEY BOARD COMMITTEES 16 FINANCIAL REPORT 17

  • Page 4
    ... ended December 31 (in millions, except per share data) 2006 2005 * 2004 * Financial Data Operating revenues Net income Income from continuing operations Ongoing earnings per common share** Reported GAAP earnings per common share Average common shares outstanding $9,570 571 514 2.58 2.28 250...

  • Page 5
    ...Shareholders: Progress Energy had a very successful year in 2006 and has entered 2007 with a healthy balance sheet and a clear strategic focus. We are concentrating on our two strong electric utilities and the robust growth in the Carolinas and Florida. I'm enthusiastic about the road ahead. In 2006...

  • Page 6
    ... fuels, natural gas production and non-utility power generation. This divided our attention and exposed our company to more risk than we like. As a result of this planning, which we continually update as conditions change, we are implementing a balanced approach to addressing the increasing energy...

  • Page 7
    ... last year to increase the power output of our Crystal River Nuclear Plant and to convert the oil-fired Bartow Plant to natural gas. (The Bartow project will double the plant's output while reducing air emissions in the densely populated Tampa Bay region.) Also in 2006, our Brunswick Nuclear Plant...

  • Page 8
    ...debt, strengthen our balance sheet in preparation for future growth and focus on our core electric utility business - all of which we have now achieved, including a $1.7 billion reduction in holding company debt. We have divested most of our noncore assets. Through rigorous cost management, we have...

  • Page 9
    ... J.D. Power Founder's Award for customer service. D R I V E N T O S U C C E E D . With our restored balance sheet, improved focus and reduced risk, Progress Energy is poised to take advantage of the opportunities in our growing communities to fuel long-range earnings growth and shareholder returns...

  • Page 10
    ..., our nuclear and fossil-fueled plants were ranked among the industry's best in production, safety and cost efficiency. And the company completed a breakthrough mobile meter reading project that is expected to save $21 million annually in operating costs while increasing meter accuracy and customer...

  • Page 11
    .... Progress Energy has a long history of supporting and enriching its service areas. In 2006, Progress Energy and the Progress Energy Foundation donated more than $12 million to community initiatives. The company also actively partnered with local leaders in our communities to recruit new businesses...

  • Page 12
    ... D . Progress Energy's service territories are among the fastest-growing areas of the country. The company currently serves approximately 3.1 million customers in the Carolinas and Florida, adding more than 64,000 new customers last year alone. In addition to population growth and economic expansion...

  • Page 13
    ... needs of the future require a balanced approach. Progress Energy is enhancing energy-efficiency programs and investing in new generation options and alternativeenergy sources. In 2006, we signed a 25-year contract to purchase power generated using environmentally friendly e-grass, reducing our...

  • Page 14
    ... to grow earnings and dividends so we can achieve total annual shareholder returns of 8 percent to 10 percent. I N D U S T R Y L E A D E R . In 2006, the Edison Electric Institute recognized Progress Energy as the industry leader in customer satisfaction and operational excellence with its highest...

  • Page 15
    ... 12,500 megawatts to keep up with the growth in our service areas. B A L A N C E D S O L U T I O N S . Balance is key to long-term energy supply. Energy efficiency, alternative energy, the modernization of existing plants and the construction of new power plants are all part of our strategy for the...

  • Page 16
    ... Operations and Nuclear Oversight (Chair). James E. Bostic, Jr. Managing Director, HEP & Associates (business consulting) and retired Executive Vice President, Georgia-Pacific Corp. (manufacturer and distributor of tissue, paper, packaging, building products, pulp and related chemicals) Atlanta, Ga...

  • Page 17
    ... President, Lincoln Financial Media (financial services company) Boston, Mass. Elected to the board in 2005 and sits on the following committees: Audit and Corporate Performance; Finance. Alfred C. Tollison, Jr. Retired Chairman and Chief Executive Officer, Institute of Nuclear Power Operations...

  • Page 18
    ... options and recommends changes in the company's dividend policy. O P E R AT I O N S A N D N U C L E A R O V E R S I G H T COMMITTEE This committee reviews the company's load forecasts and plans for generation, transmission and distribution, fuel procurement and transportation, customer service...

  • Page 19
    ... Chief Executive Oficer Progress Energy Florida, Inc. Senior Vice President - Power Operations Lloyd M. Yates Senior Vice President - Energy Delivery Progress Energy Carolinas, Inc. C. S. Hinnant Senior Vice President - Nuclear Generation and Chief Nuclear Oficer FINANCIAL REPORT Safe Harbor for...

