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2007 ANNUAL REPORT

Table of contents

  • Page 1
    2007 ANNUAL REPORT

  • Page 2
    .... They want real ways to save energy and money. Above all, they want to know we are working hard to ensure clean, reliable, affordable power. And every day, I have the satisfaction of assuring them that's exactly what we're doing. - Kisha Camacho Customer and Market Services Progress Energy Florida

  • Page 3
    ...growing area's energy needs, combining energy efficiency, alternative energy and state-of-the-art power generation. And we are working in partnership with our communities, building public and regulatory support. In short, we are developing a bright future for our company, customers and shareholders...

  • Page 4
    ... at power in a new light." I am pleased to report that in 2007 we increased our dividend for the 20th year in a row while delivering excellent service to our 3.1 million customers. We also once again met our core ongoing earnings-per-share target and further strengthened our balance sheet and credit...

  • Page 5
    ...-of-the-art nuclear power plants are the best in many years. It has become increasingly difficult to add new coal-fired generation without being able to capture and store the carbon emissions, and the nation must avoid over-reliance on natural gas as a fuel source because of its volatile price and...

  • Page 6
    ...application for a potential new nuclear plant in Wake County, N.C. This keeps our option open on this project, but it is not yet a decision to build a new nuclear plant. Meanwhile, Progress Energy Florida expanded its aggressive efficiency program, signed contracts for more renewable energy projects...

  • Page 7
    ... about this business and about life. He was an important mentor to me. As always, he had planned well and had this company ready for a smooth leadership transition. Now, more than five months later, I think Bob would be proud of what we're doing to build on Progress Energy's positive momentum...

  • Page 8
    ... EFFICIENCY IN A NEW LIGHT. Energy efficiency succeeds on many levels. We partner with our customers to develop the energy-efficiency programs that work for their lifestyles - and save them money every day. - Chris Edge Manager, DSM and Alternative Energy Strategies Progress Energy Carolinas

  • Page 9
    ... 39 new programs in 2007. In North Carolina, we are aggressively expanding our portfolio of energy-efficiency programs. Our goal is to double the 1,000 megawatts currently being saved, an amount equivalent to the capacity of more than six combustion-turbine power plants. PARTNERING WITH CUSTOMERS...

  • Page 10
    LOOKING AT ALTERNATIVE ENERGY IN A NEW LIGHT. Tomorrow's energy breakthroughs are being developed today. It's exciting to be a part of advancing the policies that will make them more successful. - Caroline Choi Director, Energy Policy and Strategy Progress Energy

  • Page 11
    ... generation portfolio to help offset the need for new power plants, reduce greenhouse gas emissions and further the development of reliable and affordable alternative energy options for the future. In 2007, we issued a request for proposals, seeking viable, cost-effective renewable energy projects...

  • Page 12
    LOOKING AT POWER GENERATION IN A NEW LIGHT. Like the parts of an intricate, efficient machine, the people at our generating plants work together to ensure safe and reliable operations. - Rufus Jackson Plant Manager, Anclote Progress Energy Florida

  • Page 13
    ... fossil fuel. At Progress Energy, we believe strongly that new nuclear is a good option for addressing these issues. We have chosen two sites (Levy County, Fla., and the Harris Plant in North Carolina) as our preferred locations if the decision to build new nuclear plants is made. And we are working...

  • Page 14
    ... looking at power in a new light - seeking out the smartest, most innovative ways to continue our track record of operational excellence in the face of today's changing energy needs. The result is increasing value for our shareholders, better service for our customers and communities - and a strong...

  • Page 15
    ... country's largest "pure play" regulated electric utility. Balanced Solution for the changing energy landscape. Growing customer base and investment opportunities. Motivated employees dedicated to operational excellence. Constructive community relations and regulatory environments. Committed to our...

  • Page 16
    ... Executive Officer, Progress Energy, Inc. Raleigh, N.C. Elected to the board in 2007. Serves as Chairman, Progress Energy Carolinas and Chairman, Progress Energy Florida. James E. Bostic, Jr. Managing Director, HEP & Associates (business consulting) and retired Executive Vice President, Georgia...

  • 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
    ... 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, energy trading...

  • Page 19
    ... Senior Vice President - Power Operations Progress Energy Carolinas, Inc. Progress Energy Florida, Inc. FINANCIAL REPORT Safe Harbor for Forward-Looking Statements ...18 Management's Discussion and Analysis ...19 Market Risk Disclosures ...60 Reports of Management and Independent Registered Public...

