Progress Energy 2007 Annual Report Download - page 22

MANAGEMENT’S DISCUSSION AND ANALYSIS
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On February 19, 2008, PEC filed its combined license (COL)
application with the Nuclear Regulatory Commission
(NRC) for two additional reactors at the Shearon Harris
Nuclear Plant (Harris). We anticipate filing a COL
application in 2008 to potentially construct new nuclear
plants in Florida. Filing of a COL is not a commitment to
build a nuclear plant but is a necessary step to keep
open the option of building a plant or plants. If we decide
to pursue nuclear expansion, favorable changes in the
regulatory and construction processes have evolved in
recent years, including standardized design, detailed
design before construction, COL to build and operate,
streamlined regulatory approval process, annual
prudence reviews and cost-recovery mechanisms for
pre-construction and financing costs. State regulatory
processes are specific to each jurisdiction. Also, nuclear
generation has recently gained greater public support as
a reliable energy source that does not emit greenhouse
gases. See “Other Matters – Nuclear Matters” for
additional information.
We are subject to significant air quality regulations passed
in 2005 by the United States Environmental Protection
Agency (EPA) that affect our fossil fuel-fired generating
facilities, the Clean Air Interstate Rule (CAIR), the Clean
Air Visibility Rule (CAVR) and mercury regulation (see
“Other Matters – Environmental Matters” for discussion
regarding Clean Air Mercury Rule [CAMR]). Additionally, at
PEC’s coal-fired facilities in North Carolina, we are subject
to the North Carolina Clean Smokestacks Act enacted
in 2002 (Clean Smokestacks Act). Including estimated
costs for CAIR, CAVR, mercury regulation and the Clean
Smokestacks Act, we currently estimate that total future
capital expenditures for the Utilities to comply with current
environmental laws and regulations addressing air and
water quality, which are eligible for regulatory recovery
through either base rates or pass-through clauses, could
be in excess of $700 million at PEC and $1.9 billion at PEF
through 2018, which corresponds to the latest emission
reduction deadline. In addition, growing state, federal
and international attention to global climate change may
result in the regulation of carbon dioxide (CO2) and other
greenhouse gases. Reductions in CO2 emissions to the
levels specified by some proposals could be materially
adverse to our financial position or results of operations
if associated costs of control or limitation cannot be
recovered from ratepayers. The cost impact of legislation
or regulation to address global climate change would
depend on the specific legislation or regulation enacted
and cannot be determined at this time.
The Utilities successfully resolved key state regulatory
issues in 2007, including retail fuel recovery filings
in all jurisdictions. PEF also received Federal Energy
Regulatory Commission (FERC) approval of its revised
Open Access Transmission Tariff (OATT), including a
settlement agreement with major transmission customers.
In addition to Florida energy legislation enacted in 2006
that included cost-recovery mechanisms supportive of
nuclear expansion, North Carolina and South Carolina
both enacted energy legislation in 2007. North Carolina’s
comprehensive energy bill included provisions for
expanding the traditional fuel clause, renewable energy
portfolio standards, recovery of qualified DSM and energy-
efficiency programs and cost recovery during baseload
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 Carolina through 2007. Subsequent
to 2007, PEC’s current North Carolina base rates are
continuing subject to traditional cost-based rate
regulation. As a result of its 2005 base rate proceeding,
PEF’s base rate settlement extends through 2009. See
“Other Matters – Regulatory Environment” and Note 7
for further information.
We have several key financial objectives, the first
of which is to achieve sustainable earnings growth.
In addition, we seek to continue our track record of
dividend growth, as we have increased our dividend for
20 consecutive years, and 32 of the last 33 years. We plan
to continue our efforts to enhance balance sheet strength
and flexibility so that we are positioned to accommodate
the significant future growth expected at the Utilities. As
of the end of 2007, our debt to total capitalization ratio
was 53.3 percent. Our targeted debt to total capitalization
ratio is 55 percent.
Our ability to meet these financial objectives is largely
dependent on the earnings and cash flows of the 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, and the timing of
recovery of fuel costs and storm damage. The Utilities
contributed $813 million of our segment profit and
generated substantially all of our consolidated cash flow
from operations in 2007. Partially offsetting the Utilities’
segment profit contribution were losses of $120 million
recorded at Corporate and Other, primarily related to
interest expense on holding company debt.
While the Utilities expect retail sales growth in the future,
they are facing, and expect to continue to face, rising