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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Exact name of each Registrant as specified in I.R.S. Employer
Commission its charter, state of incorporation, address of Identification
File No. principal executive offices and telephone number Number
1-8349 Florida Progress Corporation 59-2147112
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
State of Incorporation: Florida
1-3274 Florida Power Corporation 59-0247770
d/b/a Progress Energy Florida, Inc.
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
State of Incorporation: Florida
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class Name of each exchange on which registered
Florida Progress Corporation:
7.10% Cumulative Quarterly Income Preferred Securities, New York Stock Exchange
Series A, of FPC Capital I (and the Guarantee of Florida
Progress with respect thereto)
Progress Energy Florida, Inc.: None
1
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Florida Progress Corporation: None
Florida Power Corporation: None
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
As of June 30, 2004, the aggregate market value of the voting and non-voting
common equity of each of the registrants held by non-affiliates was $0. All of
the common stock of Florida Progress Corporation is owned by Progress Energy,
Inc., its corporate parent. All of the common stock of Florida Power Corporation
is owned by Florida Progress Corporation.
As of February 2005, each registrant had the following shares of common stock
outstanding:
Registrant Description Shares
Florida Progress Corporation Common Stock (without par value) 98,616,658
Florida Power Corporation Common Stock (without par value) 100
Florida Progress Corporation and Florida Power Corporation meet the conditions
set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore
filing this Form 10-K with the reduced disclosure format permitted by General
Instruction I(2) to such Form 10-K.
This combined Form 10-K is filed separately by two registrants: Florida Progress
Corporation and Florida Power Corporation. Information contained herein relating
to either individual registrant is filed by such registrant solely on its own
behalf. Each registrant makes no representation as to information relating
exclusively to the other registrant.
2
TABLE OF CONTENTS
GLOSSARY
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
RISK FACTORS
3
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined FORM
10-K are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement related to
retail rate matters
ARO Asset retirement obligation
AST Advanced Separation Technology
Bcf Billion cubic feet
Btu British thermal units
CAIR Clean Air Interstate Rule
Calgon Calgon Carbon Corporation
Caronet Caronet, Inc.
the Code Internal Revenue Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company, Florida
Progress or FPC Florida Progress Corporation
CP&L Energy CP&L Energy, Inc.
CR3 PEF's nuclear generating plant, Crystal River
Unit No. 3
DD&A Depreciation, depletion and amortization
DOE United States Department of Energy
ECRC Environmental Cost Recovery Clause
Electric Fuels Electric Fuels Corporation
EPA United States Environmental Protection Agency
EPIK EPIK Communications, Inc.
ESOP Employee stock ownership plan
ETS Engineering & Track-work Services
FASB Financial Accounting Standards Board
FASB Staff Position 106-2 Accounting and Disclosure Requirements Related to
the Medicare
Prescription Drug Improvement and Modernization
Act of 2003
FDEP Florida Department of Environmental Protection
FERC Federal Energy Regulatory Commission
FIN No. 46R FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of
ARB No. 51"
Financial Statements Florida Progress' Financial Statements and Progress
Energy Florida's Financial Statements contained
under ITEM 8 herein
Florida Power or
the Utility Florida Power Corporation d/b/a Progress Energy
Florida, Inc.
FPSC Florida Public Service Commission
Funding Corp. Florida Progress' Funding Corporation
GAAP Accounting principles generally accepted in the
United States of America
Georgia Power Georgia Power Company
Global U.S. Global LLC
HLW High Level Waste
IRS Internal Revenue Service
ISO Independent System Operator
kV Kilovolt
kVA Kilovolt-ampere
LRS Locomotive and Railcar Services
LTIP Long-Term Incentive Plan
MAC Material adverse change
MACT Maximum Achievable Control Technology
Mcfe Million cubic feet equivalents
Medicare Act Medicare Prescription Drug, Improvement and
Modernization Act of 2003
MGP Manufactured Gas Plant
MW Megawatts
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NOx Nitrogen Oxide
NRC United States Nuclear Regulatory Commission
4
NSP Northern States Power
OCI Other comprehensive income
Odyssey Odyssey Telecorp, Inc.
OPEB Other postretirement benefits
P11 PEF's Intercession City Unit P11
PEF or the Utility Progress Energy Florida, Inc., formerly referred
to as Florida Power Corporation
PESC Progress Energy Service Company, LLC
PFA IRS Prefiling Agreement
The Plan Revenue Sharing Incentive Plan
PLRs Private Letter Rulings
PRPs Potentially Responsible Parties
Preferred Securities FPC-obligated mandatorily redeemable preferred
securities of FPC Capital I
Preferred Stock Progress Energy Florida Preferred Stock, $100 par
value
Progress Capital Progress Capital Holdings, Inc.
Progress Energy or
the Parent Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly Electric Fuels
Corporation
Progress Rail Progress Rail Services Corporation
PSSP Performance Share Sub-Plan
PTC Progress Telecommunications Corporation
PT LLC Progress Telecom LLC
PVI Progress Ventures, Inc., formerly referred to as
Energy Ventures, a business unit of
Progress Energy
PUHCA Public Utility Holding Company Act of 1935, as
amended
PURPA Public Utility Regulatory Policies Act of 1978
PWR Pressurized Water Reactors
QFs Qualifying facilities
RAFT Railcar Asset Financing Trust
RBCA or Global RBCA Risk-based corrective action
Rail Rail Services
RCA Revolving credit agreement
ROE Return on equity
RSA Restricted stock agreement
RTO Regional Transmission Organization
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
Service Company Progress Energy Service Company, LLC
SFAS No. 71 Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of
Regulation"
SFAS No. 123 Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"
SFAS No. 133 Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative and Hedging Activities"
SFAS No. 143 Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations"
SFAS No. 144 Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of
Long-Lived Assets"
SFAS No. 148 Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB
Statement No. 123"
SMD NOPR Notice of Proposed Rulemaking in Docket
No. RM01-12-000, Remedying Undue Discrimination
through Open Access Transmission and Standard Market
Design
SNF Spent Nuclear Fuel
SO2 Sulfur dioxide
Tax Agreement Intercompany Income Tax Allocation Agreement
the Trust FPC Capital I
Winchester Energy Winchester Energy Company, LTD. (formerly
Westchester Gas Company)
Winchester Production Winchester Production Company, Ltd., an indirectly
wholly owned subsidiary of Progress Fuels
5
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Certain matters discussed throughout this Form 10-K that are not historical
facts are forward-looking and, accordingly, involve estimates, projections,
goals, forecasts, assumptions, risks and uncertainties that could cause actual
results or outcomes to differ materially from those expressed in the
forward-looking statements.
In addition, examples of forward-looking statements discussed in this Form 10-K,
include 1) PART II, ITEM 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" including, but not limited to, statements
under the "Liquidity and Capital Resources" about operating cash flows,
estimated capital requirements through the year 2007 and future financing plans
and 2) statements made in the "Risk Factors" sections.
Any forward-looking statement is based on information current as of the date of
this report and speaks only as of the date on which such statement is made, and
neither Florida Progress nor Progress Energy Florida (PEF) undertakes any
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: the impact of fluid and complex government laws and regulations,
including those relating to the environment; deregulation or restructuring in
the electric industry that may result in increased competition and unrecovered
(stranded) costs; the ability of the Parent to implement its cost management
initiatives as planned; the uncertainty regarding the timing, creation and
structure of GridFlorida or other regional transmission organizations; weather
conditions that directly influence the demand for electricity; the Company's
ability to recover through the regulatory process, and the timing of such
recovery of, the costs associated with the four hurricanes that impacted our
service territory in 2004 or other future significant weather events; recurring
seasonal fluctuations in demand for electricity; fluctuations in the price of
energy commodities and purchased power; economic fluctuations and the
corresponding impact on the Company and its subsidiaries' commercial and
industrial customers; the ability of the Company's subsidiaries to pay upstream
dividends or distributions to it; the impact on the facilities and the
businesses of the Company from a terrorist attack; the inherent risks associated
with the operation of nuclear facilities, including environmental, health,
regulatory and financial risks; the ability to successfully access capital
markets on favorable terms; the impact of the Company's financial condition and
ability to meet its cash and other financial obligations in the event its credit
ratings are downgraded below investment grade; the impact that increases in
leverage and the affect it may have on the Company; the ability of the Company
to maintain its current credit ratings; the impact of derivative contracts used
in the normal course of business by the Company; investment performance of
pension and benefit plans; the Company's ability to control costs, including
pension and benefit expense, and achieve its cost management targets for 2007;
the availability and use of Internal Revenue Code Section 29 (Section 29) tax
credits by synthetic fuel producers and the Company's continued ability to use
Section 29 tax credits related to its coal and synthetic fuel businesses; the
impact to the Company's financial condition and performance in the event it is
determined the Company is not entitled to previously taken Section 29 tax
credits; the impact of future accounting pronouncements regarding uncertain tax
positions; the outcome of PEF's rate proceeding in 2005 regarding its future
base rates; the Company's ability to manage the risks involved with the
operation of its nonregulated plants, including dependence on third parties and
related counter-party risks, and a lack of operating history; the Company's
ability to manage the risks associated with its energy marketing operations; the
outcome of any ongoing or future litigation or similar disputes and the impact
of any such outcome or related settlements; and unanticipated changes in
operating expenses and capital expenditures. Many of these risks similarly
impact the Company's subsidiaries.
These and other risk factors are detailed from time to time in the Company's and
PEF's filings with the United States Securities and Exchange Commission (SEC).
Many, but not all, of the factors that may impact actual results are discussed
in the "Risk Factors" sections of this report. You should carefully read the
"Risk Factors" sections of this report. All such factors are difficult to
predict, contain uncertainties that may materially affect actual results and may
be beyond the control of the Company and PEF. New factors emerge from time to
time, and it is not possible for management to predict all such factors, nor can
it assess the effect of each such factor on the Company and PEF.
6
PART I
ITEM 1. BUSINESS
GENERAL
COMPANY
Florida Progress Corporation (Florida Progress or the Company, which term
includes consolidated subsidiaries unless otherwise indicated) is a wholly owned
subsidiary of Progress Energy, Inc. (Progress Energy), a registered holding
company under the Public Utility Holding Company Act (PUHCA) of 1935. Progress
Energy and its subsidiaries, including Florida Progress, are subject to the
regulatory provisions of PUHCA. Florida Progress was incorporated in Florida on
January 21, 1982. Florida Progress is the parent company of Florida Power
Corporation (Florida Power or the Utility) and certain other subsidiaries.
