Back to GetFilings.com
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, 2003
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 registrants as specified in their
Commission charters, state of incorporation, address of principal I.R.S. Employer
File Number executive offices, and telephone number Identification Number
1-15929 Progress Energy, Inc. 56-2155481
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina
1-3382 Carolina Power & Light Company 56-0165465
d/b/a Progress Energy Carolinas, Inc.
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Progress Energy, Inc.:
Common Stock (Without Par Value) New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Progress Energy, Inc.: None
Carolina Power & Light Company: $100 par value Preferred Stock, Cumulative
$100 par value Serial Preferred Stock, Cumulative
Indicate by check mark whether the registrants (1) have filed all reports 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. [ ]
Indicate by check mark whether Progress Energy, Inc. is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X . No .
Indicate by check mark whether Carolina Power & Light Company is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes . No X .
As of June 30, 2003, the aggregate market value of the voting and non-voting
common equity of Progress Energy, Inc. held by non-affiliates was
$10,586,386,401. As of June 30, 2003, the aggregate market value of the common
equity of Carolina Power & Light Company held by non-affiliates was $0. All of
the common stock of Carolina Power & Light Company is owned by Progress Energy,
Inc.
1
As of January 30, 2004, each registrant had the following shares of common stock
outstanding:
Registrant Description Shares
---------- ----------- ------
Progress Energy, Inc. Common Stock (Without Par Value) 245,640,831
Carolina Power & Light Company Common Stock (Without Par Value) 159,608,055
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Progress Energy and PEC definitive proxy statements dated March
31, 2004 are incorporated into PART III, ITEMS 10, 11, 12 , 13 and 14 hereof.
This combined Form 10-K is filed separately by two registrants: Progress Energy,
Inc. (Progress Energy) and Carolina Power & Light Company d/b/a Progress Energy
Carolinas, Inc. (PEC). Information contained herein relating to either
individual registrant is filed by such registrant solely on its own behalf.
2
TABLE OF CONTENTS
GLOSSARY OF TERMS
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
EXECUTIVE OFFICERS OF THE REGISTRANTS
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
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 AND REPORTS ON FORM 8-K
PROGRESS ENERGY, INC. RISK FACTORS
CAROLINA POWER & LIGHT COMPANY 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
401(k) Progress Energy 401(k) Savings and Stock Ownership Plan
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement related to retail rate matters
AHI Affordable Housing investment
ARO Asset Retirement Obligation
Bcf Billion cubic feet
Broad River Skygen Energy LLC's Broad River Facility
Btu British thermal units
Caronet Caronet, Inc.
CCO Competitive Commercial Operations business segment
CERCLA or Superfund Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended
Code Internal Revenue Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company Progress Energy, Inc. and subsidiaries
CP&L Carolina Power & Light Company
CR3 Progress Energy Florida's nuclear generating plant, Crystal River Unit No. 3
CVO Contingent value obligation
DOE United States Department of Energy
DWM North Carolina Department of Environment and Natural Resources, Division of
Waste Management
ENCNG Eastern North Carolina Natural Gas Company, formerly referred to as
EasternNC
EITF Emerging Issues Task Force
E&TW Engineering and Trackwork
EPA United States Environmental Protection Agency
EPA of 1992 Energy Policy Act of 1992
EPIK EPIK Communications, Inc.
ESOP Employee Stock Ownership Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FDEP Florida Department of Environment and Protection
FIN No. 46 FASB Interpretation No. 46, "Consolidation of Variable Interest Entities -
an Interpretation of ARB No. 51"
FIN No. 46R December 2003 revision of FIN No. 46
Florida Progress or FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Fuels Fuels business segment
Funding Corp. Florida Progress Funding Corporation
Genco Progress Genco Ventures LLC
Georgia Power Georgia Power Company
Global U.S. Global LLC
Harris Plant Shearon Harris Nuclear Plant
Interpath Interpath Communications, Inc.
IBEW International Brotherhood of Electrical Workers
IRS Internal Revenue Service
ISO Independent System Operator
Jackson Jackson Electric Membership Corporation
kV Kilovolt
kVA Kilovolt-ampere
LIBOR London Inter Bank Offering Rate
LRS Locomotive and Railcar Services
LSEs Load-serving entities
MACT Maximum Achievable Control Technology
MDC Maximum Dependable Capability
MGP Manufactured Gas Plant
MW Megawatt
4
MWh Megawatt-hour
NCNG North Carolina Natural Gas Corporation
NCUC North Carolina Utilities Commission
NEIL Nuclear Electric Insurance Limited
NOx Nitrogen oxide
NOx SIP Call EPA rule which requires 22 states including North and South Carolina to
further reduce nitrogen oxide emissions.
NRC United States Nuclear Regulatory Commission
Nuclear Waste Act Nuclear Waste Policy Act of 1982
OPEB Postretirement benefits other than pensions
Odyssey Odyssey Telecorp, Inc.
P11 Intercession Unit P11
PEC Progress Energy Carolinas, Inc.
PESC Progress Energy Service Company, LLC
PFA IRS Prefiling Agreement
the Plan Revenue Sharing Incentive Plan
PLR Private Letter Ruling
Power Agency North Carolina Eastern Municipal Power Agency
PCH Progress Capital Holdings, Inc.
Progress Energy Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly Electric Fuels Corporation
Progress Rail Progress Rail Services Corporation
Progress Ventures Business unit of Progress Energy primarily made up of nonregulated energy
generation and marketing activities, as well as gas, coal and synthetic
fuel operations
Preferred Securities FPC-obligated mandatorily redeemable preferred securities of FPC Capital I
PRP Potentially responsible party, as defined in CERCLA
PSSP Performance Share Sub-Plan
PTC Progress Telecommunications Corporation
PTC LLC Progress Telecom, LLC
PUHCA Public Utility Holding Company Act of 1935, as amended
PURPA Public Utilities Regulatory Policies Act of 1978
PVI Progress Ventures, Inc. (formerly referred to as CPL Energy Ventures, Inc.)
PWR Pressurized water reactor
QF Qualifying facilities
Rail Services Rail Services business segment
Rockport Indiana Michigan Power Company's Rockport Unit No. 2
RSA Restricted Stock Awards program
RTO Regional Transmission Organization
SCPSC Public Service Commission of South Carolina
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
SFAS Statement of Financial Accounting Standards
SFAS No. 5 Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies"
SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation"
SFAS No. 87 Statement of Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions"
SFAS No. 121 Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of"
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. 138 Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an
Amendment of FASB Statement No. 133"
SFAS No. 142 Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets"
5
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"
SFAS No. 150 Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity"
SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission and Standard Market Design
SO2 Sulfur dioxide
SRS Strategic Resource Solutions Corp.
Tax Agreement Intercompany Income Tax Allocation Agreement
the Trust FPC Capital I
Westchester Westchester Gas Company
6
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The 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 a) PART II, ITEM 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" including, but not limited to, statements
under the following headings: 1) "Liquidity and Capital Resources" about
operating cash flows, estimated capital requirements through the year 2006 and
future financing plans 2) "Strategy" about Progress Energy's strategy and 3)
"Other Matters" about the effects of new environmental regulations, nuclear
decommissioning costs and the effect of electric utility industry restructuring,
and b) statements made in the "Risk Factors" sections.
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Progress Energy nor PEC 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; the impact of recent events in the
energy markets that have increased the level of public and regulatory scrutiny
in the energy industry and in the capital markets; deregulation or restructuring
in the electric industry that may result in increased competition and
unrecovered (stranded) costs; the uncertainty regarding the timing, creation and
structure of regional transmission organizations; weather conditions that
directly influence the demand for electricity; recurring seasonal fluctuations
in demand for electricity; fluctuations in the price of energy commodities and
purchased power; economic fluctuations and the corresponding impact on Progress
Energy, Inc. and subsidiaries' (the Company) 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 that increases in leverage 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 and the ability to control
costs; 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 Company's ability to successfully integrate newly acquired assets,
properties or businesses into its operations as quickly or as profitably as
expected; 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; 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
United States Securities and Exchange Commission (SEC) reports. 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 Progress Energy and PEC. 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 Progress Energy and PEC.