  • Page 20
    ...cash and other inancial obligations in the event our credit ratings are downgraded; the impact that increases in leverage may have on us; the impact of derivative contracts used in the normal course of business; the investment performance of our pension and beneit plans; our ability to control costs...

  • Page 21
    ... business areas. Strategy We are an integrated energy company, with our primary focus on the end-use and wholesale electricity markets. We operate in retail utility markets in the southeastern United States and in other fuels markets in the eastern United States. Over the last several years...

  • Page 22
    ...a ratings change. REGULATED UTILITIES The Utilities' earnings and operating cash lows are heavily inluenced by weather, the economy, demand for electricity related to customer growth, actions of regulatory agencies, cost controls, the timing of recovery of fuel costs, and storm damage. The Utilities...

  • Page 23
    ...of this balanced solution are: increasing energy eficiency and investing in the development of new energy resources for the future; modernizing existing plants to produce energy eficiently using state-of-the-art technology; and investing in new generating plants. We estimate that we will require new...

  • Page 24
    ... related to the 2005 cost-management initiative; • increased retail growth and usage at the Utilities; • the gain on sale of Level 3 Communications, Inc. (Level 3) stock acquired as part of the divestiture of Progress Telecom, LLC (PT LLC); and • the prior year write-off of unrecoverable storm...

  • Page 25
    ... customer growth, the favorable impact of weather, increased wholesale margins primarily due to an increase in excess generation revenues and lower depreciation 1.4 43,489 18.5 13,222 - 91 4.8 56,802 PEC's revenues, excluding fuel revenues of $1.314 billion and $1.186 billion for 2006 and 2005...

  • Page 26
    ... the change in wholesale revenue less fuel did not have a material impact on the change in revenues, wholesale electric energy sales were down 6.9 percent primarily due to lower excess generation sales in 2006 compared to 2005, partially offset by an increase in contracted wholesale capacity. The...

  • Page 27
    Progress Energy Annual Report 2006 increase included $55 million of charges in 2005 compared to 2004 expenses, which included $2 million related to a separate initiative. In addition, O&M expenses increased $26 million related to the change in accounting estimates for certain Energy Delivery ...

  • Page 28
    ... customer outages compared to 2004. This growth in retail revenues was offset by lower retail revenues of $10 million in the Winter Park area due to the sale of the related distribution system in 2005 and an $8 million decline in average use per customer. Wholesale revenues net of fuel increased...

  • Page 29
    Progress Energy Annual Report 2006 EXPENSES Fuel and Purchased Power Fuel and purchased power costs represent the costs of generation, which include fuel purchased for generation, as well as energy and capacity purchased in the market to meet customer load. Fuel, purchased power and capacity ...

  • Page 30
    ... operations Coal terminals and marketing Corporate overhead and other operations Segment (loss) proits 2006 $(44) 12 (44) $(76) 2005 $155 43 (35) $163 2004 $92 34 (36) $90 SYNTHETIC FUELS OPERATIONS The production and sale of synthetic fuels generate operating losses, but qualify for tax credits...

  • Page 31
    Progress Energy Annual Report 2006 Synthetic fuels operations' net (loss) proit changed from a proit of $155 million in 2005 to a loss of $44 million in 2006 primarily due to lower synthetic fuels production as a result of high oil prices, which increased the potential phase-out of tax credits. The...

  • Page 32
    ... completed during 2006. contingent payments based on the performance of four synthetic fuels facilities owned by Progress Energy. The payments, if any, are based on the net after-tax cash lows the facilities generate. At December 31, 2006, 2005 and 2004, the CVOs had a fair market value of...

  • Page 33
    ...cycle and combustion turbine electric generation facility in Rowan County, N.C. On May 8, 2006, we entered into deinitive agreements to sell DeSoto and Rowan, including certain existing power supply contracts, to Southern Power Company, a subsidiary of Southern Company, for a gross purchase price of...

  • Page 34
    ... natural gas prices and increased production. PROGRESS TELECOM, LLC On March 20, 2006, we completed the sale of PT LLC to Level 3. We received gross proceeds comprised of cash of $69 million and approximately 20 million shares of Level 3 common stock valued at an estimated $66 million on the date...

  • Page 35
    ...Energy Annual Report 2006 Net losses from discontinued operations for the coal mining business were $4 million, $11 million and $5 million for the years ended December 31, 2006, 2005 and 2004, respectively. PROGRESS RAIL On March 24, 2005, we completed the sale of Progress Rail Services Corporation...

  • Page 36
    ... based on the present value of discounted (at 10%) future net revenues using current prices, plus the lower of cost or fair market value of unproved properties. The ceiling test takes into consideration the prices of qualifying cash low hedges as of the balance sheet date. If the ceiling (discounted...