Progress Energy controls Florida Power Corporation and the other Florida
Progress subsidiaries through its ownership of Florida Progress.
On November 30, 2000, the acquisition of Florida Progress by CP&L Energy, Inc.
(CP&L Energy) became effective. In December 2000, CP&L Energy was renamed
Progress Energy, Inc.
Effective January 1, 2003, Florida Power began doing business under the name
Progress Energy Florida, Inc. (PEF). The legal name of the entity has not been
changed and there is no restructuring of any kind related to the name change.
The current corporate and business unit structure remains unchanged.
Florida Progress' revenues for the year ended December 31, 2004, were $5.9
billion, and assets at year-end were $9.7 billion. PEF's revenues for the year
ended December 31, 2004, were $3.5 billion, and assets at year-end were $7.9
billion. Florida Progress' principal executive offices are located at 410 South
Wilmington Street, Raleigh, North Carolina 27601-1748, telephone number (919)
546-6111. Information about Florida Progress and its subsidiaries can be found
at Progress Energy's home page on the Internet at
http://www.progress-energy.com, the contents of which are not and shall not be
deemed to be a part of this document or any other Securities and Exchange
Commission (SEC) filing. The Company makes available free of charge on its Web
site its annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to these reports as soon as reasonably
practicable after such material is electronically filed or furnished to the SEC.
Florida Progress' principal business segment is PEF, which encompasses all
regulated public utility operations. Florida Progress' other business segments,
including Energy and Related Services, Rail Services, and Other, represent its
diversified operations (See ITEM 1 "Business - Diversified Operations").
Progress Capital Holdings, Inc. (Progress Capital) is the downstream holding
company for Florida Progress' diversified subsidiaries and provides a portion of
the financing for the nonutility operations. Diversified operations include
Progress Fuels Corporation (Progress Fuels), formerly Electric Fuels Corporation
(Electric Fuels), and Progress Telecommunications Corporation (PTC). In January
2002, Electric Fuels changed its name to Progress Fuels. Progress Fuels is a
diversified nonutility energy company, whose principal business segments are
Energy and Related Services and Rail Services. The Company's Other category
consists primarily of PTC, the Company's Investment in FPC Capital I, and the
holding company, Florida Progress. PTC is a provider of wholesale
telecommunications services.
After the acquisition of Florida Progress, Progress Energy hired a financial
adviser to assist Florida Progress in evaluating its strategic alternatives with
respect to Progress Fuels' Inland Marine Transportation and Rail Services
segments. In November 2001, the Inland Marine Transportation segment was sold to
AEP Resources, Inc.
During 2001, Progress Energy decided to retain the Rail Services segment in the
near term. In December 2002, the Progress Energy Board of Directors adopted a
resolution approving the sale of Railcar Ltd., a subsidiary included in the Rail
Services segment. In March 2003, Progress Energy signed a letter of intent to
sell the majority of Railcar Ltd., assets to The Andersons, Inc. The asset
purchase agreement was signed in November 2003, and the transaction closed in
February 2004.
In February 2005, Progress Energy signed a definitive agreement to sell its
Progress Rail subsidiary to subsidiaries of One Equity Partners LLC for a sales
price of $405 million. Proceeds from the sale are expected to be used to reduce
debt (See Note 23).
7
SIGNIFICANT DEVELOPMENTS
Sale of Natural Gas Assets
In December 2004, the Company sold certain gas-producing properties and related
assets owned by Winchester Production Company, Ltd., (Winchester Production), an
indirectly wholly owned subsidiary of Progress Fuels Corporation (Progress
Fuels), which is included in the Energy and Related Services Segment. Net
proceeds of approximately $251 million were used to reduce debt (See Note 4A).
2004 Hurricanes
Hurricanes Charley, Frances, Ivan and Jeanne struck significant portions of
PEF's service territory during the third quarter of 2004. As of December 31,
2004, restoration of PEF's systems from hurricane related damage was estimated
at $385 million (See Note 3).
Divestiture of Synthetic Fuel Partnership Interests
In June 2004, the Company, through its subsidiary Progress Fuels, sold, in two
transactions, a combined 49.8% partnership interest in Colona Synfuel Limited
Partnership, LLLP, one of its synthetic fuel facilities. Substantially all
proceeds from the sales will be received over time, which is typical of such
sales in the industry (See Note 4B).
Progress Telecommunications Corporation Business Combination
In December 2003, Progress Telecommunications Corporation (PTC) and Caronet,
Inc. (Caronet), both wholly owned subsidiaries of Progress Energy, and EPIK
Communications, Inc. (EPIK), a wholly owned subsidiary of Odyssey Telecorp, Inc.
(Odyssey), contributed substantially all of their assets and transferred certain
liabilities to Progress Telecom, LLC (PT LLC), a subsidiary of PTC.
Subsequently, the stock of Caronet was sold to an affiliate of Odyssey for $2
million in cash and Caronet became a wholly owned subsidiary of Odyssey.
Following consummation of all the transactions described above, PTC holds a 55%
ownership interest in and is the parent of PT LLC (See Note 5A).
Mesa Hydrocarbons, Inc. Divestiture
In October 2003, the Company sold certain gas-producing properties owned by Mesa
Hydrocarbons, LLC, a wholly owned subsidiary of Progress Fuels. Net proceeds of
approximately $97 million were used to reduce debt (See Note 4D).
Acquisition of Natural Gas Reserves
During 2003, Progress Fuels entered into several independent transactions to
acquire approximately 200 natural gas-producing wells with proven reserves of
approximately 190 billion cubic feet (Bcf) from Republic Energy, Inc. and three
other privately owned companies, all headquartered in Texas. The total cash
purchase price for the transactions was approximately $168 million (See Note
5B).
Railcar Ltd. Divestiture
In March 2003, the Company signed a letter of intent to sell the majority of
Railcar Ltd. assets to The Andersons, Inc. The asset purchase agreement was
signed in November 2003, and the transaction closed on February 12, 2004. Net
proceeds of approximately $75 million were used to reduce debt (See Note 4C).
Westchester Acquisition
In April 2002, Progress Fuels acquired 100% of Westchester Gas Company. During
2004, the name of the company was changed to Winchester Energy Company, Ltd.
(Winchester Energy). The acquisition included approximately 215 natural
gas-producing wells, 52 miles of intrastate gas pipeline and 170 miles of
gas-gathering systems. The aggregate purchase price was approximately $153
million (See Note 5C).
8
UTILITY OPERATIONS - PEF
GENERAL
PEF, incorporated in Florida in 1899, is an operating public utility engaged in
the generation, transmission, distribution and sale of electricity. At December
31, 2004, PEF had a total summer generating capacity (including jointly owned
capacity) of approximately 8,544 MW.
PEF provided electric service during 2004 to an average of 1.5 million customers
in west central Florida. Its service territory covers approximately 20,000
square miles and includes the densely populated areas around Orlando, as well as
the cities of St. Petersburg and Clearwater. PEF is interconnected with 21
municipal and nine rural electric cooperative systems. Major wholesale power
sales customers include Seminole Electric Cooperative, Inc., Florida Power &
Light Company, Tampa Electric Company and the City of Bartow. PEF is subject to
the rules and regulations of the FERC, FPSC and the NRC. No single customer
accounts for more than 10% of PEF's revenues.
BILLED ELECTRIC REVENUES
PEF's electric revenues billed by customer class for the last three years, are
shown as a percentage of total PEF electric revenues in the table below:
BILLED ELECTRIC REVENUES
Revenue Class 2004 2003 2002
Residential 53% 55% 55%
Commercial 25% 24% 24%
Industrial 8% 7% 7%
Other retail 6% 6% 6%
Wholesale 8% 8% 8%
Important industries in PEF's territory include phosphate rock mining and
processing, electronics design and manufacturing, and citrus and other food
processing. Other important commercial activities are tourism, health care,
construction and agriculture.
FUEL AND PURCHASED POWER
General
PEF's consumption of various types of fuel depends on several factors, the most
important of which are the demand for electricity by PEF's customers, the
availability of various generating units, the availability and cost of fuel and
the requirements of federal and state regulatory agencies. PEF's total system
generation (including jointly owned capacity) by primary energy source along
with purchased power for the three years is presented in the following table:
ENERGY MIX PERCENTAGES
Fuel Type 2004 2003 2002
Coal (a) 32% 36% 33%
Oil 16% 16% 16%
Nuclear 16% 14% 15%
Gas 16% 13% 15%
Purchased Power 20% 21% 21%
(a) Amounts include synthetic fuel from unrelated third parties.
PEF is generally permitted to pass the cost of fuel and purchased power to its
customers through fuel adjustment clauses. The future prices for and
availability of various fuels discussed in this report cannot be predicted with
complete certainty. See "Commodity Price Risk" under Item 7A, QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK. However, PEF believes that its fuel
supply contracts, as described below, will be adequate to meet its fuel supply
needs.
9
PEF's average fuel costs per million Btu for the last three years were as
follows:
AVERAGE FUEL COST
(per million Btu)
2004 2003 2002
Coal (a) $ 2.30 $ 2.42 $ 2.43
Oil 4.67 4.38 3.77
Nuclear 0.49 0.50 0.46
Gas 6.41 5.98 4.06
Weighted-average 3.21 3.07 2.60
(a) Amounts include synthetic fuel from unrelated third parties.
Changes in the unit price for coal, oil and gas are due to market conditions.
Since these costs are primarily recovered through recovery clauses established
by regulators, fluctuations do not materially affect net income.
Coal
PEF anticipates a combined requirement of approximately 6 million tons of coal
in 2005. Approximately 70% of the coal is expected to be supplied from
Appalachian coal sources in the United States and 30% supplied from coal sources
in South America. Approximately 67% of the fuel is expected to be delivered by
rail and the remainder by barge. All of this fuel is supplied by Progress Fuels,
a subsidiary of Progress Energy, pursuant to contracts between PEF and Progress
Fuels.
For 2005, Progress Fuels has medium-term and long-term contracts with various
sources for approximately 115% of the burn requirements of PEF's coal units.
Supply disruption caused by recent hurricanes has made it necessary to build
inventories back to the traditional level of 45 days. These contracts have price
adjustment provisions and have expiration dates ranging from 2005 to 2006.
Progress Fuels will continue to sign contracts of various lengths, terms and
quality to meet PEF's expected burn requirements. All the coal to be purchased
for PEF is considered to be low sulfur coal by industry standards.