  • Page 20
    ... ability to fully utilize tax credits generated from the previous production and sale of qualifying synthetic fuels under Internal Revenue Code Section 29/45K (Section 29/45K); the investment performance of our nuclear decommissioning trust funds and assets of pension and benefit plans; the outcome...

  • Page 21
    ...in Florida. The Utilities have requested proposals for alternative energy sources, and options being considered include conversion of waste (such as wood, scrap tires and landfill gas) to energy, biomass as well as investments in solar and fuel cell programs. Third, we are evaluating new generation...

  • Page 22
    ... generation construction. Key elements of South Carolina's energy law included expansion of the annual fuel clause and recovery mechanisms and streamlined regulatory processes supportive of nuclear expansion. As part of the Clean Smokestacks Act, PEC operated under a base rate freeze in North...

  • Page 23
    Progress Energy Annual Report 2007 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 ...

  • Page 24
    ... The increase in profits for 2007 as compared to 2006 is primarily due to lower Clean Smokestacks Act amortization, the favorable impact of weather and favorable retail customer growth and usage, partially offset by higher O&M expenses related to plant outage and maintenance costs and employee bene...

  • Page 25
    Progress Energy Annual Report 2007 fuel are not defined under GAAP, and the presentation may not be comparable to other companies' presentation or more useful than the GAAP information provided elsewhere in this report. REVENUES PEC's electric revenues and the percentage change by year and by ...

  • Page 26
    ... of generation supplied by natural gas increased in response to plant outages and higher system requirements driven by favorable weather. Deferred fuel expense increased primarily due to the collection of fuel costs from customers that had been previously under-recovered. Purchased power expenses...

  • Page 27
    ... investment interest and interest on under-recovered fuel costs. In addition, the change in other income (expense) includes a $4 million favorable impact related to recording an audit settlement with the FERC in 2005. Total Interest Charges, Net Total interest charges, net were $210 million for 2007...

  • Page 28
    ... service revenues. Wholesale revenues increased $29 million primarily due to the $21 million impact of increased capacity under contract with a major customer. The favorable retail customer growth and usage impact of $7 million was driven by an approximate average net increase in the number...

  • Page 29
    Progress Energy Annual Report 2007 current year purchased power costs are a result of higher interchange purchases of $87 million and higher capacity costs of $43 million primarily due to new contracts. Fuel used in electric generation decreased $71 million to $1.764 billion due to a $323 million ...

  • Page 30
    ... increase in interest charges is primarily due to the $10 million impact of an increase in average long-term debt, the $7 million impact of interest on over-recovered fuel costs, $6 million increase in interest on income tax related items and $2 million increase related to the disallowed fuel costs...

  • Page 31
    ... the right of the holder to receive contingent payments based on the performance of four synthetic fuels facilities purchased by subsidiaries of Florida Progress in October 1999. The payments are based on the net after-tax cash ï¬,ows the facilities generate. At December 31, 2007, 2006 and 2005, the...

  • Page 32
    ... production of synthetic fuels at our majorityowned facilities. As a result of the expiration of the tax credit program, all of our synthetic fuels businesses were "abandoned" and all operations ceased as of December 31, 2007. In accordance with the provisions of Statement of Financial Accounting...

  • Page 33
    Progress Energy Annual Report 2007 earnings from discontinued operations of $83 million for the year ended December 31, 2007, is primarily due to increased tax credits generated due to higher production of coal-based solid synthetic fuels, unrealized markto-market gain on derivative contracts in ...

  • Page 34
    ... in utility plant plus an allowed return on the investment, as long as the costs are prudently incurred. Under the full-cost method of accounting for oil and gas properties, total capitalized costs are limited to a ceiling based on the present value of discounted (at 10%) future APPLICATION OF...

  • Page 35
    Progress Energy Annual Report 2007 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 ï¬,ow hedges as of the balance sheet date. If the ceiling (discounted revenues) does not ...

  • Page 36
    ... historically used a five-year averaging method. When we acquired Florida Progress in 2000, we retained the Florida Progress historical use of fair value to determine market-related value for Florida Progress pension assets. Changes in plan asset performance are reï¬,ected in pension costs sooner...

  • Page 37
    Progress Energy Annual Report 2007 surcharges. As a result, fuel price volatility can be both a source of and a use of liquidity resources, depending on what phase of the cycle of price volatility we are experiencing. Changes in the Utilities' fuel and purchased power costs may affect the timing of...