  • Page 37
    ... futures price level of $59.50 per barrel, we currently estimate that the synthetic fuels tax credit amount for 2007 would not be reduced. See further discussion in "Other Matters - Synthetic Fuels Tax Credits." present value future beneit payments, we increased the discount rate to approximately...

  • Page 38
    ... to fund our current business plans. Risk factors associated with credit facilities and credit ratings are discussed below. The following discussion of our liquidity and capital resources is on a consolidated basis. Historical for 2006 as Compared to 2005 and 2005 as Compared to 2004 CASH FLOWS...

  • Page 39
    Progress Energy Annual Report 2006 In 2006 and 2005, the Utilities iled requests with their respective state commissions seeking rate increases for fuel cost recovery, including amounts for previous under-recoveries. In 2005, PEF also received approval from the Florida Public Service Commission (...

  • Page 40
    ...credit facilities. For 2006, proceeds from sales of discontinued operations and other assets, net of cash divested, were used to reduce holding company debt by $1.7 billion. The increase in cash used in inancing activities was primarily related to the retirement of long-term debt in the current year...

  • Page 41
    ... and stock option plans. Included in these amounts were approximately 1.6 million shares for proceeds of approximately $70 million to meet the requirements of the Progress Energy 401(k) Savings and Stock Ownership Plan (401(k)) and the Investor Plus Stock Purchase Plan. For 2006, the dividends paid...

  • Page 42
    ...may also use limited ongoing equity sales from our Investor Plus Stock Purchase Plan and employee beneit and stock option plans to meet our liquidity requirements. Over the long term, meeting the anticipated load growth at the Utilities will require a balanced approach, including energy conservation...

  • Page 43
    ... matters, including the timing of recoveries from ratepayers, can be both a source of and a use of future liquidity resources. Base Rates PEC's base rates are subject to the regulatory jurisdiction of the North Carolina Utilities Commission (NCUC) and the South Carolina Public Service Commission...

  • Page 44
    ... Nuclear Cost Recovery In response to legislation passed by the Florida Legislature in 2006, the FPSC has promulgated rules that will allow PEF to recover prudently incurred siting, preconstruction costs and allowance for funds used during construction (AFUDC) on an annual basis through the capacity...

  • Page 45
    Progress Energy Annual Report 2006 that exceed this estimate will not be recoverable absent, among other things, extraordinary circumstances as found by the FPSC in subsequent proceedings. The current estimate of in-service cost exceeds the initial project estimate by approximately 12 percent to 15...

  • Page 46
    ...31: 2006 Common stock equity Preferred stock and minority interest Total debt 47.2% 0.6% 52.2% 2005 41.6% 0.7% 57.7% CREDIT RATING MATTERS The major credit rating agencies have currently rated our securities as follows: Moody's Investors Service Progress Energy, Inc. Outlook Corporate credit rating...

  • Page 47
    ..., citing PEC's manageable leverage, strong cash low coverage ratios for its current ratings category, and constructive regulatory environments in North Carolina and South Carolina. PEF's outlook remains stable. On July 25, 2006, S&P afirmed the corporate credit ratings of BBB at Progress Energy, Inc...

  • Page 48
    ... year. (g) We have certain future commitments related to four synthetic fuels facilities purchased that provide for contingent payments (royalties) through 2007 (See Note 22D). OTHER MATTERS Synthetic Fuels Tax Credits Historically, we have had substantial operations associated with the production...

  • Page 49
    Progress Energy Annual Report 2006 Total Section 29/45K credits generated through December 31, 2006 (including those generated by Florida Progress prior to our acquisition), were approximately $1.9 billion, of which $974 million has been used to offset regular federal income tax liability, $847 ...

  • Page 50
    ... to our synthetic fuels operations. Regulatory Environment The Utilities' operations in North Carolina, South Carolina and Florida are regulated by the NCUC, SCPSC and the FPSC, respectively. The Utilities are also subject to regulation by the FERC, the Nuclear Regulatory Commission (NRC) and other...

  • Page 51
    ... facilities suffered during recent hurricanes, during 2006 the FPSC adopted rules that require Florida's investor-owned electric utilities, including PEF, to strengthen cost effectively, or storm harden, the state's electric infrastructure. Storm-hardening plans are required to be iled and updated...

  • Page 52
    ... of this matter. In accordance with provisions of Florida's comprehensive energy bill discussed above, in December 2006, the FPSC ordered new rules that would allow investor-owned utilities such as PEF to request partial recovery of the planning and construction costs of a nuclear power plant prior...