Oil and Gas
Natural gas and oil supply for PEF's generation fleet is purchased under term
and spot contracts from several suppliers. The majority of the cost of PEF's oil
and gas is determined by market prices as reported in certain industry
publications. PEF believes that it has access to an adequate supply of oil and
gas for the reasonably foreseeable future. PEF's natural gas transportation is
purchased under term firm transportation contracts with interstate pipelines.
PEF also purchases capacity on a seasonal basis from numerous shippers and
interstate pipelines to serve its peaking load requirements. PEF uses
interruptible transportation contracts on certain occasions when available. PEF
believes that existing contracts for oil are sufficient to cover its
requirements if natural gas is unavailable during certain time periods.
Nuclear
Nuclear fuel is processed through four distinct stages. Stages I and II involve
the mining and milling of the natural uranium ore to produce a uranium oxide
concentrate and the conversion of this concentrate into uranium hexafluoride.
Stages III and IV entail the enrichment of the uranium hexafluoride and the
fabrication of the enriched uranium hexafluoride into usable fuel assemblies.
PEF has sufficient uranium, conversion, enrichment and fabrication contracts to
meet its near-term nuclear fuel requirements needs. PEF's nuclear fuel contracts
typically have terms ranging from five to ten years. For a discussion of PEF's
plans with respect to spent fuel storage, see PART I, ITEM I, "Nuclear Matters."
10
Purchased Power
PEF, along with other Florida utilities, buys and sells power in the wholesale
market on a short-term and long-term basis. At December 31, 2004, PEF had a
variety of purchase power agreements for the purchase of approximately 1,498 MW
of firm power. These agreements include (1) long-term contracts for the purchase
of about 484 MW of purchased power with other investor-owned utilities,
including a contract with The Southern Company for approximately 414 MW, and (2)
approximately 821 MW of capacity under contract with certain QFs. The capacity
currently available from QFs represents about 9% of PEF's total installed system
capacity.
COMPETITION
Electric Industry Restructuring
PEF continues to monitor developments toward a more competitive environment and
has actively participated in regulatory reform deliberations in Florida.
Movement toward deregulation in this state has been affected by developments
related to deregulation of the electric industry in other states.
In response to a legislative directive, the FPSC and the Florida Department of
Environment and Protection submitted in February 2003 a joint report on
renewable electric generating technologies for Florida. The report assessed the
feasibility and potential magnitude of renewable electric capacity for Florida,
and summarized the mechanisms other states have adopted to encourage renewable
energy. The report did not contain any policy recommendations. The Company
cannot anticipate when, or if, restructuring legislation will be enacted or if
the Company would be able to support it in its final form.
Regional Transmission Organizations
As a result of Order 2000, PEF, Florida Power & Light Company and Tampa Electric
Company (the Applicants) collectively filed with the FERC in October 2000 an
application for approval of a GridFlorida RTO. The GridFlorida proposal is
pending before both the FERC and the FPSC. The FERC provisionally approved the
structure and governance of GridFlorida. In December 2003, the FPSC ordered
further state proceedings and established a collaborative workshop process to be
conducted during 2004. In June 2004, the workshop process was abated pending
completion of a cost-benefit study currently scheduled to be presented at a FPSC
workshop on May 25, 2005, with subsequent action by the FPSC to be thereafter
determined. It is unknown when the FERC or the FPSC will take final action with
regard to the status of GridFlorida or what the impact of further proceedings
will have on the Company's earnings, revenues or pricing. See Note 8C for a
discussion of current developments of GridFlorida RTO.
Franchises
PEF holds franchises with varying expiration dates in 108 of the municipalities
in which it distributes electric energy. PEF also serves 13 other municipalities
and in all its unincorporated areas without franchise agreements. The general
effect of these franchises is to provide for the manner in which PEF occupies
rights-of-way in incorporated areas of municipalities for the purpose of
constructing, operating and maintaining an energy transmission and distribution
system.
Approximately 39% of PEF's total utility revenues for 2004 were from the
incorporated areas of the 108 municipalities that had franchise ordinances
during the year. Since 2000, PEF has renewed 34 expiring franchises and reached
agreement on a franchise with a city that did not previously have a franchise.
Franchises with five municipalities have expired without renewal.
All but 27 of the existing franchises cover a 30-year period from the date
enacted. The exceptions are 23 franchises, each with a term of 10 years and
expiring between 2005 and 2013; two franchises each with a term of 15 years and
expiring in 2017; one 30-year franchise that was extended in 1999 for 5 years
expiring in 2005; and one franchise with a term of 20 years expiring in 2020. Of
the 108 franchises, 46 expire between January 1, 2005, and December 31, 2015,
and 62 expire between January 1, 2016, and December 31, 2034.
Ongoing negotiations and, in some cases, litigation are taking place with
certain municipalities to reach agreement on franchise terms and to enact new
franchise ordinances (See Note 21E).
11
Stranded Costs
The largest stranded cost exposure for PEF is its commitment to QFs. PEF has
taken a proactive approach to this industry issue. PEF continues to seek ways to
address the impact of escalating payments from contracts it was obligated to
sign under provisions of the Public Utility Regulatory Policies Act of 1978
(PURPA).
REGULATORY MATTERS
General
PEF is subject to the jurisdiction of the FPSC with respect to, among other
things, rates and service for electric energy sold at retail, retail service
territory and issuances of securities. In addition, PEF is subject to regulation
by the FERC with respect to transmission and sales of wholesale power,
accounting and certain other matters. The underlying concept of utility
ratemaking is to set rates at a level that allows the utility to collect
revenues equal to its cost of providing service plus a reasonable rate of return
on its equity. Increased competition as a result of industry restructuring may
affect the ratemaking process.
Retail Rate Matters
The FPSC authorizes retail "base rates" that are designed to provide a utility
with the opportunity to earn a specific rate of return on its "rate base," or
average investment in utility plant. These rates are intended to cover all
reasonable and prudent expenses of utility operations and to provide investors
with a fair rate of return.
In March 2002, the parties in PEF's rate case entered into a Stipulation and
Settlement Agreement (the Agreement) related to retail rate matters. The
Agreement was approved by the FPSC and is generally effective from May 1, 2002,
through December 31, 2005. The Agreement eliminates the authorized Return on
Equity (ROE) range normally used by the FPSC for the purpose of addressing
earning levels, provided, however, that if PEF's base rate earnings fall below a
10% return on equity, PEF may petition the FPSC to amend its base rates. The
Agreement is described in more detail in Note 8B.
In January 2005, in anticipation of the expiration of the Agreement, PEF
notified the FPSC that it intends to request an increase in its base rates,
effective January 1, 2006. In its notice, PEF requested the FPSC to approve
calendar year 2006 as the projected test period for setting new base rates. The
request for increased base rates is based on the fact that PEF has faced
significant cost increases over the past decade and expects its operational
costs to continue to increase. These costs include the costs associated with
completion of the Hines 3 generation facility, extraordinary hurricane damage
costs including capital costs which are not expected to be directly recoverable,
the need to replenish the depleted storm reserve and the expected infrastructure
investment necessary to meet high customer expectations, coupled with the
demands placed on PEF as a result of strong customer growth (See "Risk
Factors").
Fuel and Other Cost Recovery
PEF's operating costs not covered by the utility's base rates include fuel,
purchased power, energy conservation expenses and specific environmental costs.
The state commission allows electric utilities to recover certain of these costs
through various cost recovery clauses, to the extent the commission determines
in an annual hearing that such costs are prudent. In addition, in December 2002,
the FPSC approved an Environmental Cost Recovery Clause, which permits the
Company to recover the costs of specified environmental projects to the extent
these expenses are found to be prudent in an annual hearing and not otherwise
included in base rates. Costs are recovered through this recovery clause in the
same manner as the other existing clause mechanisms.
The FPSC determination results in the addition of a rider to a utility's base
rates to reflect the approval of these costs and to reflect any past over- or
under-recovery. Due to the regulatory treatment of these costs and the method
allowed for recovery, changes from year to year have no material impact on
operating results.
In accordance with a regulatory order, PEF accrues $6 million annually to a
storm damage reserve and is allowed to defer losses in excess of the accumulated
reserve for major storms. Under the order, the storm reserve is charged with
operation and maintenance expenses related to storm restoration and with capital
expenditures related to storm restoration that are in excess of expenditures
assuming normal operating conditions. As of December 31, 2004, $291 million of
hurricane restoration costs in excess of the previously recorded storm reserve
12
of $47 million had been classified as a regulatory asset recognizing the
probable recoverability of these costs. On November 2, 2004, PEF filed a
petition with the FPSC to recover $252 million of storm costs plus interest from
retail ratepayers over a two-year period. Hearings on PEF's petition for
recovery of $252 million of storm costs filed with the FPSC are scheduled to
begin on March 30, 2005 (See Note 3).
PEF's January 2005 notice to the FPSC of its intent to file for an increase in
its base rates effective January 1, 2006, anticipates the need to replenish the
depleted storm reserve balance and adjust the annual $6 million accrual in light
of recent storm history to restore the reserve to an adequate level over a
reasonable time period.
NUCLEAR MATTERS
PEF owns and operates one nuclear generating plant, Crystal River Unit No. 3
(CR3), which is subject to regulation by the Nuclear Regulatory Commission (NRC)
under the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974.
In the event of noncompliance, the NRC has the authority to impose fines, set
license conditions, shut down a nuclear unit, or some combination of these,
depending upon its assessment of the severity of the situation, until compliance
is achieved. Nuclear units are periodically removed from service to accommodate
normal refueling and maintenance outages, repairs and certain other
modifications.
The nuclear power industry faces uncertainties with respect to the cost and
long-term availability of sites for disposal of spent nuclear fuel and other
radioactive waste, compliance with changing regulatory requirements, nuclear
plant operations, increased capital outlays for modifications, the technological
and financial aspects of decommissioning plants at the end of their licensed
lives and requirements relating to nuclear insurance.
The NRC operating license held by PEF for CR3 currently expires in December
2016. An application to extend this license 20 years is expected to be submitted
in the first quarter 2009. PEF currently has a 91.8% ownership interest in CR3.
A condition of the operating license for the unit requires an approved plan for
decontamination and decommissioning.
In 2002, the NRC sent a bulletin to companies that hold licenses for pressurized
water reactors (PWRs) requiring information on the structural integrity of the
reactor vessel head and a basis for concluding that the vessel head will
continue to perform its function as a coolant pressure boundary. Inspection of
the vessel head at CR3 was performed during a previous outage and no degradation
of the reactor vessel head was identified.