7
PART I
ITEM 1. BUSINESS
GENERAL
COMPANY
Progress Energy, Inc. (Progress Energy or the Company, which includes
consolidated subsidiaries unless otherwise indicated) is a registered holding
company under the Public Utility Holding Company Act of 1935 (PUHCA) and is an
integrated energy company located principally in the southeast region of the
United States. Both the Company and its subsidiaries are subject to the
regulatory provisions of PUHCA. Progress Energy was incorporated on August 19,
1999. The Company was initially formed as CP&L Energy, Inc. (CP&L Energy), which
became the holding company for Carolina Power & Light Company (CP&L) on June 19,
2000. All shares of common stock of CP&L were exchanged for an equal number of
shares of CP&L Energy common stock.
Effective January 1, 2003, CP&L, Florida Power Corporation and Progress
Ventures, Inc. began doing business under the names Progress Energy Carolinas,
Inc. (PEC), Progress Energy Florida, Inc. (PEF) and Progress Energy Ventures,
Inc. (Progress Ventures), respectively. The legal names of these entities have
not changed and there was no restructuring of any kind related to the name
change. The current corporate and business unit structure remains unchanged.
Through its wholly-owned regulated subsidiaries PEC and PEF, Progress Energy is
primarily engaged in the generation, transmission, distribution and sale of
electricity in portions of North Carolina, South Carolina and Florida. Through
its Competitive Commercial Operations (CCO) business segment, Progress Energy is
involved in nonregulated electricity generation operations. Through its Fuels
business segment (Fuels), Progress Energy is involved in natural gas drilling
and production, coal terminal services, coal mining, synthetic fuel production,
fuel transportation and delivery. Both CCO and Fuels are involved in limited
energy trading activities. Through its Rail Services business segment (Rail
Services), Progress Energy engages in various rail and railcar related services.
The Other Businesses segment primarily includes telecommunication services,
miscellaneous nonregulated activities, and holding company operations. For
information regarding the revenues, income and assets attributable to the
Company's business segments, see PART II, ITEM 8, Note 19 to the Progress Energy
Consolidated Financial Statements.
The Company has more than 24,000 megawatts (MW) of electric generation capacity
and serves more than 2.8 million retail electric customers in portions of North
Carolina, South Carolina and Florida. PEC's and PEF's utility operations are
complementary: PEC has a summer peaking demand, while PEF has a winter peaking
demand. In addition, PEC's greater proportion of commercial and industrial
customers combined with PEF's greater proportion of residential customers
creates a balanced customer base. The Company is dedicated to expanding the
region's electric generation capacity and delivering reliable, competitively
priced energy.
Progress Energy revenues for the year ended December 31, 2003 were $8.7 billion
and assets at year-end were $26.2 billion. Its principal executive offices are
located at 410 South Wilmington Street, Raleigh, North Carolina 27601, telephone
number (919) 546-6111. The Progress Energy home page on the Internet is located
at http://www.progress-energy.com, the contents of which are not and shall not
be deemed a part of this document or any other U.S. Securities and Exchange
Commission (SEC) filing. The Company makes available free of charge on its
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to the
SEC.
SIGNIFICANT TRANSACTIONS
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 (PTC 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
percent ownership interest in, and is the parent of PTC LLC. See PART II, ITEM
8, Note 4A to the Progress Energy Consolidated Financial Statements.
8
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 Corporation
(Progress Fuels), which is included in the Fuels segment. Net proceeds of
approximately $97 million were used to reduce debt. See PART II, ITEM 8, Note 3C
to the Progress Energy Consolidated Financial Statements.
NCNG Divestiture
On September 30, 2003, the Company completed the sale of North Carolina Natural
Gas Corporation (NCNG) and the Company's equity investment in Eastern North
Carolina Natural Gas Company (ENCNG) to Piedmont Natural Gas Company, Inc. As a
result of this action, the operating results of NCNG were reclassified to
discontinued operations for all reportable periods. Net proceeds from the sale
of NCNG and ENCNG of approximately $450 million were used to reduce debt. See
PART II, ITEM 8, Note 3A to the Progress Energy Consolidated Financial
Statements.
Natural Gas Reserves Acquisition
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 PART II,
ITEM 8, Note 4B to the Progress Energy Consolidated Financial Statements.
Wholesale Energy Contract Acquisition
In May 2003, PVI entered into a definitive agreement with Williams Energy
Marketing and Trading, a subsidiary of The Williams Companies, Inc., to acquire
a long-term full-requirements power supply agreement at fixed prices with
Jackson Electric Membership Corporation (Jackson), for $188 million. See PART
II, ITEM 8, Note 4C to the Progress Energy Consolidated Financial Statements.
Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a resolution
approving the sale of the majority of the assets of Railcar Ltd., a leasing
subsidiary included in the Rail Services segment. An estimated impairment on
assets held for sale was recognized in December 2002 to write-down the assets to
fair value less the costs to sell.
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 from the sale were approximately $82 million. See PART II, ITEM 8, Note
3B to the Progress Energy Consolidated Financial Statements.
Westchester Acquisition
In April 2002, Progress Fuels acquired 100% of Westchester Gas Company
(Westchester). 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 PART
II, ITEM 8, Note 4E to the Progress Energy Consolidated Financial Statements.
Generation Acquisition
In February 2002, PVI acquired 100% of two electric generating projects in
Georgia from LG&E Energy Corp., a subsidiary of Powergen plc. for a total cash
purchase price of approximately $348 million. The transaction included tolling
agreements and two power purchase agreements with LG&E Energy Marketing, Inc.
See PART II, ITEM 8, Note 4D to the Progress Energy Consolidated Financial
Statements.
9
COMPETITION
GENERAL
In recent years, the electric utility industry has experienced a substantial
increase in competition at the wholesale level, caused by changes in federal law
and regulatory policy. Several states have also decided to restructure aspects
of retail electric service. The issue of retail restructuring and competition is
being reviewed by a number of states and bills have been introduced in past
sessions of Congress that sought to introduce such restructuring in all states.
The 108th Congress spent much of 2003 working on a comprehensive energy bill.
While that legislation passed the House, the Senate failed to pass the
legislation in 2003. There will probably be an effort to resurrect the
legislation in 2004. The legislation would have further clarified the Federal
Energy Regulatory Commission's (FERC) role with respect to Standard Market
Design and mandatory Regional Transmission Organizations (RTOs) and would have
repealed PUHCA. The Company cannot predict the outcome of this matter.
As a result of the Public Utilities Regulatory Policies Act of 1978 (PURPA) and
the Energy Policy Act of 1992 (EPA of 1992), competition in the wholesale
electricity market has greatly increased, especially from non-utility generators
of electricity. In 1996, the FERC issued new rules on transmission service to
facilitate competition in the wholesale market on a nationwide basis. The rules
give greater flexibility and more choices to wholesale power customers.
In 2000, the FERC issued Order No. 2000 on RTOs, which set minimum
characteristics and eight functions for transmission entities, including
independent system operators (ISOs) and transmission companies that are required
to become FERC-approved RTOs. The rule stated that public utilities that own,
operate or control interstate transmission facilities had to have filed, by
October 2000, either a proposal to participate in an RTO or an alternative
filing describing efforts and plans to participate in an RTO. The order provided
guidance and specified minimum characteristics and functions required of an RTO
and also stated that all RTOs should be operational by December 15, 2001. During
2001, the deadline for RTOs to be operational was extended.
In July 2002, the FERC issued its Notice of Proposed Rulemaking in Docket No.
RM01-12-000 Remedying Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design (SMD NOPR). The proposed rules
set forth in the SMD NOPR would require, among other things, that 1) all
transmission-owning utilities transfer control of their transmission facilities
to an independent third party; 2) transmission service to bundled retail
customers be provided under the FERC-regulated transmission tariff, rather than
state-mandated terms and conditions; 3) new terms and conditions for
transmission service be adopted nationwide, including provisions for pricing
transmission in the event of transmission congestion; 4) new energy markets be
established for the buying and selling of electric energy; and 5) load-serving
entities (LSEs) be required to meet minimum criteria for generating reserves. In
2003, the FERC released a White Paper on the Wholesale Market Platform. The
White Paper provides an overview of what the FERC intends to include in a final
rule in the SMD NOPR docket. The White Paper retains the fundamental and most
protested aspects of SMD NOPR, including mandatory RTOs and the FERC's assertion
of jurisdiction over certain aspects of retail service. The FERC has not yet
issued a final rule on SMD NOPR.
To date, many states have adopted legislation that would give retail customers
the right to choose their electricity provider (retail choice) and most other
states have, in some form, considered the issue. There is currently no proposed
legislation in North Carolina, South Carolina or Florida that would introduce
retail choice.