  • Page 53
    ...air quality controls installed to comply with the NOx SIP Call and Clean Smokestacks Act will result in a reduction of the costs to meet the CAIR requirements for our North Carolina units at PEC. We review our estimates on an ongoing basis. The timing and extent of the costs for future projects will...

  • Page 54
    ...had earlier set aside a provision in the NSR rule, which had exempted the installation of pollution control projects from review. The Court denied a request by the EPA for a re-hearing regarding this matter on June 30, 2006. These projects are now subject to NSR requirements, adding time and cost to...

  • Page 55
    Progress Energy Annual Report 2006 prior to December 31, 2007, to determine cost-recovery amounts for 2008 and 2009. Two of PEC's largest coal-ired generation plants (the Roxboro No. 4 and Mayo Units) impacted by the Clean Smokestacks Act are jointly owned. In 2005, PEC entered into an agreement ...

  • Page 56
    ... environmental rules. At the time, PEF's recommended proposed compliance plan included approximately $740 million of estimated capital costs expected to be spent through 2016, to plan, design, build and install pollution control equipment at our Anclote and Crystal River plants. On October 27, 2006...

  • Page 57
    Progress Energy Annual Report 2006 nonattainment areas in PEC's or PEF's service territories. On December 18, 2006, environmental groups and 13 states iled a joint petition with the U.S. Circuit Court of Appeals for the District of Columbia Circuit arguing that the EPA's new particulate matter rule...

  • Page 58
    ...November 29, 2006. The outcome of this matter cannot be predicted. In 2005, we initiated a study to assess the impact of constraints on CO2 and other air emissions and on March 27, 2006, we issued our report to shareholders for an assessment of global climate change and air quality risks and actions...

  • Page 59
    ... return on marketable securities with respect to our nuclear decommissioning trust funds, changes in the market value of CVOs, and changes in energy-related commodity prices. These inancial instruments are held for purposes other than trading. The risks discussed below do not include the price risks...

  • Page 60
    ... I - Quarterly Income Preferred Securities. (b) Rate is 3-month LIBOR, which was 5.36% at December 31, 2006. (c) Anticipated 10-year debt issue hedges mature on October 1, 2017, and require mandatory cash settlement on October 1, 2007. On November 7, 2006, Progress Energy commenced a tender offer...

  • Page 61
    ... the price of natural gas, coal, fuel oil, electricity and other energy-related products marketed and purchased as a result of our ownership of energy-related assets. Our exposure to these luctuations is signiicantly limited by the cost-based regulation of the Utilities. Each state commission allows...

  • Page 62
    ... with strict policies that limit our exposure to market risk and require daily reporting to management of potential inancial exposures. Gains and losses from such contracts were not material to our or the Utilities' results of operations during the years ended December 31, 2006, 2005 and 2004...

  • Page 63
    ... to hedge exposure to market risk associated with luctuations in the price of natural gas and power for our forecasted purchases and sales. Realized gains and losses are recorded net in operating revenues or operating expenses, as appropriate. The ineffective portion of commodity cash low hedges was...

  • Page 64
    ...2006, Progress Energy maintained effective internal control over inancial reporting. Management's assessment of the effectiveness of Progress Energy's internal control over inancial reporting at December 31, 2006, has been audited by Deloitte & Touche LLP, an independent registered public accounting...

  • Page 65
    Progress Energy Annual Report 2006 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Progress Energy, Inc. We have audited management's assessment, included in the accompanying Management's Report of Internal Controls, that Progress Energy, Inc., ...

  • Page 66
    ... PUBLIC ACCOUNTING FIRM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Progress Energy, Inc. We have audited the accompanying consolidated balance sheets of Progress Energy, Inc., and its subsidiaries (the Company) at December 31, 2006 and 2005...

  • Page 67
    ...FINANCIAL STATEMENTS Progress Energy Annual Report 2006 CONSOLIDATED STATEMENTS OF INCOME (in millions except per share data) Years ended December 31 Operating revenues Electric Diversiied business Total operating revenues Operating expenses Utility Fuel used in electric generation Purchased power...

  • Page 68
    ... FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (in millions) December 31 ASSETS Utility plant Utility plant in service Accumulated depreciation Utility plant in service, net Held for future use Construction work in progress Nuclear fuel, net of amortization Total utility plant, net Current...

  • Page 69
    ... costs for utility plant and equipment and a corresponding liability for $47 million related to additions at an electric generation facility in 2006. Actual cash expenditures will not occur until 2007. • In 2005, Progress Energy Florida entered into a capital lease agreement for a building...

  • Page 70
    ... SFAS No. 158, net of tax Issuance of shares Stock options exercised Purchase of restricted stock Restricted stock expense recognition Allocation of ESOP shares Stock-based compensation expense Dividends ($2.43 per share) Balance, December 31, 2006 Common Stock Outstanding Shares Amount 246 $5,270...