  • Page 38
    ... efficient natural gas-burning technology, which will not be completed until 2009; various distribution, transmission and steam production projects; and higher spending at the Hines Unit 4 facility, partially offset by lower spending at the Hines Unit 3 facility. The increase in utility property...

  • Page 39
    ..., debt securities and preferred stock in addition to $250 million of previously registered but unsold securities. •฀ Progress฀ Energy฀ issued฀ approximately฀ 3.4฀ million฀ shares of common stock resulting in approximately $151 million in proceeds from its Investor Plus Stock Purchase...

  • Page 40
    ... 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 & Stock Ownership Plan (401(k)) and the Investor Plus Stock Purchase Plan. For 2006, the dividends paid...

  • Page 41
    ...under our credit facilities and shelf registration statements is expected to be sufficient to meet our requirements in the near term. To the extent necessary, we may also use limited ongoing equity sales from our Investor Plus Stock Purchase Plan and employee benefit and stock option plans to meet...

  • Page 42
    ... 1, 2007, residential electric bills increased by $1.83 per 1,000 kWh, or 1.9 percent, for fuel cost recovery. At December 31, 2007, PEC's South Carolina deferred fuel balance was $21 million. On June 8, 2007, PEC filed with the NCUC for an increase in the fuel rate charged to its North Carolina...

  • Page 43
    ...South Carolina expanded the annual fuel clause mechanism to include recovery of the costs of reagents used in the operation of emissions control technologies. We anticipate PEC's reagent and purchased power costs eligible for jurisdictional recovery under the North Carolina and South Carolina energy...

  • Page 44
    ... million, plus interest, of alleged excessive past fuel recovery charges and sulfur dioxide (SO2) allowance costs associated with PEF's purported failure to utilize the most economical sources of coal at Crystal River Unit 4 and Crystal River Unit 5 (CR4 and CR5) during the period 1996 to 2005. The...

  • Page 45
    ... these executive orders. Our balanced solution, as described in "Increasing Energy Demand," includes greater investment in energy efficiency, renewable energy and state-of-the-art generation and demonstrates our commitment to environmental responsibility. In addition, the Florida Energy Commission...

  • Page 46
    ... of credit outstanding, they are not available for additional borrowings. At December 31, 2007, Progress Energy, Inc. had a total amount of $19 million of letters of credit issued, which were supported by the RCA. (a) Expenditures for potential nuclear construction are net of AFUDC - borrowed funds...

  • Page 47
    ...31: 2007 Common stock equity Preferred stock and minority interest Total debt 45.7% 1.0% 53.3% 2006 47.2% 0.6% 52.2% 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 48
    ... in constructive regulatory environments with growing service territories and lower debt and business risk at the Parent as the primary factors in the upgrade. On March 15, 2007, S&P upgraded corporate credit ratings to BBB+ from BBB at Progress Energy, Inc., PEC and PEF and revised each company...

  • Page 49
    Progress Energy Annual Report 2007 (in millions) Long-term debt(a) (See Note 12) Interest payments on long-term debt(b) Capital lease obligations (See Note 22B) Operating leases (See Note 22B) Fuel and purchased power(c) (See Note 22A) Other purchase obligations(d) (See Note 22A) Minimum pension ...

  • Page 50
    ...level of oil prices, unfavorable oil price projections through the end of 2007, and the expiration of the synthetic fuels tax credit program at the end of 2007, we permanently ceased production of synthetic fuels at our majority-owned facilities. The operation of synthetic fuels facilities on behalf...

  • Page 51
    ... In 2007, due to the increase in the price of oil that limits synthetic fuels tax credits, we did not record any additional gain. See Note 22D for additional discussion related to our synthetic fuels operations. Regulatory Environment The Utilities' operations in North Carolina, South Carolina and...

  • Page 52
    ...to allow annual prudence reviews of the construction costs of a baseload generating plant if requested by the public utility that is constructing the plant and removes the requirement that a public utility prove financial distress before it may include construction work in progress in rate base and...

  • Page 53
    Progress Energy Annual Report 2007 immaterial amount of implementation and program costs for future recovery in the South Carolina jurisdiction. On July 13, 2007, the governor of Florida issued executive orders to address reduction of greenhouse gas emissions. The executive orders call for the fi...

  • Page 54
    ... energy-efficiency programs; (2) investing in the development of alternative energy resources for the future; and (3) operating state-ofthe-art plants that produce energy cleanly and efficiently by modernizing existing plants and pursuing options for building new plants and associated transmission...