In 2002, the NRC issued an additional bulletin dealing with head leakage due to
cracks near the control rod nozzles, asking licensees to commit to high
inspection standards to ensure the more susceptible plants have no cracks. PEF
replaced the vessel head at CR3 during its regularly scheduled refueling outage
in 2003.
In 2003, the NRC issued an order requiring specific inspections of the reactor
pressure vessel head and associated penetration nozzles at PWRs. The Company
responded, stating that it intended to comply with the provisions of the Order.
The NRC also issued a bulletin requesting PWR licensees to address inspection
plans for reactor pressure vessel lower head penetrations. The Company completed
a bare metal visual inspection of the vessel bottom at CR3 during its 2003
outage and found no signs of corrosion or leakage at the unit. The Company plans
to do additional, more detailed inspections as part of the next scheduled
10-year in-service inspection.
In February 2004, the NRC issued a revised Order for inspection requirements for
reactor pressure vessel heads at PWRs. The Company has reviewed the required
inspection frequencies and has incorporated them into long-range plans. CR3 will
be required to inspect its new head within 7 years or four refueling outages
after replacement. CR3 plans to inspect its new head prior to the end of 2009.
ENVIRONMENTAL MATTERS
There are two former MGP sites and other sites associated with PEF that have
required or are anticipated to require investigation and/or remediation costs.
In addition, there are distribution substations and transformers which are also
anticipated to incur investigation and remediation costs. Presently, PEF cannot
determine the total costs that may be included in connection with the
remediation of all sites. See Note 20 for further discussion of these
environmental matters.
13
DIVERSIFIED OPERATIONS
General
Florida Progress' diversified operations are owned directly or indirectly
through Progress Capital, a Florida corporation and wholly owned subsidiary of
Florida Progress. Progress Capital holds the capital stock of, and provides the
financing for, Florida Progress' nonutility subsidiaries. Its primary subsidiary
is Progress Fuels, formerly Electric Fuels. In January 2002, Electric Fuels
changed its name to Progress Fuels.
Formed in 1976, Progress Fuels is an energy and transportation company. When the
Inland Marine Transportation unit was sold in November 2001, Progress Fuels was
reorganized into two business units: Energy and Related Services and Rail
Services.
Energy and Related Services
Progress Fuels' Energy and Related Services business unit supplies coal to
Florida Power's Crystal River Energy Complex and other utility and industrial
customers. This business unit has subsidiaries that produce natural gas and oil
products, blend and transload coal, mine coal and produce a solid coal-based
synthetic fuel.
Synthetic Fuel Tax Credits
The Company has substantial operations associated with the production of
coal-based synthetic fuels. The production and sale of these products qualifies
for federal income tax credits so long as certain requirements are satisfied.
These operations are subject to numerous risks.
Although the Company believes that it operates its synthetic fuel facilities in
compliance with applicable legal requirements for taking the credits, its four
Earthco facilities are under audit by the IRS. IRS field auditors have taken an
adverse position with respect to the Company's compliance with one of these
legal requirements, and if the Company fails to prevail with respect to this
position it could incur significant liability and/or lose the ability to claim
the benefit of tax credits carried forward or generated in the future.
Similarly, the Financial Accounting Standards Board may issue new accounting
rules that would require that uncertain tax benefits (such as those associated
with the Earthco plants) be probable of being sustained in order to be recorded
on the financial statements; if adopted, this provision could have an adverse
financial impact on the Company.
The Company's ability to utilize tax credits is dependent on having sufficient
tax liability. Any conditions that negatively impact the Company's tax
liability, such as weather, could also diminish the Company's ability to utilize
credits, including those previously generated, and the synthetic fuel is
generally not economical to produce absent the credits. Finally, the tax credits
associated with synthetic fuels may be phased out if market prices for crude oil
exceed certain prices.
The Company's synthetic fuel operations and related risks are described in more
detail in Note 21 and in the "Risk Factors" section.
Rail Services
The Rail Services business segment, led by Progress Rail Services Corporation
(Progress Rail), is one of the largest integrated and diversified suppliers of
railroad and transit system products and services in North America and is
headquartered in Albertville, Alabama. Rail Services' principal business
functions include two business units: the Locomotive and Railcar Services (LRS)
and Engineering and Track-work Services (ETS).
The LRS unit is primarily focused on railroad rolling stock that includes
freight cars, transit cars and locomotives, the repair and maintenance of these
units, the manufacturing or reconditioning of major components for these units
and scrap metal recycling. The ETS unit focuses on rail and other track
components, the infrastructure which supports the operation of rolling stock, as
well as the equipment used in maintaining the railroad infrastructure and
right-of-way. The Recycling division of the LRS unit supports both business
units through its reclamation of reconditionable material and is a major
supplier of recyclable scrap metal to North American steel mills and foundries
through its processing locations as well as its scrap brokerage operations.
In February 2005, Progress Energy signed a definitive agreement to sell its
Progress Rail subsidiary to subsidiaries of One Equity Partners LLC for a sales
price of $405 million. Proceeds from the sale are expected to be used to reduce
debt. See Note 23 for more information.
In March 2003, the Company signed a letter of intent to sell Railcar Ltd., to
The Andersons, Inc. The asset purchase agreement was signed in November 2003,
and the transaction closed in February 2004.
14
With operations in 23 states, Canada and Mexico, Progress Rail offers a full
range of railcar parts, maintenance-of-way equipment, rail and other track
material, railcar repair facilities, railcar scrapping and metal recycling as
well as railcar sales and leasing.
PROGRESS TELECOM LLC
In December 2003, PTC and Caronet, both indirectly wholly owned subsidiaries of
Progress Energy, and EPIK Communications, Inc. (EPIK), a wholly owned subsidiary
of Odyssey Telecorp, Inc. (Odyssey) contributed substantially all of their
assets and transferred certain liabilities to PT LLC, a subsidiary of PTC.
Subsequently, the stock of Caronet, a Progress Energy Carolinas subsidiary, was
sold to an affiliate of Odyssey for $2 million in cash and Caronet became an
indirect wholly owned subsidiary of Odyssey. Following consummation of all the
transactions described above, PTC holds a 55% ownership interest in, and is the
parent of, PT LLC. The accounts of PT LLC have been included in the Company's
Financial Statements since the transaction date.
PT LLC has data fiber network transport capabilities that stretch from New York
to Miami, Florida, with gateways to Latin America and conducts primarily a
carrier's carrier business. PT LLC markets wholesale fiber-optic-based capacity
service in the Eastern United States to long-distance carriers, Internet service
providers and other telecommunications companies. PT LLC also markets wireless
structure attachments to wireless communication companies and governmental
entities. At December 31, 2004, PT LLC owned and managed approximately 8,500
route miles and more than 420,000 fiber miles of fiber-optic cable.
PT LLC competes with other providers of fiber-optic telecommunications services,
including local exchange carriers and competitive access providers, in the
Eastern United States.
Lease revenue for dedicated transport and data services is generally billed in
advance on a fixed rate basis and recognized over the period the services are
provided. Revenues relating to design and construction of wireless
infrastructure are recognized upon completion of services (i.e., as the revenue
is earned) for each completed phase of design and construction.
For additional information regarding asset and investment impairments related to
the Company's investments in the telecommunications industry, see Note 10 to the
Financial Statements.
COMPETITION
Florida Progress' nonutility subsidiaries compete in their respective
marketplaces in terms of price, quality of service, location and other factors.
Progress Fuels competes in several distinct markets. Its coal and synthetic fuel
operations compete in the eastern United States industrial coal markets, and its
rail operations compete in the railcar repair, parts and associated services
markets primarily in the eastern United States, but also in the midwest, west,
Canada and Mexico. Factors contributing to Progress Fuels' success in these
markets include a competitive cost structure and strategic locations. There are,
however, numerous competitors in each of these markets, although no one
competitor is dominant in any industry.
Progress Fuels' gas production operations compete in the East Texas/North
Louisiana region. Factors contributing to success include a competitive cost
structure. Although there are numerous small, independent competitors in this
market, the major oil and gas producers dominate this industry.
15
ITEM 2. PROPERTIES
GENERAL
Florida Progress believes that its physical properties and those of its
subsidiaries are adequate to carry their businesses as currently conducted.
Florida Progress and its subsidiaries maintain property insurance against loss
or damage by fire or other perils to the extent that such property is usually
insured.
UTILITY OPERATIONS
At December 31, 2004, PEF's 14 generating plants represent a flexible mix of
fossil, nuclear, combustion turbine and combined cycle resources with a total
summer generating capacity (including jointly owned capacity) of 8,544 MW. At
December 31, 2004, PEF had the following generating facilities:
- ------------------------------------------------------------------------------------------------------------------------
PEF Summer Net
No. of In-Service Ownership
Capability (a)
Facility Location Units Date Fuel (in %) (in MW)
- ------------------------------------------------------------------------------------------------------------------------
STEAM TURBINES
Anclote Holiday, Fla. 2 1974-1978 Gas/Oil 100 993
Bartow St. Petersburg, Fla. 3 1958-1963 Gas/Oil 100 444
Crystal River Crystal River, Fla. 4 1966-1984 Coal 100 2,302
Suwannee River Live Oak, Fla. 3 1953-1956 Gas/Oil 100 143
--------- ----------------
Total 12 3,882
COMBINED CYCLE
Hines Bartow, Fla. 2 1999-2003 Gas/Oil 100 998
Tiger Bay Fort Meade, Fla. 1 1997 Gas 100 207
--------- ----------------
Total 3 1,205
COMBUSTION TURBINES
Avon Park Avon Park, Fla. 2 1968 Gas/Oil 100 52
Bartow St. Petersburg, Fla. 4 1958-1972 Gas/Oil 100 187
Bayboro St. Petersburg, Fla. 4 1973 Oil 100 184
DeBary DeBary, Fla. 10 1975-1992 Gas/Oil 100 667
Higgins Oldsmar, Fla. 4 1969-1970 Gas/Oil 100 122
Intercession City Intercession City, 14 1974-2000 Gas/Oil 100 (c) 1,041 (b)
Fla.