  • Page 71
    ... requirements as a business segment. PEC and PEF are regulated public utilities. PEC is subject to the regulatory provisions of the North Carolina Utilities Commission (NCUC), the Public Service Commission of South Carolina (SCPSC), the United States Nuclear Regulatory Commission (NRC) and the FERC...

  • Page 72
    ...market price of fuel used by the entity's plants to produce the power purchased by PEC. We are able to recover these fuel costs under PEC's fuel clause. Total purchases from this counterparty were $45 million, $44 million and $42 million in 2006, 2005 and 2004, respectively. The generation capacity...

  • Page 73
    ... taxes levied by the state or local government upon the customers. The Utilities account for sales and use tax on a net basis and gross receipts tax, franchise taxes and other excise taxes on a gross basis. The amount of gross receipts tax, franchise taxes and other excise taxes included in electric...

  • Page 74
    ... - UTILITY PLANT For inancial reporting purposes, substantially all depreciation of utility plant other than nuclear fuel is computed on the straight-line method based on the estimated remaining useful life of the property, adjusted for estimated salvage (See Note 5A). Pursuant to their rate-setting...

  • Page 75
    Progress Energy Annual Report 2006 gas properties, depreciation is computed on a straightline basis using the estimated useful lives disclosed in Note 5B. Depletion of mineral rights is provided on the units-of-production method based upon the estimates of recoverable amounts of clean mineral. We ...

  • Page 76
    ... based on the present value of discounted (at 10%) future net revenues using current prices, plus the lower of cost or fair market value of unproved properties. The ceiling test takes into consideration the prices of qualifying cash low hedges as of the balance sheet date. If the ceiling (discounted...

  • Page 77
    Progress Energy Annual Report 2006 iscal year (with limited exceptions). SFAS No. 158 also requires an entity to recognize changes in the funded status of a pension or other postretirement beneit plan within accumulated other comprehensive income (AOCI), net of tax, to the extent such changes are ...

  • Page 78
    ... MW of power generation facilities in Georgia, as well as forward gas and power contracts, gas transportation, storage and structured power and other contracts, including the full requirements contracts with 16 Georgia Electric Membership Cooperatives (the Georgia Contracts). The operations of CCO...

  • Page 79
    ... cycle and combustion turbine electric generation facility in Rowan County, N.C. On May 8, 2006, we entered into deinitive agreements to sell DeSoto and Rowan, including certain existing power supply contracts, to Southern Power Company, a subsidiary of Southern Company, for gross purchase prices of...

  • Page 80
    ... 14, 2005, our board of directors approved a plan to divest of ive subsidiaries of Progress Fuels engaged in the coal mining business. On May 1, 2006, we sold certain net assets of three of our coal mining businesses to Alpha Natural Resources, LLC for gross proceeds of $23 million plus a $4 million...

  • Page 81
    Progress Energy Annual Report 2006 G. Progress Rail On March 24, 2005, we completed the sale of Progress Rail Services Corporation (Progress Rail) to One Equity Partners LLC, a private equity irm unit of J.P. Morgan Chase & Co. Cash proceeds from the sale were approximately $429 million, consisting...

  • Page 82
    ... rates charged to customers by the Utilities over the service life of the property. Our depreciation provisions on utility plant, as a percent of average depreciable property other than nuclear fuel, were 2.7%, 2.5% and 2.2% in 2006, 2005 and 2004, respectively. The depreciation provisions related...

  • Page 83
    ... 2006 and 2005, the asset retirement costs, included in utility plant, related to nuclear decommissioning of irradiated plant, net of accumulated depreciation, totaled $156 million and $168 million, respectively. The fair value of funds set aside in the Utilities' nuclear decommissioning trust funds...

  • Page 84
    .... The FPSC requires that PEF update its cost estimate for nuclear decommissioning every ive years. PEF iled a new site-speciic estimate of decommissioning costs for the Crystal River Unit No. 3 (CR3) with the FPSC on April 29, 2005, as part of PEF's base rate iling. PEF's estimate is based on prompt...

  • Page 85
    Progress Energy Annual Report 2006 The FPSC requires that PEF update its cost estimate for fossil plant dismantlement every four years. PEF iled an updated fossil dismantlement study with the FPSC on April 29, 2005, as part of its base rate iling. PEF's reserve for fossil plant dismantlement was ...

  • Page 86
    ... Both of the Utilities are insured against public liability for a nuclear incident up to $10.760 billion per occurrence. Under the current provisions of the Price Anderson Act, which limits liability for accidents at nuclear power plants, each company, as an owner of nuclear units, can be assessed...