  • Page 55
    ... energy bill enacted in 2006, the FPSC ordered new rules in December 2006 that would allow investor-owned utilities such as PEF to request recovery of certain planning and construction costs of a nuclear power plant prior to commercial operation. The FPSC issued a final rule on February 13, 2007...

  • Page 56
    .... The NOx SIP Call is not applicable to Florida. Expenditures for the NOx SIP Call include the cost to install NOx controls under North Carolina's and South Carolina's programs to comply with the federal eight-hour ozone standard. The air quality controls installed to comply with the NOx SIP...

  • Page 57
    ... of NOx and SO2 from their North Carolina coal-fired power plants in phases by 2013. PEC currently has approximately 5,000 MW of coal-fired generation capacity in North Carolina that is affected by the Clean Smokestacks Act. In March 2007, PEC filed its annual estimate with the NCUC of the total...

  • Page 58
    ... of construction materials, such as concrete and steel, refinement of cost and scope estimates for the current projects, and increases in the estimated inï¬,ation factor applied to future project costs. We are continuing to evaluate various design, technology and new generation options that...

  • Page 59
    ...additional costs that may be incurred if pollution controls are required on Crystal River Units No. 1 and No. 2 in order to comply with the requirements of CAVR beyond BART, should reasonable progress in improving visibility not be achieved, as discussed above. The increase from the estimates filed...

  • Page 60
    ... areas may be designated in PEC's and PEF's service territories. The final rule is expected in March 2008. The outcome of this matter cannot be predicted. Water Quality 1. General As a result of the operation of certain control equipment needed to address the air quality issues outlined above, new...

  • Page 61
    Progress Energy Annual Report 2007 will need to be reassessed and determined in accordance with any revised or new implementing rule once it is established by the EPA. Costs of compliance with a new implementing rule are expected to be higher, and could be significantly higher, than estimated ...

  • Page 62
    ... exposures are changes in interest rates with respect to our long-term debt and commercial paper, ï¬,uctuations in the 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...

  • Page 63
    Progress Energy Annual Report 2007 (dollars in millions) December 31, 2007 Fixed-rate long-term debt Average interest rate Variable-rate long-term debt Average interest rate Debt to affiliated trust(a) Interest rate Interest rate derivatives Interest rate forward contracts(b) Average pay rate ...

  • Page 64
    ... Risk The Utilities maintain trust funds, pursuant to NRC requirements, to fund certain costs of decommissioning their nuclear plants. These funds are primarily invested in stocks, bonds and cash equivalents, which are exposed to price ï¬,uctuations in equity markets and to changes in interest rates...

  • Page 65
    ...these oil price hedge instruments was 25 million barrels and provided protection for the equivalent of approximately 8 million tons of 2007 synthetic fuels production. The cost of the hedges was approximately $65 million. The contracts were markedto-market with changes in fair value recorded through...

  • Page 66
    .... We manage open positions with strict policies that limit our exposure to market risk and require daily reporting to management of potential financial exposures. The Utilities have derivative instruments related to their exposure to price ï¬,uctuations on fuel oil and natural gas purchases. These...

  • Page 67
    ...AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Progress Energy Annual Report 2007 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING It is the responsibility of Progress Energy's management to establish and maintain adequate internal control over financial reporting, as such term...

  • Page 68
    REPORTS OF MANAGEMENT AND INDEPENDENT REGISTERED 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 internal control over financial reporting of Progress Energy, Inc., (the Company) ...

  • Page 69
    Progress Energy Annual Report 2007 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, ...

  • Page 70
    CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (in millions except per share data) Years ended December 31 Operating revenues Operating expenses Fuel used in electric generation Purchased power Operation and maintenance Depreciation and amortization Taxes other than on income ...

  • Page 71
    ... Energy Annual Report 2007 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 72
    ... to reconcile net income to net cash provided by operating activities Impairment of assets Charges for voluntary enhanced retirement program Depreciation and amortization Deferred income taxes and investment tax credits, net Deferred fuel cost (credit) Deferred income Other adjustments to net income...

  • Page 73
    Progress Energy Annual Report 2007 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (in millions) Balance, December 31, 2004 Net income Other comprehensive income Comprehensive income Issuance of shares Presentation reclassification - SFAS No. 123R adoption Stock options exercised ...

  • Page 74
    ... 2005). Our reportable segments are PEC and PEF, both of which are primarily engaged in the generation, transmission, distribution and sale of electricity. The Corporate and Other segment primarily includes amounts applicable to the activities of the Parent and Progress Energy Service Company, LLC...