Rio Pinar Rio Pinar, Fla. 1 1970 Oil 100 13
Suwannee River Live Oak, Fla. 3 1980 Gas/Oil 100 164
Turner Enterprise, Fla. 4 1970-1974 Oil 100 154
University of Gainesville, Fla. 1 1994 Gas 100 35
Florida Cogeneration
--------- ----------------
Total 47 2,619
NUCLEAR
Crystal River Crystal River, Fla. 1 1977 Uranium 91.78 838 (b)
--------- ----------------
Total 1 838
TOTAL 63 8,544
- ------------------------------------------------------------------------------------------------------------------------
(a) Amounts represent PEF's net summer peak rating, gross of co-ownership
interest in plant capacity.
(b) Facilities are jointly owned. The capacities shown include joint
owners' share.
(c) PEF and Georgia Power Company (Georgia Power) are co-owners of a 143
MW advanced combustion turbine located at PEF's Intercession City site
(P11). Georgia Power has the exclusive right to the output of this
unit during the months of June through September. PEF has that right
for the remainder of the year.
At December 31, 2004, PEF had total capacity resources of approximately 10,042
MW, including both the total generating capacity of 8,544 MW and the total firm
contracts for purchased power of 1,498 MW.
16
Several entities have acquired undivided ownership interests in CR3 in the
aggregate amount of 8.22%. The joint ownership participants are: City of Alachua
- - 0.08%, City of Bushnell - 0.04%, City of Gainesville - 1.41%, Kissimmee
Utility Authority - 0.68%, City of Leesburg - 0.82%, Utilities Commission of the
City of New Smyrna Beach - 0.56%, City of Ocala - 1.33%, Orlando Utilities
Commission - 1.60% and Seminole Electric Cooperative, Inc. - 1.70%. PEF and
Georgia Power are co-owners of a 143 MW advance combustion turbine located at
PEF's Intercession City site (P11). Georgia Power has the exclusive right to the
output of this unit during the months of June through September. PEF has that
right for the remainder of the year. Otherwise, PEF has good and marketable
title to its principal plants and important units, subject to the lien of its
mortgage and deed of trust, with minor exceptions, restrictions and reservations
in conveyances, as well as minor defects of the nature ordinarily found in
properties of similar character and magnitude. PEF also owns certain easements
over private property on which transmission and distribution lines are located.
At December 31, 2004, PEF had approximately 5,000 circuit miles of transmission
lines including 200 miles of 500 kV lines and 1,500 miles of 230 kV lines. PEF
also had 22,000 circuit miles of overhead distribution conductor and 13,000
circuit miles of underground distribution cable. Distribution and transmission
substations in service had a transformer capacity of approximately 45,000,000
kVA in 616 transformers. Distribution line transformers numbered approximately
365,000 with an aggregate capacity of about 18,000,000 kVA.
DIVERSIFIED OPERATIONS
Progress Fuels controls, either directly or through subsidiaries, coal reserves
located in eastern Kentucky and southeastern Virginia of approximately 46
million tons and controls, through mineral leases, additional estimated coal
reserves of approximately 48 million tons. The reserves controlled include
substantial quantities of high quality, low sulfur coal that is appropriate for
use at PEF's existing generating units. Progress Fuels' total production of coal
during 2004 was approximately 3.4 million tons.
In connection with its coal operations, Progress Fuels' business units own and
operate surface and underground mines, coal processing and loadout facilities in
southeastern Kentucky and southwestern Virginia. Other subsidiaries own and
operate a river terminal facility in eastern Kentucky, a railcar-to-barge
loading facility in West Virginia, two bulk commodity terminals on the Kanawha
River near Charleston, West Virginia and a bulk commodity terminal on the Ohio
River near Huntington, West Virginia. Progress Fuels and its subsidiaries employ
both Company and contract miners in their mining activities.
Progress Fuels has oil and gas leases in East Texas and Louisiana with total
proven oil and gas reserves of approximately 247 billion cubic feet equivalent.
Progress Fuels' oil and gas production in 2004 was 30.4 billion cubic feet
equivalent. The following provides further information on the oil and gas
operations (See Note 22).
Gross and net developed and undeveloped acreage at December 31, 2004 follow:
- --------------------------------------------------------------------------
Developed Undeveloped
--------------------------- -------------------------
Gross Net Gross Net
- --------------------------------------------------------------------------
United States 94,891 67,300 15,797 13,291
- --------------------------------------------------------------------------
The number of gross and net development wells completed during each of the years
ending December 31 follows:
- ---------------------------------------------------------------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------------------
(in millions) Gross Net Gross Net Gross Net
- ---------------------------------------------------------------------------------------
Development Wells:
Productive 90 74 110 101 51 44
Dry 1 1 2 2 - -
- ---------------------------------------------------------------------------------------
Total Development 91 75 112 103 51 44
- ---------------------------------------------------------------------------------------
The number of productive oil and gas wells at December 31, 2004, follows:
- ------------------------------------------------------------
Oil Gas
--------------------- -------------------
(in millions) Gross Net Gross Net
- ------------------------------------------------------------
United States 55 51 363 336
- ------------------------------------------------------------
17
OTHER
Progress Rail, a Progress Fuels subsidiary, is one of the largest integrated
processors of railroad materials in the United States, and is a leading supplier
of new and reconditioned freight car parts; rail, rail welding and track work
components; railcar repair facilities; railcar and locomotive leasing;
maintenance-of-way equipment and scrap metal recycling. It has facilities and
offices in 23 states, Mexico and Canada.
Progress Rail owns and/or operates approximately 2,000 railcars and 50
locomotives that are used for the transportation and shipping of coal, steel,
and other bulk products.
PTC provides wholesale telecommunications services throughout the Eastern United
States. PT LLC incorporates more than 420,000 fiber miles in its network,
including over 189 Points-of-Presence, or physical locations where a presence
for network access exists.
18
ITEM 3. LEGAL PROCEEDINGS
1. Calgon Carbon Corporation v. Potomac Capital Investment Corporation,
Potomac Electric Power Company, Progress Capital Holdings, Inc., and
Florida Progress Corporation, United States District Court for the Western
District of Pennsylvania, Civil Action No. 98-0072.
In 1996, Florida Progress sold its 80% interest in Advanced Separation
Technologies (AST) to Calgon Carbon Corporation (Calgon) for net proceeds
of $56 million in cash. In 1998, Calgon filed a lawsuit against Florida
Progress and the other selling shareholder and amended it in April 1998,
alleging misstatement of AST's 1996 revenues, assets and liabilities,
seeking damages and granting Calgon the right to rescind the sale. The
lawsuit also accused the sellers of failing to disclose flaws in AST's
manufacturing process and a lack of quality control.
All parties filed motions for summary judgment in July 2001. The summary
judgment motions of Calgon and the other selling shareholder were denied in
April 2002. The summary judgment motion of Florida Progress was withdrawn
pending a legal challenge to portions of the report of Calgon's expert,
Arthur Andersen, which had been used to oppose summary judgment. In
September 2003, the United States District Court for the Western District
of Pennsylvania issued final orders excluding from evidence in the case
that portion of Arthur Andersen's damage analysis based on the discounted
cash flow methodology of valuation. The Court did not exclude Arthur
Andersen's use of the guideline publicly traded company methodology in its
damage analysis. Florida Progress filed a renewed motion for summary
judgment in October 2003, which is pending. Because the motion has now been
outstanding for over a year, a ruling on the motion is expected at any
time.
Florida Progress believes that the aggregate total of all legitimate
warranty claims by customers of AST for which it is probable that Florida
Progress will be responsible under the Stock Purchase Agreement with Calgon
is approximately $3 million, and accordingly, accrued $3 million in the
third quarter of 1999 as an estimate of probable loss. The Company cannot
predict the outcome of this matter, but will vigorously defend against the
allegations (See Note 21).
2. U.S. Global, LLC v. Progress Energy, Inc. et al., Case No. 03004028-03
Progress Synfuel Holdings, Inc. et al. v. U.S. Global, LLC, Case No.
03004028-03
A number of Progress Energy, Inc. subsidiaries and affiliates are parties
to two lawsuits arising out of an Asset Purchase Agreement dated as of
October 19, 1999, by and among U.S. Global LLC (Global), Earthco, certain
affiliates of Earthco (collectively the Earthco Sellers), EFC Synfuel LLC
(which is owned indirectly by Progress Energy, Inc.) and certain of its
affiliates, including Solid Energy LLC, Solid Fuel LLC, Ceredo Synfuel LLC,
Gulf Coast Synfuel LLC (currently named Sandy River Synfuel LLC)
(collectively the Progress Affiliates), as amended by an amendment to
Purchase Agreement as of August 23, 2000 (the Asset Purchase Agreement).
Global has asserted that pursuant to the Asset Purchase Agreement it is
entitled to (1) an interest in two synthetic fuel facilities currently
owned by the Progress Affiliates, and (2) an option to purchase additional
interests in the two synthetic fuel facilities.
The first suit, U.S. Global, LLC v. Progress Energy, Inc. et al., was filed
in the Circuit Court for Broward County, Florida, in March 2003 (the
Florida Global Case). The Florida Global Case asserts claims for breach of
the Asset Purchase Agreement and other contract and tort claims related to
the Progress Affiliates' alleged interference with Global's rights under
the Asset Purchase Agreement. The Florida Global Case requests an
unspecified amount of compensatory damages, as well as declaratory relief.
Following briefing and argument on a number of dispositive motions on
successive versions of Global's complaint, on August 16, 2004, the Progress
Affiliates answered the Fourth Amended Complaint by generally denying all
of Global's substantive allegations and asserting numerous affirmative
defenses. The parties are currently engaged in discovery in the Florida
Global Case.
The second suit, Progress Synfuel Holdings, Inc. et al. v. U.S. Global,
LLC, was filed by the Progress Affiliates in the Superior Court for Wake
County, North Carolina, seeking declaratory relief consistent with the
Company's interpretation of the asset Purchase Agreement (the North
Carolina Global Case). Global was served with the North Carolina Global
Case on April 17, 2003.
19
On May 15, 2003, Global moved to dismiss the North Carolina Global Case for
lack of personal jurisdiction over Global. In the alternative, Global
requested that the court decline to exercise its discretion to hear the
Progress Affiliates' declaratory judgment action. On August 7, 2003, the
Wake County Superior court denied Global's motion to dismiss and entered an
order staying the North Carolina Global Case, pending the outcome of the
Florida Global Case. The Progress Affiliates appealed the Superior court's
order staying the case. By order dated September 7, 2004, the North
Carolina Court of Appeals dismissed the Progress Affiliates' appeal.
The Company cannot predict the outcome of these matters, but will
vigorously defend against the allegations.