  • Page 87
    ... and the settlement agreement's factor. Effective October 1, 2006, residential electric bills increased by $4.87 per 1,000 kWh for fuel cost recovery. At December 31, 2006, PEC's North Carolina deferred fuel balance was $281 million, of which $109 million is expected to be collected after 2007 in...

  • Page 88
    ...equity for the impact of Standard & Poor's Rating Services' (S&P's) imputed off-balance sheet debt for future capacity payments to qualifying facilities (QFs) and other entities under longterm purchase power agreements. This adjusted capital structure will be used for surveillance reporting with the...

  • Page 89
    Progress Energy Annual Report 2006 debt. If PEF's regulatory ROE falls below 10 percent, and for certain other events, PEF is authorized to petition the FPSC for a base rate increase. PASS-THROUGH CLAUSE COST RECOVERY On September 1 and September 15, 2006, PEF iled requests with the FPSC seeking ...

  • Page 90
    ...these storm costs. On April 25, 2006, PEF entered into a settlement agreement with certain intervenors in its storm cost-recovery docket that would allow PEF to extend its current two-year storm surcharge, which equals approximately $3.61 on the average residential monthly customer bill of 1,000 kWh...

  • Page 91
    ... Georgia Region operations, we performed an interim goodwill impairment test during the irst quarter of 2006. We estimated the fair value of that reporting unit using the expected present value of future cash lows. As a result of that test, we recognized a pre-tax goodwill impairment charge of $64...

  • Page 92
    ... the requirements of the Progress Energy 401(k) Savings and Stock Ownership Plan (401(k)) and the Investor Plus Stock Purchase Plan. At December 31, 2006 and 2005, we had approximately 54 million shares and 58 million shares, respectively, of common stock authorized by the board of directors that...

  • Page 93
    Progress Energy Annual Report 2006 with original issue shares. We continue to meet the requirements of the restricted stock plan with issued and outstanding shares. There are various provisions limiting the use of retained earnings for the payment of dividends under certain circumstances. At ...

  • Page 94
    ... changes with, the value of a share of Progress Energy common stock, and dividend equivalents are accrued on, and reinvested Dividend yield and the volatility factor were calculated using three years of historical trend information. The expected term was based on the contractual life of the options...

  • Page 95
    ... grant date based on the fair value of common stock on that date, with certain subsequent adjustments related to our results as compared to the peer group of utilities. PSSP cash-settled liabilities totaling $4 million, $5 million and $7 million were paid in the years ended December 31, 2006, 2005...

  • Page 96
    ... million and 3.0 million stock options outstanding at December 31, 2006, 2005 and 2004, respectively, which were not included in the weighted-average number of shares for computing the fully diluted earnings per share because they were antidilutive. 11. PREFERRED STOCK OF SUBSIDIARIES - NOT SUBJECT...

  • Page 97
    ... of this obligation was not expected to require the use of working capital in 2006 as we had the intent and ability to reinance this debt on a long-term basis. On January 13, 2006, Progress Energy issued $300 million of 5.625% Senior Notes due 2016 and $100 million of Series A Floating Rate Senior...

  • Page 98
    ... and interest rates under the new RCA will continue to be determined based upon the credit rating of Progress Energy's long-term unsecured senior noncredit-enhanced debt, currently rated as Baa2 by Moody's Investors Service, Inc. (Moody's) and BBB- by S&P. On May 3, 2006, PEC's ive-year $450 million...

  • Page 99
    ... any restrictions on the payment of dividends, so long as no shares of preferred stock are outstanding. At December 31, 2006, Progress Energy, Inc. had no shares of preferred stock outstanding. Certain documents restrict the payment of dividends by Progress Energy, Inc.'s subsidiaries as outlined...

  • Page 100
    ... risk management activities and derivative transactions. 13. INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS A. Investments At December 31, 2006 and 2005, we had investments in various debt and equity securities, cost investments, company-owned life insurance and investments held in trust funds...

  • Page 101
    ... market values, and for which we do not have control, are accounted for as availablefor-sale securities at fair value in accordance with SFAS No. 115. These investments include investments held in trust funds, pursuant to NRC requirements, to fund certain costs of decommissioning nuclear plants...

  • Page 102
    ... of these matters to have a material impact on our inancial position or results of operations. The tax contingency reserves relate primarily to capitalization and basis issues. Reconciliations of our effective income tax rate to the statutory federal income tax rate for the years ended December...