The developments described above have created changing markets for energy. As a
strategy for competing in these changing markets, the Company is becoming a
total energy provider in the region by providing a full array of energy-related
services to its current customers and expanding its market reach. The Company
took a major step towards implementing this strategy through its acquisition of
Florida Progress Corporation (FPC) in November 2000.
Since passage of the EPA of 1992, competition in the wholesale electric utility
industry has significantly increased due to a greater participation by
traditional electricity suppliers, wholesale power marketers and brokers and due
to the trading of energy futures contracts on various commodities exchanges.
This increased competition could affect PEC and PEF's load forecasts, plans for
power supply and wholesale energy sales and related revenues. The impact could
10
vary depending on the extent to which additional generation is built to compete
in the wholesale market, new opportunities are created for PEC and PEF to expand
their wholesale load, or current wholesale customers elect to purchase from
other suppliers after existing contracts expire.
An issue encompassed by industry restructuring is the recovery of "stranded
costs." Stranded costs primarily include the generation assets of utilities
whose value in a competitive marketplace would be less than their current book
value, as well as above-market purchased power commitments to qualifying
facilities (QFs). Thus far, all states that have passed restructuring
legislation have provided for the opportunity to recover a substantial portion
of stranded costs. Assessing the amount of stranded costs for a utility requires
various assumptions about future market conditions, including the future price
of electricity.
In November 2003, the FERC adopted new standards of conduct that apply uniformly
to interstate natural gas pipelines and public utilities. The new standards of
conduct govern the relationship between transmission providers and their energy
affiliates in a manner that prevents market power and preferential treatment.
Each utility was required to submit a plan and schedule for compliance with the
new rules by February 2004. All utilities must be in compliance with the new
rules no later than June 2004. PEC and PEF have submitted their plans and
schedules for timely compliance.
See PART I, ITEM 1, "Competition" of Electric-PEC and Electric-PEF for
discussions of franchises as they relate to PEC and PEF.
See PART I, ITEM 1, "Competition," under Electric-PEC, Electric-PEF and Other
for further discussion of competitive developments within these segments.
PUHCA
As a result of the acquisition of FPC, Progress Energy is now a registered
holding company subject to regulation by the SEC under PUHCA. Therefore,
Progress Energy and its subsidiaries are subject to the regulatory provisions of
PUHCA, including provisions relating to the issuance of securities, sales and
acquisitions of securities and utility assets, and services performed by
Progress Energy Service Company, LLC.
While various proposals, including the 2003 energy bill, have been introduced in
Congress regarding PUHCA, the prospects for legislative reform or repeal are
uncertain at this time.
REGULATORY MATTERS
GENERAL
PEC and PEF are subject to regulation in North Carolina by the North Carolina
Utilities Commission (NCUC), in South Carolina by the Public Service Commission
of South Carolina (SCPSC) and in Florida by the Florida Public Service
Commission (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, PEC and PEF are 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 including a reasonable rate of return on its equity. Increased
competition as a result of industry restructuring may affect the ratemaking
process.
NUCLEAR MATTERS
GENERAL
PEC owns and operates four nuclear units and PEF owns and operates one nuclear
generating unit which are regulated by the United States 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. The nuclear units are periodically
removed from service to accommodate normal refueling and maintenance outages,
repairs and certain other modifications.
11
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.
NRC operating licenses held by PEC currently expire in July 2010 for Robinson
Unit No. 2, in December 2014 and September 2016 for Brunswick Units 2 and 1,
respectively and in October 2026 for the Shearon Harris Nuclear Plant (Harris
Plant). An application to extend the Robinson license 20 years was submitted in
June 2002 and a similar application is expected to be made for the Brunswick
Plant in December 2004 and for the Harris Plant in 2006. According to the NRC
schedule, the Company expects to receive the new license extension for Robinson
in April 2004. A condition of the operating license for each unit requires an
approved plan for decontamination and decommissioning.
In addition, PEC will request to have its license for the Independent Spent Fuel
Storage Installation at the Robinson Plant extended 20 years with an exemption
request for an additional 20-year extension during the first quarter of 2004.
Its current license is due to expire in August 2006. PEC expects to receive this
extension.
PEF has a license to operate its Crystal River Unit No. 3 (CR3) nuclear
generating plant through December 3, 2016. On February 20, 2003, PEF notified
the NRC of its intent to submit an application to extend the plant license in
the first quarter of 2009.
PRESSURIZED WATER REACTORS
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. Inspections of
the vessel heads at the Company's PWR plants had been performed during previous
outages. At the Robinson and Harris Plants, inspections were completed in 2001
and there was no degradation of the reactor vessel heads. The Company's
Brunswick Plant has a different design and is not affected by the issue.
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. The
Robinson Plant is in this category and had a refueling outage in 2002. The
Company completed a series of examinations in 2002 of the entire reactor
pressure vessel head and found no indications of control rod drive mechanism
cracking and no corrosion of the head itself. During the outage, a walkdown of
the reactor coolant pressure boundary was also completed and no corrosion was
found. The Company currently plans to re-inspect the Robinson Plant reactor head
during its next refueling outage in 2004 and replace the head in 2005. The
Harris Plant is ranked in the lowest susceptibility classification. 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.
No adverse impact is anticipated. The NRC also issued a bulletin requesting PWR
licensees to address inspection plans for reactor pressure vessel lower head
penetrations. The Company plans to perform bare metal visual inspections of
Robinson during the next regularly scheduled refueling outages in 2004. The
Company completed a bare metal visual inspection of the vessel bottom at Harris
and CR3 during their 2003 outages and found no signs of corrosion or leakage at
either unit. The Company plans to do additional, more detailed inspections as
part of the next scheduled 10-year in-service inspections.
In February 2004, the NRC issued a revised Order for inspection requirements for
reactor pressure vessel heads at PWRs. The Company is in the process of
reviewing the Order. No adverse impact is anticipated.
12
SECURITY
The NRC has issued various orders since September 2001 with regard to security
at nuclear plants. These orders include additional restrictions on access,
increased security measures and closer coordination with the Company's partners
in intelligence, military, law enforcement and emergency response at the
federal, state and local levels. The Company is completing the requirements as
outlined in the orders by the established deadlines. As the NRC, other
governmental entities and the industry continue to consider security issues, it
is possible that more extensive security plans could be required.
SPENT FUEL AND OTHER HIGH-LEVEL RADIOACTIVE WASTE
The Nuclear Waste Policy Act of 1982 (Nuclear Waste Act) provides the framework
for development by the federal government of interim storage and permanent
disposal facilities for high-level radioactive waste materials. The Nuclear
Waste Act promotes increased usage of interim storage of spent nuclear fuel at
existing nuclear plants. The Company will continue to maximize the use of spent
fuel storage capability within its own facilities for as long as feasible. With
certain modifications and additional approval by the NRC including the
installation of onsite dry storage facilities at Robinson (2005) and Brunswick
(2008), PEC's spent nuclear fuel storage facilities will be sufficient to
provide storage space for spent fuel generated on PEC's system through the
expiration of the current operating licenses for all of PEC's nuclear generating
units. PEF currently is storing spent nuclear fuel onsite in spent fuel pools.
PEF will seek renewal of the CR3 operating license and currently, CR3 has
sufficient storage capacity in place for fuel consumed through the end of the
expiration of the current license in 2016. If PEF receives approval of the CR3
operating license renewal, dry storage may be necessary. See PART II, ITEM 8,
Note 21E to the Progress Energy Consolidated Financial Statements and Note 16D
to the PEC Consolidated Financial Statements for a discussion of the Company's
contract with the U.S. Department of Energy (DOE) for spent nuclear waste.
DECOMMISSIONING
In PEC's and PEF's retail jurisdictions, provisions for nuclear decommissioning
costs are approved by the NCUC, the SCPSC and the FPSC and are based on
site-specific estimates that include the costs for removal of all radioactive
and other structures at the site. In the wholesale jurisdiction, the provisions
for nuclear decommissioning costs are approved by the FERC. See PART II, ITEM 8,
Note 5D to the Progress Energy Consolidated Financial Statements and Note 3D to
the PEC Consolidated Financial Statements for a discussion of PEC and PEF's
nuclear decommissioning costs.
ENVIRONMENTAL
GENERAL
In the areas of air quality, water quality, control of toxic substances and
hazardous and solid wastes and other environmental matters, the Company is
subject to regulation by various federal, state and local authorities. The
Company considers itself to be in substantial compliance with those
environmental regulations currently applicable to its business and operations
and believes it has all necessary permits to conduct such operations.