For a discussion of certain other legal matters, see Note 21 to the Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by ITEM 4 is omitted pursuant to Instruction I (2)
(c) to Form 10-K (Omission of Information by Certain Wholly owned Subsidiaries).
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
FLORIDA PROGRESS
Since November 2000, all of Florida Progress' common stock is owned by Progress
Energy, and as a result there is no established public trading market for the
stock. Since the Progress Energy acquisition Florida Progress has not issued or
repurchased any equity securities. Florida Progress receives dividends from PEF.
PEF has provisions restricting dividends in certain limited circumstances (See
Note 12B). FPC did not issue or repurchase any equity securities during 2004.
FPC does not have any equity compensation plans under which its equity
securities are issued.
PEF
All of PEF's common stock is owned by Florida Progress, and as a result there is
no established public trading market for the stock. For the past three years,
PEF has paid quarterly dividends to Florida Progress totaling the amounts shown
in the Statements of Common Equity in the Financial Statements. PEF has
provisions restricting dividends in certain circumstances (See Note 12B). PEF
did not issue or repurchase any equity securities during 2004. PEF does not have
any equity compensation plans under which its equity securities are issued.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by ITEM 6 is omitted pursuant to Instruction I (2)
(a) to Form 10-K (Omission of Information by Certain Wholly owned Subsidiaries).
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements that involve estimates, projections, goals, forecasts, assumptions,
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Please review
"Risk Factors" and "SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion
of the factors that may impact any such forward-looking statements made herein.
Overview
Florida Progress' income from continuing operations for the years ended December
31, 2004 and 2003 were $474 million and $443 million, respectively. The increase
in income from continuing operations in 2004 is primarily due to:
o Reduction in revenue sharing provisions in Florida.
o Favorable customer growth at the utility.
o Increased margins as a result of the allowed return on the Hines 2 Plant at
the utility.
o Increased earnings for natural gas operations, which include the gain
recorded on the disposition of certain gas assets.
o Increased earnings for Rail operations.
Partially offsetting these items were the:
o Reduction in synthetic fuel earnings due to lower synthetic fuel sales due
to the impact of hurricanes during the year.
o Reduction in revenues due to customer outages in Florida associated with
the hurricanes.
o Increased interest charges due to the reversal of interest expense for
resolved tax matters in 2003.
These and other key operating results are discussed by segment below.
Progress Energy Florida
PEF's operating results are primarily influenced by customer demand for
electricity, its ability to control costs and its regulatory return on equity.
Annual demand for electricity is based on the number of customers, their annual
usage and the impact of weather. Since PEF serves a predominately retail
customer base, operating results are primarily influenced by the level of retail
sales and the costs associated with those sales. In addition, the current
economic conditions in the service territories may impact the annual demand for
electricity.
The FPSC oversees the retail sales of the state's investor-owned electric
utilities and authorizes retail base rates. Base rates and the resulting base
revenues are intended to cover certain reasonable and prudent expenses of
utility operations and provide investors with a fair rate of return.
Costs not covered by base rates include fuel, purchased power, energy
conservation expenses and certain environmental costs. The FPSC allows electric
utilities to recover these costs, referred to as "pass-through" costs, through
various cost recovery clauses to the extent those costs are prudent. Due to the
regulatory treatment of these expenses and the method allows for recovery,
changes from year to year have no material impact on operating results.
PEF contributed segment profits of $333 million and $295 million in 2004 and
2003, respectively. Profits for 2004 increased due to favorable customer growth,
a reduction in the provision for revenue sharing, favorable wholesale revenues,
the additional return on investment on the Hines 2 plant and reduced O&M
expenses. These items were partially offset by unfavorable weather, a reduction
in revenues related to the hurricanes, increased interest expense and increased
depreciation expense from assets placed in service. The decrease in profits in
2003, when compared to 2002, was primarily due to the impact of the 2002 rate
case stipulation, higher benefit-related costs primarily related to higher
pension expense, higher depreciation and the unfavorable impact of weather.
These amounts were partially offset by continued customer growth and lower
interest charges.
PEF's profits in 2004 and 2003 were affected by the outcome of the Florida Power
rate case stipulation, which included a one-time retroactive revenue refund in
2002, a decrease in retail rates of 9.25% (effective May 1, 2002), provisions
for revenue sharing with the retail customer base, lower depreciation and
amortization and increased service revenue rates (See Note 8B).
21
A comparison of the results of operations of PEF for the past two years follows:
REVENUES
PEF's electric revenues for the years ended December 31, 2004, 2003 and 2002 and
the percentage change by year and by customer class, as well as the impact of
the rate case settlement on revenue, are as follows:
----------------------------------------------------------------------------------------------
(in millions)
----------------------------------------------------------------------------------------------
Customer Class 2004 % Change 2003 % Change 2002
----------------------------------------------------------------------------------------------
Residential $ 1,806 6.8 $ 1,691 2.8 $ 1,645
Commercial 853 15.3 740 1.2 731
Industrial 254 16.0 219 3.8 211
Governmental 211 16.6 181 4.6 173
Revenue sharing refund (11) - (35) - (5)
Retroactive retail rate refund - - - - (35)
----------------------------------------------------------------------------------------------
Total retail revenues $ 3,113 11.3 $ 2,796 2.8 $ 2,720
Wholesale 268 18.1 227 (1.3) 230
Unbilled 7 - (2) - (3)
Miscellaneous 137 4.6 131 13.9 115
----------------------------------------------------------------------------------------------
Total electric revenues $ 3,525 11.8 $ 3,152 2.9 $ 3,062
----------------------------------------------------------------------------------------------
PEF's electric energy sales for the years ended December 31, 2004, 2003 and 2002
and the percentage change by year and by customer class are as follows:
------------------------------------------------------------------------------------------------
(in thousands of MWh)
------------------------------------------------------------------------------------------------
Customer Class 2004 % Change 2003 % Change 2002
------------------------------------------------------------------------------------------------
Residential 19,347 (0.4) 19,429 3.6 18,754
Commercial 11,734 1.6 11,553 1.2 11,420
Industrial 4,069 1.7 4,000 4.3 3,835
Governmental 3,044 2.4 2,974 4.4 2,850
------------------------------------------------------------------------------------------------
Total retail energy sales 38,194 0.6 37,956 3.0 36,859
Wholesale 5,101 18.0 4,323 3.4 4,180
Unbilled 358 - 233 - 5
------------------------------------------------------------------------------------------------
Total MWh sales 43,653 2.6 42,512 3.6 41,044
------------------------------------------------------------------------------------------------
PEF's revenues, excluding recoverable fuel and other pass-through revenues of
$2.007 billion and $1.692 billion for 2004 and 2003, respectively, increased $58
million. This increase was due primarily to favorable customer growth, which
increased revenues $34 million. PEF has 37,000 additional retail customers
compared to prior year. Revenues were also favorably impacted by a reduction in
the provision for revenue sharing of $24 million. Results for 2003 included an
additional refund of $18 million related to the 2002 revenue sharing provision
as ordered by the FPSC in July of 2003. In addition, improved wholesale sales
increased revenues by $11 million. Included in fuel revenues is the recovery of
depreciation and capital costs associated with the Hines Unit 2, which was
placed into service in December 2003 and contributed $36 million in additional
revenues in 2004. The recovery of the Hines Unit 2 costs through the fuel clause
is in accordance with the 2002 rate stipulation. These increases were partially
offset by the reduction in revenues related to customer outages for Hurricanes
Charley, Frances and Jeanne of approximately $12 million and the impact of
milder weather in the current year of $10 million.
PEF's revenues, excluding recoverable fuel and other pass-through revenues of
$1.692 billion and $1.602 billion in 2003 and 2002, respectively, were unchanged
from 2002 to 2003. Revenues were favorably impacted by $49 million in 2003,
primarily as a result of customer growth (approximately 36,000 additional
customers). In addition, other operating revenues were favorable by $16 million
due primarily to higher wheeling and transmission revenues and higher service
charge revenues (resulting from increased rates allowed under the 2002 rate
settlement). These increases were partially offset by the negative impact of the
rate settlement, which decreased revenues, lower wholesale sales and the impact
of unfavorable weather. The provision for revenue sharing increased $12 million
in 2003 compared to the $5 million provision recorded in 2002. Revenues in 2003
were also impacted by the final resolution of the 2002 revenue sharing
provisions as the FPSC issued an order in July of 2003 that required PEF to
refund an additional $18 million to customers related to 2002. The 9.25% rate
reduction from the settlement accounted for an additional $46 million decline in
revenues. The 2003 impact of the rate settlement was partially offset by the
absence of the prior year interim rate refund of $35 million. Lower wholesale
revenues (excluding fuel revenues) of $17 million and the $8 million impact of
milder weather also reduced base revenues during 2003.
22
EXPENSES
Fuel and Purchased Power
Fuel and purchased power costs represent the costs of generation, which include
fuel purchases for generation, as well as energy purchased in the market to meet
customer load. Fuel and purchased power expenses are recovered primarily through
cost recovery clauses, and, as such, changes in these expenses do not have a
material impact on earnings. The difference between fuel and purchased power
costs incurred and associated fuel revenues that is subject to recovery is
deferred for future collection or refund to customers.
Fuel and purchased power expenses were $1.742 billion in 2004, which represents
a $306 million increase compared to 2003. This increase is due to increases in
fuel used in electric generation and purchased power expenses of $305 million
and $1 million, respectively. Higher system requirements and increased fuel
costs in the current year account for $87 million of the increase in fuel used
in electric generation. The remaining increase is due to the recovery of fuel
expenses that were deferred in the prior year, partially offset by the deferral
of current year under-recovered fuel expenses. In November 2003, the FPSC
approved PEF's request for a cost adjustment in its annual fuel filing due to
the rising costs of fuel. The new rates became effective January 2004.
Operations and Maintenance (O&M)
O&M expenses were $630 million in 2004, which represents a $10 million decrease
when compared to the prior year. This decrease is primarily related to favorable
benefit-related costs of $16 million, primarily due to lower pension costs which
resulted from improved pension asset performance.
O&M expenses were $640 million in 2003, which represents a $49 million increase
when compared to the prior year. The increase is largely related to increases in
certain benefit-related expenses of $36 million, which consisted primarily of
higher pension expense of $27 million and higher operational costs related to
the CR3 nuclear outage and plant maintenance.