  • Page 103
    Progress Energy Annual Report 2006 2006 Effective income tax rate State income taxes, net of federal beneit Minority interest Federal tax credits Investment tax credit amortization Employee stock ownership plan dividends Domestic manufacturing deduction Other differences, net Statutory federal ...

  • Page 104
    ... value for Florida Progress pension assets. The components of the net periodic beneit cost for the years ended December 31 were: Other Postretirement Beneits 2004 $54 110 (155) 6 (1) $14 2006 $9 33 (6) 4 5 $45 2005 $9 33 (5) 6 5 $48 2004 $12 31 (5) 4 3 $45 Pension Beneits (in millions) Service cost...

  • Page 105
    ...of the changes in our beneit obligations and our funded status as of December 31, 2006 and 2005 are presented below, followed by related supplementary information. Pension Beneits (in millions) Projected beneit obligation at January 1 Service cost Interest cost Beneit payments Plan amendment Special...

  • Page 106
    ... cost trend rate Effect on total of service and interest cost Effect on postretirement beneit obligation (1) (22) $2 29 The asset allocation for the beneit plans at the end of 2006 and 2005 and the target allocation for the plans, by asset category, are presented in the following tables: Pension...

  • Page 107
    ...Under our risk policy, we may use a variety of instruments, including swaps, options and forward contracts, to manage exposure to luctuations in commodity prices and interest rates. Such instruments contain credit risk if the counterparty fails to perform under the contract. We minimize such risk by...

  • Page 108
    ... with strict policies that limit our exposure to market risk and require daily reporting to management of potential inancial exposures. Gains and losses from such contracts were not material to our or the Utilities' results of operations during the years ended December 31, 2006, 2005 and 2004...

  • Page 109
    ... 8, 2006, and subsequent regulation by the FERC did not change our current intercompany services. Services include purchasing, human resources, accounting, legal, transmission and delivery support, engineering materials, contract support, loaned employees payroll costs, construction management and...

  • Page 110
    ... engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina, South Carolina and Florida. These electric operations also distribute and sell electricity to other utilities, primarily in the eastern United States. Our Coal and Synthetic Fuels segment is...

  • Page 111
    Progress Energy Annual Report 2006 In the following tables, capital and investment expenditures include property additions, acquisitions of nuclear fuel and other capital investments. Operational results and assets of discontinued operations are not included in the table presented below. Coal and ...

  • Page 112
    ... energy and delivery services include power protection services and mass market programs such as surge protection, appliance services and area light sales, and delivery, transmission and substation work for other utilities. AFUDC equity represents the estimated equity costs of capital funds...

  • Page 113
    ... Carolina Transformer site located in Fayetteville, N.C. The EPA offered PEC and a number of other PRPs the opportunity to share in the reimbursement to the EPA of past expenditures in addressing conditions at the site, which are currently approximately $32 million. In May 2006, a meeting was called...

  • Page 114
    ... of PEC's largest coal-ired generation plants (the Roxboro No. 4 and Mayo Units) impacted by the Clean Smokestacks Act are jointly owned. Pursuant to joint ownership agreements, the joint owners are required to pay a portion of the costs of owning and operating these plants. PEC has determined that...

  • Page 115
    ... through 2009 with estimated minimum annual payments of approximately $42 million, representing capital-related capacity costs. Total purchases (including energy and transmission use charges) under the Rockport agreement amounted to $80 million, $71 million and $62 million for 2006, 2005 and 2004...

  • Page 116
    ... a capacity cost-recovery clause, which is similar to, and works in conjunction with, energy payments recovered through the fuel costrecovery clause. On December 2, 2004, PEF entered into precedent and related agreements with Southern Natural Gas Company (SNG), Florida Gas Transmission Company (FGT...

  • Page 117
    Progress Energy Annual Report 2006 The total cost to PEF associated with this agreement is approximately $128 million. The transaction is subject to several conditions precedent, including the completion and commencement of operation of necessary related interstate natural gas pipeline system ...

  • Page 118
    ... in connection with sales of businesses, and for timely payment of obligations in support of our nonwholly owned synthetic fuels operations. Related to the sales of businesses, the latest notice period extends until 2012 for the majority of legal, tax and environmental matters provided for in the...

  • Page 119
    Progress Energy Annual Report 2006 entered into an agreement with the joint owner of certain facilities at the Mayo and Roxboro plants to limit their aggregate costs associated with capital expenditures to comply with the Clean Smokestacks Act and recognized a liability related to this ...

  • Page 120
    ...Statements of Income, Balance Sheets and Cash Flows as required by Rule 3-10 of Regulation S-X. In September 2005, we issued our guarantee of certain payments of two wholly owned indirect subsidiaries, FPC Capital I (the Trust) and Florida Progress Funding Corporation (Funding Corp.). Our guarantees...