Environmental laws and regulations constantly evolve and the ultimate costs of
compliance cannot always be accurately estimated. The estimated capital costs
associated with compliance with pollution control laws and regulations at the
Company's existing fossil facilities that the Company expects to incur from 2004
through 2006 are included in the "Investing Activities" discussion under PART
II, ITEM 7, "Liquidity and Capital Resources".
AIR QUALITY
Amendments to the Federal Clean Air Act require substantial reductions in sulfur
dioxide (SO2) and nitrogen oxide (NOx) emissions from fossil-fueled electric
generating plants. The Company meets the SO2 emissions requirements by
maintaining sufficient SO2 emission allowances. Installation of additional
equipment was necessary to reduce NOx emissions. Increased operation and
maintenance costs, including emission allowance expense, installation of
additional equipment and increased fuel costs are not material to the
consolidated financial position or results of operations of the Company.
13
There has been and may be further proposed federal legislation requiring
reductions in air emissions for NOx, SO2, carbon dioxide and mercury. Some of
these proposals establish nationwide caps and emission rates over an extended
period of time. This national multi-emission approach to air pollution control
could involve significant capital costs which could be material to the Company's
financial operations. Some companies may seek recovery of the related costs
through rate adjustments or similar mechanisms. Control equipment that will be
installed on North Carolina fossil generating facilities as part of the North
Carolina law discussed below may address some of the issues outlined above.
However, the Company cannot predict the outcome of this matter.
The U.S. Environmental Protection Agency (EPA) is conducting an enforcement
initiative related to a number of coal-fired utility power plants in an effort
to determine whether modifications at those facilities were subject to New
Source Review requirements or New Source Performance Standards under the Clean
Air Act. Both PEC and PEF were asked to provide information to the EPA as part
of this initiative and cooperated in providing the requested information. The
EPA initiated enforcement actions against other unaffiliated utilities as part
of this initiative, some of which have resulted in settlement agreements calling
for expenditures, ranging from $1.0 billion to $1.4 billion. A utility that was
not subject to a civil enforcement action settled its New Source Review issues
with the EPA for $300 million. These settlement agreements have generally called
for expenditures to be made over extended time periods, and some of the
companies may seek recovery of the related cost through rate adjustments or
similar mechanisms. The Company cannot predict the outcome of this matter.
In 2003, the EPA published a final rule addressing routine equipment replacement
under the New Source Review program. The rule defines routine equipment
replacement and the types of activities that are not subject to New Source
Review requirements or New Source Performance Standards under the Clean Air Act.
The rule was challenged in federal court and its implementation has been stayed.
The Company cannot predict the outcome of this matter.
In 1998, the EPA published a final rule at Section 110 of the Clean Air Act
addressing the issue of regional transport of ozone (NOx SIP Call). The EPA's
rule requires 23 jurisdictions, including North Carolina, South Carolina and
Georgia, but not Florida, to further reduce NOx emissions in order to attain a
pre-set state emission level during each year's "ozone season," beginning May
31, 2004. PEC is currently installing controls necessary to comply with the rule
and expects to be in compliance as required by the final rule. Capital
expenditures to meet these measures in North Carolina and South Carolina could
reach approximately $370 million, which has not been adjusted for inflation. The
Company has spent approximately $258 million to date related to these
expenditures. Increased operation and maintenance costs relating to the NOx SIP
Call are not expected to be material to the Company's results of operations. The
Company cannot predict the outcome of this matter.
The EPA published a final rule approving petitions under Section 126 of the
Clean Air Act. This rule, as originally promulgated, required certain sources to
make reductions in NOx emissions by May 1, 2003. The final rule also includes a
set of regulations that affect NOx emissions from sources included in the
petitions. The North Carolina coal-fired electric generating plants are included
in these petitions. Acceptable state plans under the NOx SIP Call can be
approved in lieu of the final rules the EPA approved as part of the Section 126
petitions. In April 2002, the EPA published a final rule harmonizing the dates
for the Section 126 rule and the NOx SIP Call. The new compliance date for all
affected sources is now May 31, 2004, rather than May 1, 2003. The EPA has
approved North Carolina's NOx SIP Call rule and has indicated it will rescind
the Section 126 rule in a future rulemaking.
In June 2002, legislation was enacted in North Carolina requiring the state's
electric utilities to reduce the emissions of NOx and SO2 from coal-fired power
plants. Operation and maintenance costs will increase due to the additional
personnel, materials and general maintenance associated with the equipment.
Operation and maintenance expenses are recoverable through base rates, rather
than as part of this program. The legislation also freezes the utilities' base
rates for five years unless there are extraordinary events beyond the control of
the utilities or unless the utilities persistently earn a return substantially
in excess of the rate of return established and found reasonable by the NCUC in
the utilities' last general rate case. See PART II, ITEM 8, Note 21E to the
Progress Energy Consolidated Financial Statements and Note 16D to the Progress
Energy Carolinas Consolidated Financial Statements for further discussion.
14
In 1997, the EPA's Mercury Study Report and Utility Report to Congress conveyed
that mercury is not a risk to the average American and expressed uncertainty
about whether reductions in mercury emissions from coal-fired power plants would
reduce human exposure. Nevertheless, the EPA determined in 2000 that regulation
of mercury emissions from coal-fired power plants was appropriate. In December
2003, the EPA proposed and solicited comment on two alternative control plans
that would limit mercury emissions from coal-fired power plants. The agency has
indicated that it will choose one of the alternatives as the final rule, which
is expected to be promulgated in December 2004. Achieving compliance with either
proposal could involve significant capital costs. The Company cannot predict the
outcome of this matter.
In conjunction with the proposed mercury rule, the EPA proposed a Maximum
Achievable Control Technology (MACT) standard to regulate nickel emissions from
residual oil-fired units. The agency estimates the proposal will reduce national
nickel emissions to approximately 103 tons. The rule is expected to become final
in December 2004. The company cannot predict the outcome of this matter.
In December 2003, the EPA released its proposed Interstate Air Quality Rule
(commonly known as the Fine Particulate Transport Rule and/or the Regional
Transport Rule). The EPA's proposal requires 28 jurisdictions, including North
Carolina, South Carolina, Georgia and Florida, to further reduce NOx and SO2
emissions in order to attain pre-set state NOx and SO2 emissions levels (which
have not yet been determined). The rule is expected to become final in 2004. The
installation of controls necessary to comply with the rule could involve
significant capital costs. The Company cannot predict the outcome of this
matter.
WATER QUALITY
As a result of the operation of certain control equipment needed to address the
air quality issues outlined above, new wastewater streams may be generated.
Integration of these new wastewater streams into existing wastewater treatment
processes may result in permitting, construction and water treatment challenges
to the Company in the immediate and extended future.
After many years of litigation and settlement negotiations the EPA published
final regulations in February 2004 for the implementation of Section 316(b) of
the Clean Water Act. The purpose of these regulations is to minimize any adverse
environmental impact caused by cooling water intake structures and intake
systems located at existing facilities. Over the next several years these
regulations may require the facilities to mitigate the effects to aquatic
organisms by undertaking intake modifications or other restorative activities.
Substantial costs could be incurred by the facilities in order to comply with
the new regulations. The Company cannot predict the outcome and impacts to the
facilities at this time or its cost to comply with any new regulations.
SUPERFUND
The provisions of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA), authorize the EPA to require the
clean up of hazardous waste sites. This statute imposes retroactive joint and
several liabilities. Some states, including North and South Carolina, have
similar types of legislation. There are presently several sites with respect to
which the Company has been notified by the EPA, the State of North Carolina or
the State of Florida of its potential liability, as described below in greater
detail.
Various organic materials associated with the production of manufactured gas,
generally referred to as coal tar, are regulated under federal and state laws.
The lead or sole regulatory agency that is responsible for a particular former
coal tar site depends largely upon the state in which the site is located. There
are several manufactured gas plant (MGP) sites to which both electric utilities
have some connection. In this regard, both electric utilities, with other
potentially responsible parties (PRP), are participating in investigating and,
if necessary, remediating former coal tar sites with several regulatory
agencies, including, but not limited to, the EPA, the Florida Department of
Environmental Protection (FDEP) and the North Carolina Department of Environment
and Natural Resources, Division of Waste Management (DWM). Although the Company
may incur costs at these sites about which it has been notified, based upon the
current status of these sites, the Company cannot predict the outcome of this
matter.