  • Page 75
    ...or no impact on PEC's common stock equity, net earnings or cash ï¬,ows. PEC also has an interest in one power plant resulting from long-term power purchase contracts. Our only significant exposure to variability from these contracts results from ï¬,uctuations in the market price of fuel used by the...

  • Page 76
    ... These deferred fuel costs are recognized in revenues and fuel expenses as they are billable to customers. EXCISE TAXES The Utilities collect from customers certain excise taxes levied by the state or local government upon the customers. The Utilities account for sales and use tax on a net basis and...

  • Page 77
    Progress Energy Annual Report 2007 ASSET RETIREMENT OBLIGATIONS We account for AROs, which represent legal obligations associated with the retirement of certain tangible longlived assets, in accordance with SFAS No. 143. The present values of retirement costs for which we have a legal obligation ...

  • Page 78
    ... operations have been deferred and are being amortized over the estimated service life of the related properties. Credits for the production and sale of synthetic fuels are deferred credits to the extent they cannot be or have not been utilized in the annual consolidated federal income tax returns...

  • Page 79
    ... to fair value with a new cost basis established. SUBSIDIARY STOCK TRANSACTIONS Gains and losses realized as a result of common stock sales by our subsidiaries are recorded in the Consolidated Statements of Income, except for any transactions that must be credited directly to equity in accordance...

  • Page 80
    ...-tax of the impairment recorded in 2006. Additionally, on June 1, 2007, PVI closed the transaction involving the assignment of a contract portfolio consisting of full-requirements contracts with 16 Georgia electric membership cooperatives (the Georgia Contracts), forward gas and power contracts, gas...

  • Page 81
    Progress Energy Annual Report 2007 of the assignments, PVI made a net cash payment of $347 million, which represents the net cost to assign the Georgia Contracts and other related contracts. In the year ended December 31, 2007, we recorded a charge associated with the costs to exit the Georgia ...

  • Page 82
    ... 3 stock in 2006. D. CCO - DeSoto and Rowan Generation Facilities On May 2, 2006, our board of directors approved a plan to divest of two subsidiaries of PVI, DeSoto County Generating Co., LLC (DeSoto) and Rowan County Power, LLC (Rowan). DeSoto owned a 320 MW dual-fuel combustion turbine electric...

  • Page 83
    ...our coal mining businesses to Alpha Natural Resources, LLC for gross proceeds of $23 million plus a $4 million working capital adjustment. As a result, during the year ended December 31, 2006, we recorded an aftertax loss of $10 million on the sale of these assets. On December 24, 2007, we signed an...

  • Page 84
    ... Corporation (Progress Rail) to One Equity Partners LLC, a private equity firm unit of J.P. Morgan Chase & Co. Cash proceeds from the sale were approximately $429 million, consisting of $405 million base proceeds plus a working capital adjustment. Proceeds from the sale were used to reduce debt...

  • Page 85
    Progress Energy Annual Report 2007 a non-recourse note receivable of $54 million. Payments on the note are due as we produce and sell qualifying synthetic fuels on behalf of the buyer. In accordance with the terms of the agreement, we received payments on the note related to 2007 production of $49 ...

  • Page 86
    ... included in fuel used for electric generation in the Consolidated Statements of Income. PEC's depreciation provisions on utility plant, as a percent of average depreciable property other than nuclear fuel, were 2.1% for 2007, 2006 and 2005. The depreciation provisions related to utility plant were...

  • Page 87
    ... of the Utilities' share of operating costs of the above jointly owned generating facilities is included within the corresponding line in the Consolidated Statements of Income. The co-owner of Intercession City Unit P11 has exclusive rights to the output of the unit during the months of June through...

  • Page 88
    ... requires that PEF update its cost estimate for nuclear decommissioning every five years. PEF filed a new site-specific 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 filing. PEF's estimate is based on prompt...

  • Page 89
    Progress Energy Annual Report 2007 indefinitely. In the event we decide to abandon or cease the use of a particular easement, an ARO would be recorded at that time. Our nonregulated AROs relate to our abandoned synthetic fuels operations. The related asset retirement costs, net of accumulated ...

  • Page 90
    ...) Fuel for production Inventory for sale Materials and supplies Emission allowances Total inventory 2007 $455 - 520 19 $994 2006 $470 2 442 22 $936 Investment in GridSouth (Note 7D) Other Total long-term regulatory assets Deferred fuel cost - current (Note 7C) Deferred energy conservation cost and...