  • Page 121
    ... and Preferred Securities Guarantee are listed on the New York Stock Exchange. The Subordinated Notes may be redeemed at the option of Funding Corp. at par value plus accrued interest through the redemption date. The proceeds of any redemption of the Subordinated Notes will be used by the Trust to...

  • Page 122
    ... STATEMENT OF INCOME Year ended December 31, 2006 (in millions) Operating revenues Electric Diversiied business Total operating revenues Operating expenses Utility Fuel used in electric generation Purchased power Operation and maintenance Depreciation and amortization Taxes other than on...

  • Page 123
    Progress Energy Annual Report 2006 CONDENSED CONSOLIDATING STATEMENT OF INCOME Year ended December 31, 2005 (in millions) Operating revenues Electric Diversiied business Total operating revenues Operating expenses Utility Fuel used in electric generation Purchased power Operation and maintenance ...

  • Page 124
    ... STATEMENT OF INCOME Year ended December 31, 2004 (in millions) Operating revenues Electric Diversiied business Total operating revenues Operating expenses Utility Fuel used in electric generation Purchased power Operation and maintenance Depreciation and amortization Taxes other than on...

  • Page 125
    Progress Energy Annual Report 2006 CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2006 (in millions) Utility plant, net Current assets Cash and cash equivalents Short-term investments Notes receivable from afiliated companies Deferred fuel cost Assets of discontinued operations Other current ...

  • Page 126
    ... FINANCIAL STATEMENTS CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2005 (in millions) Utility plant, net Current assets Cash and cash equivalents Short-term investments Notes receivable from afiliated companies Deferred fuel cost Assets of discontinued operations Other current assets...

  • Page 127
    Progress Energy Annual Report 2006 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year ended December 31, 2006 (in millions) Net cash provided (used) by operating activities Investing activities Gross utility property additions Diversiied business property additions Nuclear fuel additions Proceeds...

  • Page 128
    ... Year ended December 31, 2005 (in millions) Net cash provided by operating activities Investing activities Gross utility property additions Diversiied business property additions Nuclear fuel additions Proceeds from sales of discontinued operations and other assets, net of cash divested Purchases...

  • Page 129
    Progress Energy Annual Report 2006 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year ended December 31, 2004 (in millions) Net cash provided by operating activities Investing activities Gross utility property additions Diversiied business property additions Nuclear fuel additions Proceeds from ...

  • Page 130
    ... operations Net income (loss) Dividends declared per common share Market price per share High Low 2005 Operating revenues Operating income Income from continuing operations before cumulative effect of change in accounting principle Net income (loss) Common stock data Basic earnings per common share...

  • Page 131
    ... common stock equity (percent) Ratio of earnings to ixed charges Number of common shareholders of record Book value per common share Dividends declared per common share Energy supply (millions of kilowatt-hours) Generated Steam Nuclear Combusion turbines/combined cycle Hydro Purchased Total energy...

  • Page 132
    ... earnings per share Contingent value obligations mark-to-market Discontinued operations Impairments and one-time charges Loss on debt redemption Postretirement and severance charges Litigation settlement Reported GAAP earnings per share 2006 $2.58 (0.10) 0.23 (0.29) (0.14) - - $2.28 2005 $3.31 0.03...

  • Page 133
    ... Annual Report 2006 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN* AMONG PROGRESS ENERGY, INC., S&P 500 STOCK INDEX AND S&P ELECTRIC INDEX $225 $200 $175 $150 $125 $100 $75 $50 $25 $0 2001 2002 2003 2004 2005 2006 $142 $135 $193 Progress Energy S&P Electric S&P 500 Measurement Period (Fiscal...

  • Page 134
    ...of our public disclosure. Shareholder Programs Progress Energy offers the Progress Energy Investor Plus Plan, a direct stock-purchase and dividend-reinvestment plan, and direct deposit of cash dividends to bank accounts for the convenience of shareholders. For information on these programs, contact...

  • Page 135
    ...PROGRESS ENERGY AT A GLANCE 1 â-² 2 â-² 3 â-² 4 â-² 5 â-² 6 â-² 7 Headquarters: Employees: Customers: Service Territory: Raleigh, N.C. 10,500 3.1 million â-² 8 54,000 square miles â-² â˜... Progress Energy Corporate Headquarters Operating Plant Locations 9 â- Progress Energy Regulated Service...

  • Page 136
    P r o g r e s s E n e r g y, I n c . P. O . B o x 1 5 5 1 Raleigh, N.C. 27602-1551 p r o g r e s s - e n e r g y. c o m 002CS - 13168