15
Both electric utilities, Progress Fuels and Progress Rail Services Corporation
(Progress Rail) are periodically notified by regulators such as the EPA and
various state agencies of their involvement or potential involvement in sites,
other than MGP sites, that may require investigation and/or remediation.
Although the Company's subsidiaries may incur costs at the sites about which
they have been notified, based upon the current status of these sites, the
Company cannot predict the outcome of this matter.
EMPLOYEES
As of January 31, 2004, Progress Energy and its subsidiaries employed
approximately 15,300 full-time employees. Of this total, approximately 2,200
employees at PEF are represented by the International Brotherhood of Electrical
Workers (IBEW). PEF and the IBEW reached agreement in December 2002 on a new
three-year labor contract.
The Company and some of its subsidiaries have a non-contributory defined benefit
retirement (pension) plan for substantially all full-time employees and an
employee stock purchase plan among other employee benefits. The Company and some
of its subsidiaries also provide contributory postretirement benefits, including
certain health care and life insurance benefits, for substantially all retired
employees.
As of January 31, 2004, PEC employed approximately 5,200 full-time employees.
ELECTRIC - PEC
GENERAL
PEC is a public service corporation formed under the laws of North Carolina in
1926, and is primarily engaged in the generation, transmission, distribution and
sale of electricity in portions of North and South Carolina. At December 31,
2003, PEC had a total summer generating capacity (including jointly-owned
capacity) of approximately 12,416 MW.
PEC distributes and sells electricity in 56 of the 100 counties in North
Carolina and 15 counties in northeastern South Carolina. The territory served is
an area of approximately 34,000 square miles, including a substantial portion of
the coastal plain of North Carolina extending to the Atlantic coast between the
Pamlico River and the South Carolina border, the lower Piedmont section of North
Carolina, an area in northeastern South Carolina and an area in western North
Carolina in and around the city of Asheville. The estimated total population of
the territory served is more than 4.0 million. At December 31, 2003, PEC was
providing electric services, retail and wholesale, to approximately 1.3 million
customers. Major wholesale power sales customers include North Carolina Eastern
Municipal Power Agency (Power Agency) and North Carolina Electric Membership
Corporation. PEC is subject to the rules and regulations of the FERC, the NCUC
and the SCPSC.
BILLED ELECTRIC REVENUES
PEC's electric revenues billed by customer class, for the last three years, are
shown as a percentage of total PEC electric revenues in the table below:
BILLED ELECTRIC REVENUES
Revenue Class 2003 2002 2001
------------- ---- ---- ----
Residential 35% 35% 34%
Commercial 24% 24% 23%
Industrial 18% 18% 19%
Wholesale 19% 19% 19%
Other retail 4% 4% 5%
Major industries in PEC's service area include textiles, chemicals, metals,
paper, food, rubber and plastics, wood products and electronic machinery and
equipment.
16
FUEL AND PURCHASED POWER
Sources of Generation
PEC's total system generation (including jointly-owned capacity) by primary
energy source, along with purchased power, for the last three years is set forth
below:
ENERGY MIX PERCENTAGES
2003 2002 2001
---- ---- ----
Coal 46% 46% 49%
Nuclear 44% 42% 41%
Hydro 1% 1% 0%
Oil/Gas 2% 3% 2%
Purchased power 7% 8% 8%
PEC is generally permitted to pass the cost of recoverable 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. However, PEC believes that its fuel supply contracts,
as described below, will be adequate to meet its fuel supply needs.
PEC's average fuel costs per million British thermal units (Btu) for the last
three years were as follows:
AVERAGE FUEL COST
(per million Btu)
2003 2002 2001
---- ---- ----
Coal $ 2.00 $ 1.93 $ 1.78
Nuclear 0.43 0.43 0.44
Hydro - - -
Oil 6.69 5.48 6.38
Gas 8.32 5.31 4.69
Weighted-average 1.43 1.38 1.26
Changes in the unit price for oil and gas are due to market conditions. Changes
in the unit price for coal between 2001 and 2002 are primarily due to
transportation costs. Changes in the unit price for coal between 2002 and 2003
are being driven by increases in market prices for coal in 2003. Since these
costs are primarily recovered through recovery clauses established by
regulators, fluctuations do not materially affect net income.
Coal
PEC anticipates a requirement of approximately 11.3 million to 11.6 million tons
of coal in 2004. Almost all of the coal will be supplied from Appalachian coal
sources in the United States and is primarily delivered by rail.
For 2004, PEC has short-term, intermediate and long-term agreements from various
sources for approximately 83% of its burn requirements of its coal units. Two of
these contracts are index priced and the remainder are annually fixed price. The
contracts have expiration dates ranging from 2004 to 2008. PEC will continue to
sign contracts of various lengths, terms and quality to meet its expected burn
requirements. All of the coal that PEC has purchased under intermediate and
long-term agreements is considered to be low sulfur coal by industry standards.
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.
17
PEC has sufficient uranium, conversion, enrichment and fabrication contracts to
meet its near-term nuclear fuel requirement needs. PEC typically contracts for
all of its enrichment services and fabrication needs with contract durations
ranging from five to ten years. Recent shutdown of a major North American
conversion facility and increased uncertainty of uranium supply has raised the
risk of supply disruption. As a result, Progress Energy has adjusted its nuclear
fuel inventory and procurement strategy accordingly to offset increased supply
disruption risk by increasing planned delivery lead times and strategic
inventory stockpiles. For a discussion of PEC's plans with respect to spent fuel
storage, see PART I, ITEM 1, "Nuclear Matters."
Hydroelectric
Hydroelectric power is electric energy generated by the force of falling water.
PEC has three hydroelectric generating plants licensed by the FERC: Walters,
Tillery and Blewett. PEC also owns the Marshall Plant which has a license
exemption. The total maximum dependable capacity for these units is 218 MW. PEC
is seeking to relicense its Tillery and Blewett Plants. These plants' licenses
currently expire in April 2008. The Walters Plant license will expire in 2034.
Oil & Gas
Natural gas and oil supply for PEC's generation fleet is purchased under term
and spot contracts from several suppliers. The cost of PEC's oil and gas is
determined by market prices as reported in certain industry publications. PEC
believes that it has access to an adequate supply of oil for the reasonably
foreseeable future. PEC's natural gas transportation is purchased under term
firm transportation contracts with interstate pipelines. PEC also purchases
capacity on a seasonal basis from numerous shippers for its peaking load
requirements. PEC believes that existing contracts for oil are sufficient to
cover its requirements if natural gas is unavailable during a normal winter
period for PEC's combustion turbine and combined cycle fleet.
Purchased Power
PEC purchased approximately 4.5 million MWh in 2003, approximately 5.2 million
MWh in 2002 and approximately 5.3 million MWh in 2001 of its system energy
requirements and had available 1,810 MW in 2003, 1,737 MW in 2002 and 1,756 MW
in 2001 of firm purchased capacity under contract at the time of peak load. PEC
may acquire purchased power capacity in the future to accommodate a portion of
its system load needs.
COMPETITION
Electric Industry Restructuring
PEC continues to monitor any developments that occur toward a more competitive
environment and has actively participated in regulatory reform deliberations in
North Carolina and South Carolina. PEC expects that both the North Carolina and
South Carolina General Assemblies will continue to monitor the experiences of
states that have implemented electric restructuring legislation.
Regional Transmission Organizations
In October 2000, as a result of Order 2000, PEC, along with Duke Energy
Corporation and South Carolina Electric & Gas Company, filed an application with
the FERC for approval of a GridSouth RTO. In July 2001, the FERC issued an order
provisionally approving GridSouth. However, in July 2001, the FERC issued orders
recommending that companies in the southeast engage in a mediation to develop a
plan for a single RTO for the Southeast. PEC participated in the mediation. The
FERC has not issued an order specifically on this mediation.
See PART II, ITEM 7, "Other Matters" for additional discussion of current
developments of GridSouth RTO.
Standard Market Design
See PART I, ITEM 1, "General," under Competition for further discussion of
Standard Market Design developments.
18
Franchises
PEC has nonexclusive franchises with varying expiration dates in most of the
municipalities in which it distributes electric energy in North Carolina and
South Carolina. Of these 239 franchises, 194 have expiration dates ranging from
2008 to 2061 and 45 of these have no specific expiration dates. All but 13 of
the 194 franchises with expiration dates have a term of sixty years. The
exceptions include three franchises with terms of ten years, one with a term of
twenty years, six with terms of thirty years, two with terms of forty years and
one with a term of fifty years. PEC also serves within a number of
municipalities and in all of its unincorporated areas without franchise
agreements.