  • Page 91
    ..., residential electric bills increased by $1.83 per 1,000 kilowatt-hours (kWh), or 1.9 percent, for fuel cost recovery. At December 31, 2007, PEC's South Carolina deferred fuel balance was $21 million. On June 8, 2007, PEC filed with the NCUC for an increase in the fuel rate charged to its North...

  • Page 92
    ... South Carolina jurisdiction. During 2007, the North Carolina legislature passed comprehensive energy legislation, which became law on August 20, 2007. Among other provisions, the law allows the utility to recover the costs of new demandside management (DSM) and energy-efficiency programs through...

  • Page 93
    ... above, residential base rates increased due to specified generation facilities placed in service in 2007 by $2.73 for the first 1,000 kWh effective January 1, 2008. After considering the net effect of the base rate increase and the proposed fuel cost adjustment, 2008 residential bills would...

  • Page 94
    ... related to PEF's restoration of power associated with the four hurricanes in 2004. The ruling allowed PEF to include a charge of approximately $3.27 on the average residential monthly customer bill of 1,000 kWh beginning August 1, 2005. The ruling by the FPSC approved the majority of PEF's requests...

  • Page 95
    ... including independent transmission service. In October 2000, as a result of Order 2000, PEC, along with Duke Energy Corporation and South Carolina Electric & Gas Company, filed an application with the FERC for approval of an RTO, GridSouth Transco, LLC (GridSouth). In July 2001, the FERC issued an...

  • Page 96
    ... plants (Georgia Operations). As a result of our evaluation of certain business opportunities that impacted the future cash ï¬,ows of our Georgia Operations, we performed the annual goodwill impairment test during the first quarter of 2006. We estimated the fair value of that reporting unit using...

  • Page 97
    ..., to meet the requirements of the Progress Energy 401(k) Savings & Stock Ownership Plan (401(k)) and the Investor Plus Stock Purchase Plan. At December 31, 2007 and 2006, we had approximately 50 million shares and 54 million shares, respectively, of common stock authorized by the board of directors...

  • Page 98
    ... cost is allocated to participants' accounts in the form of Progress Energy common stock, with the number of shares determined by dividing compensation cost by the common stock market value at the time of allocation. We currently meet common stock share needs with open market purchases, with shares...

  • Page 99
    ...-settled PSSP plan at December 31, 2007, and changes during the year then ended is presented below: Number of Stock-Settled Performance Shares(a) Beginning balance Granted Paid(b) Forfeited Ending balance 1,044,583 892,410 (190,567) (116,431) 1,629,995 Weighted-Average Grant Date Fair Value $44.26...

  • Page 100
    ... Cash expended to purchase shares for 2007 was not significant due to the curtailment of the RSA program and the rollout of the new restricted stock unit (RSU) program. Beginning in 2007, we began issuing RSUs rather than restricted stock awards for our officers, vice presidents, managers, and key...

  • Page 101
    Progress Energy Annual Report 2007 11. PREFERRED STOCK OF SUBSIDIARIES - NOT SUBJECT TO MANDATORY REDEMPTION All of our preferred stock was issued by our subsidiaries and was not subject to mandatory redemption. At December 31, 2007 and 2006, preferred stock outstanding consisted of the following: ...

  • Page 102
    ... investments for general corporate use as needed. At December 31, 2007 and 2006, we had committed lines of credit used to support our commercial paper borrowings. 100 At December 31, 2007 and 2006, we had no outstanding borrowings under our credit facilities. We are required to pay minimal annual...

  • Page 103
    ... the borrower fail to pay various debt obligations in excess of their respective cross-default threshold, the lenders of that credit facility could accelerate payment of any outstanding borrowing and terminate their commitments to the credit facility. Progress Energy, Inc.'s cross-default provision...

  • Page 104
    ...of its debt obligations contain any restrictions on the payment of dividends, so long as no shares of preferred stock are outstanding. At December 31, 2007, Progress Energy, Inc. had no shares of preferred stock outstanding. Certain documents restrict the payment of dividends by Progress Energy, Inc...

  • Page 105
    Progress Energy Annual Report 2007 (in millions) Nuclear decommissioning trust (See Note 5D) Investments in equity securities(a) Equity method investments(b) Cost investments(c) Benefit investment trusts(d) Company-owned life insurance(d) Marketable debt securities(e) Total 2007 $1,384 - 23 8 82 ...