Depreciation and Amortization
Depreciation and amortization expense was $281 million for 2004, which
represents a decrease of $26 million when compared to the prior year, primarily
due to the amortization of the Tiger Bay regulatory asset in the prior year. The
Tiger Bay regulatory asset, for contract termination costs, was recovered
pursuant to an agreement between PEF and the FPSC that was approved in 1997. The
amortization of the regulatory asset was calculated using revenues collected
under the fuel adjustment clause; as such, fluctuations in this expense did not
have an impact on earnings. During 2003, Tiger Bay amortization was $47 million.
The Tiger Bay asset was fully amortized in September 2003. The decrease in Tiger
Bay amortization was partially offset by additional depreciation for assets
placed in service, including depreciation for Hines Unit 2 of approximately $9
million. This depreciation expense is being recovered through the fuel cost
recovery clause as allowed by the FPSC. See discussion of the return on Hines 2
in the revenues analysis above.
Depreciation and amortization was $307 million in 2003, which represents an
increase of $12 million when compared to 2002. Depreciation increased primarily
as a result of additional assets being placed into service that were partially
offset by lower amortization of the Tiger Bay regulatory asset of $2 million,
which was fully amortized in September 2003.
Taxes other than on income
Taxes other than on income were $254 million in 2004, which represents an
increase of $13 million compared to the prior year. This increase is due to
increases in gross receipts and franchise taxes of $8 million and $7 million,
respectively, related to an increase in revenues and an increase in property
taxes of $5 million due to increases in property placed in service and tax
rates. These increases were partially offset by a reduction in payroll taxes of
$7 million.
Taxes other than on income were $241 million in 2003, which represents an
increase of $13 million compared to prior year. This increase was due to
increases in payroll taxes of $10 million and increases in gross receipts and
franchise taxes of $4 million combined.
23
Interest Expense
Interest charges, net were $114 million in 2004, which represents an increase of
$23 million compared to the prior year. Interest charges, net were $91 million
in 2003, which represents a $15 million decrease compared to 2002. The
fluctuations were primarily due to interest costs in 2003 being favorably
impacted by the reversal of interest expense due to the resolution of certain
tax matters.
Income Tax Expense
Income tax expense was $174 million, $147 million and $163 million in 2004, 2003
and 2002, respectively. In 2004, 2003 and 2002, $14 million, $13 million and $20
million, respectively, of the tax benefit that was previously held at Progress
Energy holding company was allocated to PEF. As required by an SEC order issued
in 2002, certain holding company tax benefits are allocated to profitable
subsidiaries. Other fluctuations in income taxes are primarily due to changes in
pretax income.
Progress Fuels Corporation
Progress Fuels makes up the majority of Florida Progress' diversified
operations. The results of operations for Progress Fuels' Energy and Related
Services and Rail Services units are discussed below.
Energy and Related Services - Income from continuing operations for Energy and
Related Services were $137 million and $166 million for 2004 and 2003,
respectively. The following summarizes Energy and Related Services' segment
profits for the years ended 2004 and 2003:
--------------------------------------------------------------------
(in millions) 2004 2003
--------------------------------------------------------------------
Synthetic fuel operations $ 57 $ 139
Natural gas operations 85 34
Coal fuel and other operations (5) (7)
--------------------------------------------------------------------
Segment profits $ 137 $ 166
--------------------------------------------------------------------
SYNTHETIC FUEL OPERATIONS
Synthetic fuel operations generated profits of $57 million and $139 million for
the years ended December 31, 2004 and 2003, respectively. The production and
sale of the synthetic fuel generate operating losses, but qualify for tax
credits under Section 29 of the Internal Revenue Code, which more than offset
the effects of such losses. The operations resulted in the following losses
(prior to tax credits) and tax credits for 2004 and 2003.
-----------------------------------------------------------------------
(in millions) 2004 2003
-----------------------------------------------------------------------
Tons sold 4.9 7.5
After-tax losses (excluding tax credits) $ (70) $ (74)
Tax credits 127 213
-----------------------------------------------------------------------
Net Profit $ 57 $ 139
-----------------------------------------------------------------------
Synthetic fuel operations' net profits decreased in 2004 as compared to 2003 due
primarily to a decrease in synthetic fuel production and an increase in
operating expenses in 2004. The Company's total synthetic fuel production of
approximately five million tons in 2004 is down compared to 2003 production
levels of approximately eight million tons as a result of hurricane costs, which
reduced the Company's projected 2004 regular tax liability and its corresponding
ability to record tax credits from its synthetic fuel production.
As of September 30, 2004, the Company anticipated an ability to record
approximately three million tons of production based on the Company's projected
tax liability for 2004. This estimate was based upon the Company's projected
casualty loss as a result of the storms. Therefore, the Company recorded a
charge of $47 million in the third quarter for tax credits associated with
approximately 1.8 million tons sold during the year that the Company anticipated
it would not be able to use. On November 2, 2004, PEF filed a petition with the
FPSC to recover $252 million of storm costs plus interest from customers over a
two-year period. Based on a reasonable expectation at December 31, 2004, that
the FPSC will grant the requested recovery of the storm costs, the Company's
loss from the casualty is less than originally anticipated. Accordingly, as of
December 31, 2004, the Company's anticipated 2004 tax liability supported
credits on approximately five million tons. Therefore, the Company recorded tax
credits of $55 million for the quarter ended December 31, 2004, for tax credits
associated with approximately 2 million tons sold during the year that the
Company now anticipates can be used. As of December 31, 2004, the Company
24
anticipates that approximately $5 million of tax credits associated with
approximately 0.2 million tons sold during the year could not be used (See Note
21E). The Company ceased operations at its Earthco facilities for the last three
months of 2004 due to the decrease in the Company's projected 2004 tax
liability, and these facilities were restarted in January 2005.
The Company believes its right to recover storm costs is well established,
however, the Company cannot predict the timing or outcome of this matter. If the
FPSC should deny PEF's petition for the recovery of storm costs in 2005, there
could be a material impact on the amount of 2005 synthetic fuels production and
results of operations.
NATURAL GAS OPERATIONS
Natural gas operations generated profits of $85 million and $34 million for the
years ended December 31, 2004 and 2003, respectively. Natural gas profits
increased $51 million in 2004 compared to 2003 due primarily to the gain
recognized on the sale of gas assets during the year. In December 2004, the
Company sold certain gas-producing properties and related assets owned by
Winchester Production (North Texas gas operations). Because the sale
significantly altered the ongoing relationship between capitalized costs and
remaining proved reserves, under the full-cost method of accounting the pre-tax
gain of $56 million ($31 million net of taxes) was recognized in earnings rather
than as a reduction of the basis of the Company's remaining oil and gas
properties. In addition, an increase in production, coupled with higher gas
prices in 2004, contributed to the increased earnings in 2004 as compared to
2003. Production levels increased resulting from the acquisition of North Texas
Gas in late February 2003 and increased drilling in 2004. Volume and prices have
increased 21% and 16%, respectively, for 2004 compared to 2003.
The following summarizes the production and revenues of the natural gas
operations by location:
- --------------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Production in Bcf equivalent
East Texas/LA gas operations 20 13 6
North Texas gas operations 10 7 -
Mesa - 5 7
- --------------------------------------------------------------------------------
Total production 30 25 13
- --------------------------------------------------------------------------------
Revenues in millions
East Texas/LA gas operations $ 110 $ 65 $ 24
North Texas gas operations 52 38 -
Mesa - 13 15
- --------------------------------------------------------------------------------
Total revenues $ 162 $ 116 $ 39
- --------------------------------------------------------------------------------
Gross margin
In millions of $ $ 126 $ 91 $ 29
As a % of revenues 78% 78% 74%
- --------------------------------------------------------------------------------
25
RESULTS FROM PRODUCING ACTIVITIES
The following summarizes the results of operations of natural gas production
operations:
- ------------------------------------------------------------------------------
Years ending December 31,
($ in millions except for averages) 2004 2003 2002
- ------------------------------------------------------------------------------
Gas production (Bcfe) 30.4 25.1 12.7
Average sales price:
Gas (per Mcf) $ 4.84 $ 4.24 $ 2.77
Oil (per Bbl) $ 41.06 $ 29.46 $ 26.33
Average sales price combined (per Mcfe) $ 4.95 $ 4.27 $ 2.84
Average production cost (per Mcfe) $ 0.92 $ 0.66 $ 0.54
Revenue (millions)
Gas $ 168 $ 116 $ 32
Oil $ 11 $ 7 $ 3
Hedging $ (28) $ (16) $ 1
- ------------------------------------------------------------------------------
Total revenue 151 107 36
- ------------------------------------------------------------------------------
Production costs $ 28 $ 16 $ 7
- ------------------------------------------------------------------------------
COAL FUEL AND OTHER OPERATIONS
Coal fuel and other operations generated losses of $5 million and $7 million for
the years ended December 31, 2004 and, 2003, respectively. The increase in
profits for 2004 is primarily due to higher volumes and margins for coal fuel
operations of $16 million after-tax. A reduction in impairment losses of $2
million after-tax also increased coal earnings. An impairment of goodwill
related to the Diamond May coal mine reduced earnings by $8 million before and
after-tax (See Note 9). Results in 2003 included the recording of an impairment
of certain assets at the Kentucky May coal mine of $10 million after-tax in 2003
(See Note 10). This favorability was offset by a reduction in profits of $7
million after-tax for fuel transportation operations related to the waterborne
transportation ruling by the FPSC (See Note 8B). Profits were also negatively
impacted by higher corporate costs of $10 million in 2004. Corporate cost in the
prior year included $4 million of favorability related to the reduction of an
environmental reserve (See Note 20). The remaining unfavorability in corporate
costs is attributable to increased interest expense related to unresolved tax
matters and higher professional fees.
The Company is exploring strategic alternatives regarding the Fuels' coal mining
business, which could include divesting these assets. As of December 31, 2004
the carrying value of long-lived assets of the coal mining business were $62
million. The Company cannot currently predict the outcome of this matter.
RAIL SERVICES
Rail's operations represent the activities of Progress Rail Services Corporation
(Progress Rail) and include railcar and locomotive repair, track-work, rail
parts reconditioning and sales, scrap metal recycling, railcar leasing and other
rail-related services.