Wholesale Competition
See PART I, ITEM 1, "General," under Competition for a discussion of wholesale
competition.
Stranded Costs
See PART I, ITEM 1, "General," under Competition for a discussion of stranded
costs.
REGULATORY MATTERS
Retail Rate Matters
The NCUC and the SCPSC authorize 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 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 PEC's most recent rate cases in 1988,
the NCUC and the SCPSC each authorized a return on equity of 12.75% for PEC.
Legislation enacted in North Carolina in 2002 freezes PEC's base retail rates
for five years unless there are extraordinary events beyond the control of PEC,
in which case PEC can petition for a rate increase. See PART II, ITEM 8, Note
21E to the Progress Energy Consolidated Financial Statements and Note 16D to the
PEC Consolidated Financial Statements for further discussion of PEC's rate
freeze.
See PART II, ITEM 8, Note 7B to the Progress Energy Consolidated Financial
Statements and Note 5B to the PEC Consolidated Financial Statements for further
discussion of PEC's retail rate developments during 2003.
Wholesale Rate Matters
PEC is subject to regulation by the FERC with respect to rates for transmission
and sale of electric energy at wholesale, the interconnection of facilities in
interstate commerce (other than interconnections for use in the event of certain
emergency situations), the licensing and operation of hydroelectric projects
and, to the extent the FERC determines, accounting policies and practices. PEC
and its wholesale customers last agreed to a general increase in wholesale rates
in 1988; however, wholesale rates have been adjusted since that time through
contractual negotiations.
Fuel Cost Recovery
PEC's operating costs not covered by the utility's base rates include fuel and
purchased power. Each state commission allows electric utilities to recover
certain of these costs through various cost recovery clauses; to the extent the
respective commission determines in an annual hearing that such costs are
prudent. Costs recovered by PEC, by state, are as follows:
o North Carolina - fuel costs and the fuel portion of purchased power
o South Carolina - fuel costs, certain purchased power costs and
emission allowance expense
Each state commission's 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.
19
NUCLEAR MATTERS
PEC is currently implementing power uprate projects at its nuclear facilities to
increase electrical generation output. A power uprate was completed at the
Harris Plant during 2001 and at the Robinson Nuclear Plant in 2002. Power
uprates are also in progress at the Brunswick Plant. Brunswick Unit 1 increased
its capacity by 52 MW in 2002 and Brunswick 2 increased its capacity by 89 MW in
2003. Additional increases will be implemented in phases over the next couple of
years. The total increased generation from all these projects is estimated to be
approximately 290 MW. See PART I, ITEM 1, "Nuclear Matters," for further
discussion of these and other nuclear matters.
ENVIRONMENTAL MATTERS
There are nine former MGP sites and other sites associated with PEC that have
required or are anticipated to require investigation and/or remediation costs.
In September 2003, the Company sold NCNG to Piedmont Natural Gas Company, Inc.
As part of the sales agreement, the Company retained responsibility to remediate
five former NCNG MGP sites to state standards pursuant to an Administrative
Order by consent. At the time of the sale, the liability for these costs and the
related accrual was transferred to PEC. Presently, PEC cannot determine the
total costs that may be incurred in connection with the remediation of any of
these MGP sites. See PART II, ITEM 8, Note 21E to the Progress Energy
Consolidated Financial Statements and Note 16D to the PEC Consolidated Financial
Statements for further discussion of these environmental matters.
ELECTRIC - PEF
GENERAL
PEF was incorporated in Florida in 1899, and is an operating public utility
engaged in the generation, purchase, transmission, distribution and sale of
electricity. At December 31, 2003, PEF had a total summer generating capacity
(including jointly-owned capacity) of approximately 8,544 MW.
PEF provided electric service during 2003 to an average of 1.5 million customers
in west central Florida. Its service area 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 20 municipal
and nine rural electric cooperative systems. Major wholesale power sales
customers include Seminole Electric Cooperative, Inc., Florida Municipal Power
Agency, Florida Power & Light Company and Tampa Electric Company. PEF is subject
to the rules and regulations of the FERC and the FPSC.
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 2003 2002 2001
------------- ---- ---- ----
Residential 55% 55% 54%
Commercial 24% 24% 24%
Industrial 7% 7% 7%
Others 6% 6% 6%
Wholesale 8% 8% 9%
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.
20
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 energy mix for
the last three years is presented in the following table:
ENERGY MIX PERCENTAGES
Fuel Type 2003 2002 2001
--------- ---- ---- ----
Coal (a) 36% 33% 33%
Oil 16% 16% 16%
Nuclear 14% 15% 15%
Gas 13% 15% 14%
Purchased Power 21% 21% 22%
(a) Amounts include synthetic fuel from unrelated third parties and petroleum
coke.
PEF is generally permitted to pass the cost of recoverable 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. However, PEF believes that its fuel supply contracts,
as described below, will be adequate to meet its fuel supply needs.
PEF's average fuel costs per million Btu for the last three years were as
follows:
AVERAGE FUEL COST
(per million Btu)
2003 2002 2001
------ ------ ------
Coal (a) $ 2.42 $ 2.43 $ 2.16
Oil 4.38 3.77 3.81
Nuclear 0.50 0.46 0.47
Gas 5.98 4.06 4.52
Weighted-average 3.07 2.60 2.59
(a) Amounts include synthetic fuel from unrelated third parties and petroleum
coke.
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 6.0 million to 6.5
million tons of coal in 2004. Most of the coal is expected to be supplied from
Appalachian coal sources in the United States. Approximately two-thirds 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 2004, Progress Fuels has medium-term and long-term contracts with various
sources for approximately 100% of the burn requirements of PEF's coal units.
These contracts have price adjustment provisions and have expiration dates
ranging from 2004 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 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
21
pipelines to serve its peaking load requirements. PEF also 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 typically contracts for
all of its future long-term uranium, conversion and enrichment service needs
with contract durations ranging from five to ten years. Recent shutdown of a
major North American conversion facility and increased uncertainty of uranium
supply has raised the risk of supply disruption. As a result, Progress Energy
has adjusted its nuclear fuel inventory and procurement strategy accordingly to
offset increased supply disruption risk by increasing planned delivery lead
times and strategic inventory stockpiles.
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, 2003, PEF had a
variety of purchase power agreements for the purchase of approximately 1,313 MW
of firm power. These agreements include (1) long-term contracts for the purchase
of about 474 MW of purchased power with other investor-owned utilities,
including a contract with The Southern Company for approximately 414 MWs, and
(2) approximately 839 MWs of capacity under contract with certain QFs. The
capacity currently available from QFs represents about 10% 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 FDEP 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, along with Florida Power & Light Company and
Tampa Electric Company (the Applicants) 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. The Commission's most recent order in
December 2003 ordered further state proceedings. 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 PART II, ITEM 7, "Other Matters," for a discussion of current
developments of GridFlorida RTO.
Standard Market Design
See PART I, ITEM 1, "General," under Competition for further discussion of
standard market design developments.
22
Franchise Agreements
PEF holds franchises with varying expiration dates in 107 of the municipalities
in which it distributes electric energy. PEF also serves 14 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 44% of PEF's total utility revenues for 2003 were from the
incorporated areas of the 107 municipalities that had franchise ordinances
during the year. Since 2000, PEF has renewed 32 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 26 of the existing franchises cover a 30-year period from the date
enacted. The exceptions are 22 franchises, each with a term of 10 years and
expiring between 2005 and 2012; two franchises each with a term of 15 years and
expiring in 2017; one 30-year franchise that was extended in 1999 for five years
expiring in 2005; and one franchise with a term of 20 years expiring in 2020. Of
the 107 franchises, 36 expire between January 1, 2004 and December 31, 2012 and
71 expire between January 1, 2013 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 PART II, ITEM 7, "Other Matters," for a discussion of
PEF's franchise litigation.
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 PURPA. See PART I, ITEM 1, "General," under Competition
for further discussion.
Wholesale Competition
See PART I, ITEM 1, "General," under Competition for a discussion of wholesale
competition.
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 PART II, ITEM 8, Note 7D to the
Progress Energy Consolidated Financial Statements.
23
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 respective commission
determines in an annual hearing that such costs are prudent. In addition, in
December 2002, the FPSC approved an Environmental Cost Recovery Clause (ECRC)
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 state commission's 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.
