Progress Energy 2006 Annual Report Download - page 22

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S
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Our ability to meet these financial objectives is largely
dependent on the earnings and cash flows of the Utilities.
The Utilities contributed $780 million of our segment profit
and generated substantially all of our consolidated cash
flow from operations in 2006. Partially offsetting the net
income contribution provided by the Utilities was a loss
of $76 million recorded at our Coal and Synthetic Fuels
operations, primarily related to the impairment of our
synthetic fuels assets, and a loss of $190 million recorded
at Corporate and Other, primarily related to interest
expense on holding company debt.
While our synthetic fuels operations have historically
provided significant net earnings driven by the Section
29/45K tax credit program, which is scheduled to expire
at the end of 2007, the associated cash flow benefits
from synthetic fuels are expected to come in the future
when deferred tax credits are ultimately utilized. The total
Section 29/45K credits that have been generated through
December 31, 2006, but not yet utilized, are currently
carried forward as deferred tax credits and will provide
cash flow benefits when utilized. At December 31, 2006,
the amount of these deferred tax credits was $847 million.
See “Other Matters – Synthetic Fuels Tax Credits” below
and Note 22D for additional information on our synthetic
fuels operations.
Our total debt to total capitalization ratio calculated from
the Consolidated Balance Sheet is 52.2 percent at the end
of 2006, a decrease from 57.7 percent at the end of 2005,
primarily due to a reduction in total debt with proceeds
from asset sales, recovery of storm costs incurred in
Florida during 2004, fuel cost recovery, operating cash
flow and growth in equity from retained earnings and
limited ongoing equity issuances. We expect total capital
expenditures for 2007, 2008 and 2009 to be approximately
$2.4 billion, $2.5 billion and $2.4 billion, respectively,
primarily related to the ongoing Utilities’ operations. We
believe that operating cash flows plus availability under
our credit facilities and shelf registration statements
will be sufficient to fund our current business plans in
the near term. In the long term, we expect to fund our
business plans and any new baseload 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.
In 2006, the Parent’s, PEC’s, and PEF’s corporate credit
ratings of BBB were affirmed and their ratings outlooks
were changed to “positive” from “stable” by Standard &
Poor’s (S&P). Moody’s Investors Service, Inc. (Moody’s)
upgraded the Parent’s outlook to “stable” from “negative”
and upgraded PEC’s outlook to “positive” from “stable.”
Fitch Ratings (Fitch) upgraded the senior unsecured
credit ratings of the Parent (BBB), PEC (A-) and PEF (A-),
changed their ratings outlooks to “stable” and removed
the Ratings Watch Positive. See “Credit Rating Matters”
and “Guarantees” under “Future Liquidity and Capital
Resources” below for more information regarding the
potential impact on our financial condition and results of
operations resulting from a ratings change.
REGULATED UTILITIES
The Utilities’ earnings and operating cash flows are
heavily influenced 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 operate in the southeastern United States,
one of the fastest-growing regions of the country, and
had a net increase of approximately 64,000 customers
over the past year. However, lower industrial sales
related mainly to weakness in the textile sector at PEC
have reduced the rate of revenue growth in recent years.
We do not expect any significant improvement or further
degradation in industrial sales in the near term. These
combined factors under normal weather conditions are
expected to contribute approximately 1.5 percent to
2.0 percent annual retail kilowatt-hour (kWh) sales growth
at PEC and approximately 2.5 percent to 3.0 percent
annual retail kWh sales growth at PEF through at least
2008. The Utilities also seek to maintain their regulated
wholesale business through targeted contract renewals
and origination opportunities. The Utilities must
continue to invest significant capital in additional energy
conservation and efficiency programs, development
and deployment of new energy technologies, and new
generation, transmission and distribution facilities to
support this load growth. Subject to regulatory approval,
these investments are expected to increase the Utilities’
“rate base” or investment in utility plant, upon which
additional return can be realized that creates the basis
for long-term earnings growth in the Utilities. Through
2008, we will meet this load growth at PEC through
existing resources and at PEF through the previously
planned combined cycle unit of approximately
500 megawatts (MW) at PEF’s Hines Energy Complex
in 2007. The Utilities expect total capital expenditures