  • Page 106
    ...FINANCIAL STATEMENTS third-party investment managers who have the right to sell securities without our authorization. Losses at December 31, 2007 and 2006 for investments in these trusts were not material. Other securities are evaluated on an individual basis to determine if a decline in fair value...

  • Page 107
    ... of our effective income tax rate to the statutory federal income tax rate for the years ended December 31 follow: 2007 Effective income tax rate State income taxes, net of federal benefit Investment tax credit amortization Employee stock ownership plan dividends Domestic manufacturing deduction...

  • Page 108
    ... million contingent value obligations (CVOs). Each CVO represents the right of the holder to receive contingent payments based on the performance of four Earthco synthetic fuels facilities purchased by subsidiaries of Florida Progress in October 1999. The payments are based on the net after-tax cash...

  • Page 109
    Progress Energy Annual Report 2007 The components of the net periodic benefit cost for the years ended December 31 were: Pension Benefits Other Postretirement Benefits 2005 $47 117 (147) 21 - $38 2007 $7 32 (6) 2 5 $40 2006 $9 33 (6) 4 5 $45 2005 $9 33 (5) 6 5 $48 (in millions) Service cost ...

  • Page 110
    ... 1 25 23 $40 $7 1 108 28 $144 (in millions) Projected benefit obligation at January 1 Service cost Interest cost Benefit payments Plan amendment Actuarial gain Obligation at December 31 Fair value of plan assets at December 31 Funded status 2007 2006 Total not yet recognized as a component of...

  • Page 111
    Progress Energy Annual Report 2007 Balance' Pension Plan." Therefore, effective December 31, 2003, we began to use the traditional unit credit method for purposes of measuring the benefit obligation of this plan. Under the traditional unit credit method, no assumptions are included about future ...

  • Page 112
    ... of 2007 synthetic fuels production. The cost of the hedges was approximately $65 million. The contracts were marked-to-market with changes in fair value recorded through earnings. These contracts ended on December 31, 2007, and were settled for cash on January 8, 2008, with no B. Florida Progress...

  • Page 113
    .... We manage open positions with strict policies that limit our exposure to market risk and require daily reporting to management of potential financial exposures. The Utilities have derivative instruments related to their exposure to price ï¬,uctuations on fuel oil and natural gas purchases. These...

  • Page 114
    ...rate risk in anticipation of future debt issuances. FAIR VALUE HEDGES For interest rate fair value hedges, the change in the fair value of the hedging derivative is recorded in net interest charges and is offset by the change in the fair value of the hedged item. At December 31, 2007, we had no open...

  • Page 115
    ...FINANCIAL INFORMATION BY BUSINESS SEGMENT Our reportable PEC and PEF business segments are primarily 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...

  • Page 116
    ... TO CONSOLIDATED FINANCIAL STATEMENTS Synthetic Fuels segment are not eliminated if the sales price is reasonable and the future recovery of sales price through the ratemaking process is probable. The profits realized for 2007, 2006 and 2005 were not significant. Prior to 2006, income tax expense...

  • Page 117
    ... 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 necessary to finance the construction of new...

  • Page 118
    ...reduced PEC's allocable share, and the estimated scope of work increased. These factors resulted in a net reduction to PEC's accrual for this site. At December 31, 2007, PEC's recorded liability for the site was approximately $6 million. Actual experience may differ from current estimates, and it is...

  • Page 119
    Progress Energy Annual Report 2007 In September 2005, the EPA advised PEC that it had been identified as a PRP at the 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...

  • Page 120
    ... costs. Total purchases (including energy and transmission use charges) under the Rockport agreement amounted to $77 million, $80 million and $71 million for 2007, 2006 and 2005, respectively. for 2011 and $14 million annually thereafter through 2019. PEC has various pay-for-performance contracts...

  • Page 121
    Progress Energy Annual Report 2007 power taken under these contracts. Capacity payments are subject to the QFs meeting certain contract performance obligations. In most cases, these contracts account for 100 percent of the generating capacity of each of the facilities. All commitments, except one ...

  • Page 122
    ...obligations primarily related to service contracts for operational services entered into by PESC, parts and services contracts, and a PEF service agreement related to the Hines Energy Complex. Our payments under these agreements were $97 million, $122 million and $100 million for 2007, 2006 and 2005...

  • Page 123
    ... performance, legal, tax and environmental matters to third parties, including indemnifications made in connection with sales of businesses, and for timely payment of obligations in support of our nonwholly owned synthetic fuels operations, which are within the scope of FIN 45. Related to the sales...