NUCLEAR MATTERS
In late 2002, CR3 received a license amendment authorizing a small power level
increase. The power level increase of approximately four MW was implemented in
February 2003.
See PART I, ITEM 1, "Nuclear Matters," for further discussion of these and other
nuclear matters.
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 PART II, ITEM 8, Note 21E to the Progress Energy
Consolidated Financial Statements for further discussion of these environmental
matters.
FUELS
The Fuels business segment owns an array of assets that produce, transport and
deliver fuel and provide related services for the open market. The Fuels
business segment has subsidiaries that produce natural gas and oil products,
blend and transload coal, mine coal, and others that produce a solid coal-based
synthetic fuel. This product has been classified as a synthetic fuel within the
meaning of Section 29. Sales of synthetic fuel therefore qualify for tax
credits. See PART II, ITEM 7, "Other Matters," for a discussion of the synthetic
fuel tax credits.
The current combined assets of Fuels which are involved in fuel extraction,
manufacturing and delivery include:
o Natural gas properties in Texas and Louisiana producing about 30 Bcf
per year;
o Five terminals on the Ohio River and its tributaries, part of the
trucking, rail and barge network for coal delivery;
o Three coal-mining complexes, expected to produce about 3 million tons
per year:
o Five wholly-owned synthetic fuel entities, and a 10% minority interest
in one synthetic fuel entity, capable of producing up to 18 million
tons per year;
o Majority-ownership in a barge partnership that moves coal products
from the mouth of the Mississippi River to the CR3 facility in
Florida.
During 2003, Progress Fuels acquired approximately 200 natural gas-producing
wells with proven reserves of approximately 190 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
PART II, ITEM 8, Note 4B to the Progress Energy Consolidated Financial
Statements.
24
COMPETITION
Fuels' synthetic fuel operations and coal operations compete in the eastern
United States industrial coal markets. Factors contributing to the 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.
Fuels' gas production operations compete in the East Texas, North Texas and
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.
ENVIRONMENTAL MATTERS
See PART II, ITEM 8, Note 21E to the Progress Energy Consolidated Financial
Statements for a discussion of Fuel's environmental matters.
COMPETITIVE COMMERCIAL OPERATIONS (CCO)
CCO sells capacity and energy on the wholesale market outside the realm of
retail regulation. CCO currently owns six plants with approximately 3,100 MW of
generation capacity. CCO has contracts representing 85% of planned production
capacity for 2004 and 50% of planned production capacity for 2005 and 2006.
In May 2003, PVI acquired from Williams Energy Marketing and Trading, a
subsidiary of the Williams Companies, Inc., a long-term full-requirements power
supply agreement at fixed prices with Jackson, for $188 million.
CCO is responsible for marketing the energy produced by the nonregulated plants.
The energy is sold under both term contracts and in the spot market. CCO markets
the nonregulated plants not under contract into the nonregulated market and
engages in limited financial trading activities primarily for hedging the fuel
and economic value of its generation portfolio. CCO is also responsible for
purchasing fuel for the merchant generation fleet, such as natural gas and oil.
CCO also uses financial instruments to manage the risks associated with
fluctuating commodity prices and increase the value of the Company's power
generation assets.
COMPETITION
CCO does not operate in the same environment as regulated utilities. It operates
specifically in the wholesale market, which means competition is its primary
driver. CCO competes in the eastern United States utility markets. Factors
contributing to the success in these markets include a competitive cost
structure and strategic locations.
RAIL SERVICES
The Rail Services business segment, led by 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: Locomotive
and Railcar Services (LRS) and Engineering and Trackwork (E&TW).
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 E&TW unit focuses on rail and other track
components, the infrastructure which supports the operation of rolling stock,
and 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.
Rail Services' key railroad industry customers are Class 1 railroads, regional
and short line railroads, North American transit systems, railcar and locomotive
builders, and railcar lessors. The U.S. operations are located in 23 states and
include further geographic coverage through mobile crews on a selected basis.
This coverage allows for Rail Services' customer base to be dispersed throughout
the U.S., Canada and Mexico.
25
In March 2003, the Company signed a letter of intent to sell the majority of
Railcar Ltd. assets to the Andersons, Inc. A definitive purchase agreement was
signed in November 2003 and the transaction closed in February 2004. See PART
II, ITEM 8, Note 3B to the Progress Energy Consolidated Financial Statements for
a discussion of this transaction.
ENVIRONMENTAL MATTERS
See PART II, ITEM 8, Note 21E to the Progress Energy Consolidated Financial
Statements for a discussion of Rail's environmental matters.
OTHER
GENERAL
The Other Businesses segment primarily includes the operations of PTC LLC and
Strategic Resource Solutions Corp. (SRS). This segment also includes other
nonregulated operations of PEC and FPC.
PROGRESS TELECOM LLC
In December 2003, PTC and Caronet, both wholly-owned subsidiaries of Progress
Energy, and EPIK, a wholly-owned subsidiary of Odyssey, contributed
substantially all of their assets and transferred certain liabilities to PTC
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 percent ownership interest in, and is the parent, of PTC
LLC; Odyssey holds a combined 45 percent ownership interest in PTC LLC through
EPIK and Caronet. The accounts of PTC LLC are included in the Company's
Consolidated Financial Statements since the transaction date.
PTC 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. PTC LLC markets wholesale fiber-optic-based capacity
service in the Eastern United States to long-distance carriers, internet service
providers and other telecommunications companies. PTC LLC also markets wireless
structure attachments to wireless communication companies and governmental
entities. At December 31, 2003, PTC LLC owned and managed more than 8,500 route
miles and more than 420,000 fiber miles of fiber-optic cable.
PTC 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 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 PART II, ITEM
8, Note 9 to the Progress Energy Consolidated Financial Statements, and Note 6
to the PEC Consolidated Financial Statements.
NCNG
In October 2002, the Company approved the sale of NCNG. In September 2003, the
Company completed the sale of NCNG and the Company's equity investment in ENCNG
to Piedmont Natural Gas Company, Inc. See PART II, ITEM 8, Note 3A to the
Progress Energy Consolidated Financial Statements for further discussion of this
transaction.
26
ELECTRIC UTILITY OPERATING STATISTICS - PROGRESS ENERGY
Years Ended December 31
2003 2002 2001 2000(d) 1999
------------ ----------- ----------- ----------- ----------
Energy supply (millions of kilowatt-hours)
Generated - Steam 51,501 49,734 48,732 31,132 28,260
Nuclear 30,576 30,126 27,301 23,857 22,451
Hydro 955 491 245 441 520
Combustion Turbines/Combined Cycle 7,819 8,522 6,644 1,337 435
Purchased 13,848 14,305 14,469 5,724 5,132
------------ ----------- ----------- ----------- ----------
Total energy supply (Company share) 104,699 103,178 97,391 62,491 56,798
Jointly-owned share (a) 5,213 5,258 4,886 4,505 4,353
------------ ----------- ----------- ----------- ----------
Total system energy supply 109,912 108,436 102,277 66,996 61,151
============ =========== =========== =========== ==========
Average fuel cost (per million Btu)
Fossil $ 2.94 $ 2.62 $ 2.46 $ 1.96 $ 1.75
Nuclear fuel $ 0.44 $ 0.44 $ 0.45 $ 0.45 $ 0.46
All fuels $ 2.05 $ 1.84 $ 1.77 $ 1.30 $ 1.16
Energy sales (millions of kilowatt-hours)
Retail
Residential 34,712 33,993 31,976 15,365 13,348
Commercial 24,110 23,888 23,033 12,221 11,068
Industrial 16,749 16,924 17,204 14,762 14,568
Other Retail 4,382 4,287 4,149 1,626 1,359
Wholesale 19,841 19,204 17,715 15,012 14,526
Unbilled 189 275 (1,045) 1,098 (110)
------------ ----------- ----------- ----------- ----------
Total energy sales 99,983 98,571 93,032 60,084 54,759
Company uses and losses 3,753 3,604 3,478 2,286 2,039
------------ ----------- ----------- ----------- ----------
Total energy requirements 103,736 102,175 96,510 62,370 56,798
============ =========== =========== =========== ==========
Electric revenues (in millions)
Retail $ 5,620 $ 5,515 $ 5,462 $ 2,799 $ 2,531
Wholesale 915 881 923 665 556
Miscellaneous revenue 206 205 172 81 60
-------------- ----------- ----------- ----------- ----------
Total electric revenues $ 6,741 $ 6,601 $ 6,557 $ 3,545 $ 3,147
============ =========== =========== =========== ==========
Peak demand of firm load (thousands of kW)
System (b) 19,876 20,365 19,166 18,874 10,948
Company 19,235 19,746 18,564 18,272 10,344
Total regulated capability at year-end (thousands of kW)
Fossil plants 16,522 16,006 15,826 (e) 14,747 6,736
Nuclear plants 4,220 (g) 4,127 (f) 4,008 4,008 3,174
Hydro plants 218 218 218 218 218
Purchased 2,826 2,929 2,890 2,278 1,088
------------ ----------- ----------- ---------- ---------
Total system capability 23,786 23,280 22,942 21,251 11,216
Less jointly-owned portion (c) 698 682 668 662 593
------------ ----------- ----------- ---------- ---------
Total Company capability - regulated 23,088 22,598 22,274 20,589 10,623
============ =========== =========== ========== =========
(a) Amounts represent co-owner's share of the energy supplied from the six
generating facilities that are jointly owned.