Rail contributed segment profits of $16 million and losses of $1 million for the
years ended December 31, 2004 and 2003, respectively. Results in 2004 were
favorably impacted by the strong scrap metal market in 2004. Revenues were
$1.131 billion in 2004, which represents an increase of $284 million compared to
prior year. This increase is due primarily to increased volumes and higher
prices in recycling operations and in part to increased production and sales in
locomotive and railcar services and engineering and track services. Tonnage for
recycling operations is up approximately 35% on an annualized basis compared to
2003. The increase in tonnage, coupled with an increase in the average index
price of approximately 80%, accounts for the significant increase in revenues
year over year. The American Metal Market index price for #1 rail road heavy
melt (which is used as the index for buying and selling of railcars) has
increased to $191 as of December 31, 2004, from $106 as of December 31, 2003.
Cost of goods sold was $990 million in 2004, which represents an increase of
$252 million compared to the prior year. The increase in costs of good sold is
due to increased costs for inventory, labor and operations as a result of the
increased volume in the recycling operations, locomotive and railcar services
and engineering and track services. In addition, results in 2003 were negatively
impacted by the retroactive reallocation of Service Company costs of $3 million
after-tax. The favorability related to the reallocation was offset by an
increase in general and administrative costs in 2004 related primarily to higher
professional fees associated with divestiture efforts.
26
In February 2005, Progress Energy signed a definitive agreement to sell its
Progress Rail subsidiary to subsidiaries of One Equity Partners LLC for a sales
price of $405 million. Proceeds from the sale are expected to be used to reduce
debt. See Note 22 for more information.
Other
The Other segment includes telecommunications, holding company and financing
expenses and had net losses from continuing operations of $12 million and $17
million in 2004 and 2003, respectively.
PTC had net losses of $5 million and $3 million for 2004 and 2003, respectively.
The increase in losses compared to prior year is due to an increase in fixed
costs, mainly depreciation expense, and professional fees related to the merger
with EPIK. In December 2003, PTC and Caronet, Inc., both indirectly wholly owned
subsidiaries of Progress Energy, and EPIK Communications, Inc., a wholly owned
subsidiary of Odyssey Telecorp, Inc., contributed substantially all of their
assets and transferred certain liabilities to PT LLC, a subsidiary of PTC.
Subsequently, the stock of Caronet, a subsidiary of Progress Energy Carolinas,
was sold to an affiliate of Odyssey for $2 million in cash and Caronet became an
indirect wholly owned subsidiary of Odyssey. Following consummation of all the
transactions described above, PTC holds a 55 percent ownership interest in, and
is the parent of PT LLC. Odyssey holds a combined 45 percent ownership interest
in PT LLC through EPIK and Caronet. The accounts of PT LLC are included in the
Company's Financial Statements since the transaction date.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Florida Progress and PEF prepared their financial statements in accordance with
accounting principles generally accepted in the United States. In doing so,
certain estimates were made that were critical in nature to the results of
operations. The following discusses those significant estimates that may have a
material impact on its financial results and are subject to the greatest amount
of subjectivity. Senior management has discussed the development and selection
of these critical accounting policies with the Audit Committee of Progress
Energy's Board of Directors.
Utility Regulation
PEF is subject to regulation that sets the prices (rates) it is permitted to
charge customers based on the costs that regulatory agencies determine PEF is
permitted to recover (See Note 8). At times, regulators permit the future
recovery through rates of costs that would be currently charged to expense by a
nonregulated company. This ratemaking process results in deferral of expense
recognition and the recording of regulatory assets based on anticipated future
cash inflows. As a result of the changing regulatory framework, a significant
amount of regulatory assets have been recorded. PEF continually reviews these
assets to assess their ultimate recoverability within the approved regulatory
guidelines. Impairment risk associated with these assets relates to potentially
adverse legislative, judicial or regulatory actions in the future. Additionally,
the state regulatory agency often provides flexibility in the manner and timing
of the depreciation of property, nuclear decommissioning costs and amortization
of the regulatory assets.
Asset Impairments
Florida Progress evaluates the carrying value of long-lived assets for
impairment whenever indicators exist. Examples of these indicators include
current period losses combined with a history of losses, or a projection of
continuing losses, or a significant decrease in the market price of a long-lived
asset group. If an indicator exists, the asset group held and used is tested for
recoverability by comparing the carrying value to the sum of undiscounted
expected future cash flows directly attributable to the asset group. If the
asset group is not recoverable through undiscounted cash flows or if the asset
group is to be disposed of, an impairment loss is recognized for the difference
between the carrying value and the fair value of the asset group. A high degree
of judgment is required in developing estimates related to these evaluations and
various factors are considered, including projected revenues and cost and market
conditions.
In connection with a review of strategic alternatives regarding the Fuels' coal
mining business, the Company performed an impairment test of the goodwill of the
coal mining business in the fourth quarter of 2004. As a result of the
impairment test, the Company recorded an impairment loss of $8 million to write
off all of the goodwill of the coal mining business. The Company used a
probability-weighted discounted cash flow analysis to perform the assessment.
27
Due to the reduction in coal production at the Kentucky May Coal Mine, the
Company evaluated its long-lived assets in 2003 and recorded an impairment of
$15 million on a pre-tax basis during the fourth quarter of 2003. See Note 10 to
the Financial Statements for further information on this impairment. Fair value
was determined based on discounted cash flows.
During 2002, Florida Progress recorded pre-tax long-lived asset impairments of
$215 million related to its telecommunications business. See Note 10 to the
Financial Statements for further information on this impairment and other
charges. The fair value of these assets was determined using an external
valuation study heavily weighted on a discounted cash flow methodology and using
market approaches as supporting information.
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 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 flow hedges as of the balance sheet
date. If the ceiling (discounted revenues) is not equal to or greater than total
capitalized costs, the Company is required to write-down capitalized costs to
this level. The Company performs this ceiling test calculation every quarter. No
write-downs were required in 2004, 2003 or 2002.
Synthetic Fuels Tax Credits
As discussed in Note 21E, Florida Progress, through the Energy and Related
Services business unit, owns facilities that produce synthetic fuel as defined
under the Internal Revenue Code. The production and sale of the synthetic fuel
from these facilities qualifies for tax credits under Section 29 if certain
requirements are satisfied, including a requirement that the synthetic fuel
differs significantly in chemical composition from the coal used to produce such
synthetic fuel and that the fuel was produced from a facility that was placed in
service before July 1, 1998. The amount of Section 29 credits that the Company
is allowed to claim in any calendar year is limited by the amount of the
Company's regular federal income tax liability. Synthetic fuel tax credit
amounts allowed but not utilized are carried forward indefinitely as deferred
alternative minimum tax credits on the Consolidated Balance Sheets. All of
Florida Progress' synthetic fuel facilities have received PLRs from the IRS with
respect to their operations, although these do not address placed-in-service
date determinations. The PLRs do not limit the production on which synthetic
fuel credits may be claimed. The current Section 29 tax credit program expires
at the end of 2007. These tax credits are subject to review by the IRS, and if
Progress Energy fails to prevail through the administrative or legal process,
there could be a significant tax liability owed for previously taken Section 29
credits, with a significant impact on earnings and cash flows. Additionally, the
ability to use tax credits currently being carried forward could be denied. See
further discussion at Note 21E and in the "Risk Factors" section.
Pension Costs
As discussed in Note 15 to the Financial Statements, Florida Progress and PEF
maintain qualified non-contributory defined benefit retirement (pension) plans.
The reported costs of providing pension benefits are dependent on numerous
factors resulting from actual plan experience and assumptions of future
experience. For example, such costs are impacted by employee demographics,
changes made to plan provisions, actual plan asset returns and key actuarial
assumptions such as rates of return on plan assets and discount rates used in
determining benefit obligations and annual costs. In addition, reported costs
reflect certain delayed recognition features in the accounting model used to
determine each year's cost.
Due to a decline in market interest rates for high-quality (AAA/AA) debt
securities, which are used as the benchmark for setting the discount rate used
to present value future benefit payments, Florida Progress lowered the discount
rate to 5.9% at December 31, 2004, which will increase the 2005 benefit costs
recognized, all other factors remaining constant. Plan assets performed well in
2004, with returns of approximately 14%. That positive asset performance will
result in decreased pension cost in 2005, all other factors remaining constant.
Evaluations of the effects of these and other factors have not been completed,
but Florida Progress estimates that 2005 total cost recognized for pension will
be approximately plus or minus $2 million of the amount recorded in 2004.
Florida Progress has pension plan assets with a fair value of approximately $919
million at December 31, 2004. Florida Progress' expected rate of return on
pension plan assets is 9.25%. The Company reviews this rate on a regular basis.
Under SFAS No. 87, "Employers' Accounting for Pensions" the expected rate of
return used in pension cost recognition is a long-term rate of return;
therefore, Florida Progress would only adjust that return if its fundamental
assessment of the debt and equity markets changes or its investment policy
changes significantly. Florida Progress believes that its pension plans' asset
investment mix and historical performance support the long-term rate of 9.25%
being used. Florida Progress does not adjust the rate in response to short-term
market fluctuations such as the abnormally high market return levels of the
28
latter 1990's, recent years' market declines and the market rebound in 2003 and
2004. A 0.25% change in the expected rate of return for 2004 would have changed
2004 pension cost by approximately $2 million. Approximately 95% of Florida
Progress' pension assets and obligations are attributable to PEF.
Another factor affecting Florida Progress' and PEF's pension cost, and
sensitivity of the cost to plan asset performance, is its selection of a method
to determine the market-related value of assets, i.e., the asset value to which
the 9.25% long-term expected rate of return is applied. SFAS No. 87 specifies
that entities may use either fair value or an averaging method that recognizes
changes in fair value over a period not to exceed five years, with the method
selected applied on a consistent basis from year to year. Florida Progress uses
the fair value method of determining market-related value. Changes in plan asset
performance are reflected in pension cost sooner under the fair value method
than the five-year averaging method and, therefore, pension cost tends to be
more volatile using the fair value method.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Florida Progress' utility and diversified operations are capital-intensive
businesses. Florida Progress relies upon its operating cash flow, commercial
paper facilities and its ability to access long-term capital markets for its
liquidity needs. Since a substantial majority of Florida Progress' operating
costs are related to its regulated electric utility, a significant portion of
these costs are recovered from customers through fuel and energy cost recovery
clauses.
The Company and its subsidiaries participate in two internal money pools,
operated by Progress Energy, to more effectively utilize cash resources and to
reduce outside short-term borrowings. Short-term borrowing needs are met first
by available funds of the money pool participants. Borrowing companies pay
interest at a rate designed to approximate the cost of outside short-term
borrowings. Subsidiaries, which invest in the money pool, earn interest on a
basis proportionate to their av