  • Page 124
    ... to have a material impact on the Utilities' results of operations given the anticipated regulatory and accounting treatment. 122 In July 2002, Congress passed an override resolution to Nevada's veto of the DOE's proposal to locate a permanent underground nuclear waste storage facility at Yucca...

  • Page 125
    Progress Energy Annual Report 2007 licenses, including any license extensions, for their nuclear generating units. Harris has sufficient storage capacity in its spent fuel pools through the expiration of its operating license, including any license extensions. SYNTHETIC FUELS MATTERS A number of ...

  • Page 126
    ... guarantee by Florida Progress of the Trust's obligations under the Preferred Securities. The Preferred Securities 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...

  • Page 127
    Progress Energy Annual Report 2007 CONDENSED CONSOLIDATING STATEMENT OF INCOME Year ended December 31, 2007 (in millions) Operating revenues Non-affiliate revenues Affiliate revenues Total operating revenues Operating expenses Fuel used in electric generation Purchased power Operation and ...

  • Page 128
    ... FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF INCOME Year ended December 31, 2005 (in millions) Operating revenues Non-affiliate revenues Affiliate revenues Total operating revenues Operating expenses Fuel used in electric generation Purchased power Operation and maintenance...

  • Page 129
    Progress Energy Annual Report 2007 CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2007 (in millions) Utility plant, net Current assets Cash and cash equivalents Short-term investments Notes receivable from affiliated companies Deferred fuel cost Assets to be divested Prepayments and other ...

  • Page 130
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2006 (in millions) Utility plant, net Current assets Cash and cash equivalents Short-term investments Notes receivable from affiliated companies Deferred fuel cost Assets to be divested Prepayments and ...

  • Page 131
    Progress Energy Annual Report 2007 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year ended December 31, 2007 (in millions) Net cash provided by operating activities Investing activities Gross property additions Nuclear fuel additions Proceeds from sales of discontinued operations and other ...

  • Page 132
    ...Nuclear fuel additions Proceeds from sales of discontinued operations and other assets, net of cash divested Purchases of available-for-sale securities and other investments Proceeds from sales of available-for-sale securities and other investments Changes... 127 $72 Progress Energy, Inc. $2,001 (1,...

  • Page 133
    Progress Energy Annual Report 2007 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year ended December 31, 2005 (in millions) Net cash provided by operating activities Investing activities Gross property additions Nuclear fuel additions Proceeds from sales of discontinued operations and other ...

  • Page 134
    ...) Dividends declared per common share Market price per share - High - Low 2006 Operating revenues Operating income Income from continuing operations Net income (loss) Common stock data Basic earnings per common share Income from continuing operations before cumulative effect of change in accounting...

  • Page 135
    ...debt Other financial data Return on average common stock equity (percent) Ratio of earnings to fixed 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...

  • Page 136
    ...corporate overhead costs associated with divested business. Contingent Value Obligation (CVO) Mark-to-Market In connection with the acquisition of Florida Progress Corporation, we issued 98.6 million CVOs. Each CVO represents the right of the holder to receive contingent payments based on after-tax...

  • Page 137
    ... Annual Report 2007 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN(a) AMONG PROGRESS ENERGY, INC., S&P 500 STOCK INDEX, S&P ELECTRIC INDEX AND COMPARABLE BUSINESS MODEL UTILITIES $300 $275 $250 $225 $200 $175 $150 $125 $100 $75 $50 $25 $0 2002 2003 2004 2005 2006 2007 Progress Energy S&P Electric...

  • Page 138
    ...Jr., vice president, Investor Relations, at the corporate headquarters address or call 919.546.7474. Additional Information Progress Energy files periodic reports with the Securities and Exchange Commission that contain additional information about the company. Copies are available to shareholders...

  • Page 139
    ... Y AT A GL A N CE PROGRESS ENERGY CAROLINAS PROGRESS ENERGY FLORIDA HE ADQUARTERS : EMPLOYEES : CUSTOMERS : RALEIGH, N.C. 10,500 3.1 MILLION 54,000 SQUARE MILES H l n Progress Energy Corporate Headquarters Generating Plant Locations Progress Energy Regulated Service Areas SERVICE TERRITORY:

  • Page 140
    ... receive future copies electronically, visit computershare.com/investor. WE'RE LOOKING AT POWER IN A NEW LIGHT. GLOBAL CLIMATE CHANGE CHALLENGES. STRATEGIES. ACTIONS. See Progress Energy's Corporate Responsibility and Global Climate Change reports at progress-energy.com/environment. 002CS-61033