(b) For 2000 - 2003, this represents the combined summer non-coincident system
net peaks for PEC and PEF.
(c) For PEC, this represents Power Agency's retained share of jointly-owned
facilities per the Power Coordination Agreement between PEC and Power
Agency.
(d) Amounts include information for PEF since November 30, 2000, the date of
acquisition.
(e) Amount includes 459 MW related to Rowan units that were transferred to PVI
in February 2002.
(f) Amount includes power uprates for Harris, Brunswick 1 and Robinson. The
Maximum Dependable Capability (MDC) for Harris was restated January 2002;
the MDCs for Brunswick 1 and Robinson were restated January 2003.
(g) Amount includes power uprates for CR3 and Brunswick 2. The MDC's were
restated January 2004.
27
OPERATING STATISTICS - PROGRESS ENERGY CAROLINAS
Years Ended December 31
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- ---------
Energy supply (millions of kilowatt-hours)
Generated - Steam 28,522 28,547 27,913 29,520 28,260
Nuclear 24,537 23,425 21,321 23,275 22,451
Hydro 955 491 245 441 520
Combustion Turbines/Combined Cycle 1,344 1,934 802 733 435
Purchased 4,467 5,213 5,296 4,878 5,132
----------- ----------- ----------- ----------- ---------
Total energy supply (Company share) 59,825 59,610 55,577 58,847 56,798
Power Agency share (a) 4,670 4,659 4,348 4,505 4,353
----------- ----------- ----------- ----------- ---------
Total system energy supply 64,495 64,269 59,925 63,352 61,151
=========== =========== =========== =========== =========
Average fuel cost (per million Btu)
Fossil $ 2.29 $ 2.16 $ 1.91 $ 1.83 $ 1.75
Nuclear fuel $ 0.43 $ 0.43 $ 0.44 $ 0.45 $ 0.46
All fuels $ 1.43 $ 1.38 $ 1.26 $ 1.21 $ 1.16
Energy sales (millions of kilowatt-hours)
Retail
Residential 15,283 15,239 14,372 14,091 13,348
Commercial 12,557 12,468 11,972 11,432 11,068
Industrial 12,749 13,089 13,332 14,446 14,568
Other Retail 1,408 1,437 1,423 1,423 1,359
Wholesale 15,518 15,024 12,996 14,582 14,526
Unbilled (44) 270 (534) 679 (110)
----------- ----------- ----------- ----------- ---------
Total energy sales 57,471 57,527 53,561 56,653 54,759
Company uses and losses 2,354 2,083 2,016 2,194 2,039
----------- ----------- ----------- ----------- ---------
Total energy requirements 59,825 59,610 55,577 58,847 56,798
=========== =========== =========== =========== =========
Electric revenues (in millions)
Retail $ 2,825 $ 2,795 $ 2,666 $ 2,609 $ 2,531
Wholesale 687 652 634 577 556
Miscellaneous revenue 77 92 44 122 59
----------- ----------- ----------- ----------- ---------
Total electric revenues $ 3,589 $ 3,539 $ 3,344 $ 3,308 $ 3,146
=========== =========== =========== =========== =========
Peak demand of firm load (thousands of kW)
System 11,771 11,977 11,376 11,157 10,948
Company 11,130 11,358 10,774 10,555 10,344
Total regulated capability at year-end (thousands of kW)
Fossil plants 8,816 8,816 8,648 (c) 7,569 6,891
Nuclear plants 3,382 (e) 3,293 (d) 3,174 3,174 3,174
Hydro plants 218 218 218 218 218
Purchased 1,513 1,617 1,586 978 1,088
----------- ----------- ---------- ---------- ---------
Total system capability 13,929 13,944 13,626 11,939 11,371
Less Power Agency-owned portion (b) 629 613 599 593 593
----------- ----------- ---------- ---------- ---------
Total Company capability 13,300 13,331 13,027 11,346 10,778
=========== =========== ========== ========== =========
(a) Amounts represent Power Agency's share of the energy supplied from the four
generating facilities that are jointly owned.
(b) Amounts represent Power Agency's retained share of jointly-owned facilities
per the Power Coordination Agreement between PEC and Power Agency.
(c) Amount includes 459 MW related to Rowan units that were transferred to PVI
in February 2002.
(d) Amount includes power upgrades for Harris, Brunswick 1 and Robinson. The
MDC for Harris was restated January 2002; the MDCs for Brunswick 1 and
Robinson were restated January 2003.
(e) Amount includes power uprate for Brunswick 2; the MDC was restated January
2004.
28
ITEM 2. PROPERTIES
The Company believes that its physical properties and those of its subsidiaries
are adequate to carry on its and their businesses as currently conducted. The
Company and its subsidiaries maintain property insurance against loss or damage
by fire or other perils to the extent that such property is usually insured.
ELECTRIC - PEC
At December 31, 2003, PEC's eighteen generating plants represent a flexible mix
of fossil, nuclear, hydroelectric, combustion turbines and combined cycle
resources, with a total summer generating capacity of 12,416 MW. Of this total,
Power Agency owns approximately 682 MW. On December 31, 2003, PEC had the
following generating facilities:
- --------------------------------------------------------------------------------------------------------------------
PEC Summer Net
No. of In-Service Ownership Capability (a)
Facility Location Units Date Fuel (in %) (in MW)
- --------------------------------------------------------------------------------------------------------------------
STEAM TURBINES
Asheville Skyland, NC 2 1964-1971 Coal 100 392
Cape Fear Moncure, NC 2 1956-1958 Coal 100 316
Lee Goldsboro, NC 3 1952-1962 Coal 100 407
Mayo Roxboro, NC 1 1983 Coal 83.83 745 (b)
Robinson Hartsville, SC 1 1960 Coal 100 174
Roxboro Roxboro, NC 4 1966-1980 Coal 96.32 (c) 2,462 (b)
Sutton Wilmington, NC 3 1954-1972 Coal 100 613
Weatherspoon Lumberton, NC 3 1949-1952 Coal 100 176
-------- ---------------
Total 19 5,285
COMBINED CYCLE
Cape Fear Moncure, NC 2 1969 Oil 100 84
Richmond Hamlet, NC 1 2002 Gas/Oil 100 472
-------- ---------------
Total 3 556
COMBUSTION TURBINES
Asheville Skyland, NC 2 1999-2000 Gas/Oil 100 330
Blewett Lilesville, NC 4 1971 Oil 100 52
Darlington Hartsville, SC 13 1974-1997 Gas/Oil 100 812
Lee Goldsboro, NC 4 1968-1971 Oil 100 91
Morehead City Morehead City, NC 1 1968 Oil 100 15
Richmond Hamlet, NC 5 2001-2002 Gas/Oil 100 775
Robinson Hartsville, SC 1 1968 Gas/Oil 100 15
Roxboro Roxboro, NC 1 1968 Oil 100 15
Sutton Wilmington, NC 3 1968-1969 Gas/Oil 100 64
Wayne County Goldsboro, NC 4 2000 Gas/Oil 100 668
Weatherspoon Lumberton, NC 4 1970-1971 Gas/Oil 100 138
-------- ---------------
Total 42 2,975
NUCLEAR
Brunswick Southport, NC 2 1975-1977 Uranium 81.67 1,772 (b)(d)
Harris New Hill, NC 1 1987 Uranium 83.83 900 (b)
Robinson Hartsville, SC 1 1971 Uranium 100 710
-------- ---------------
Total 4 3,382
HYDRO
Blewett Lilesville, NC 6 1912 Water 100 22
Marshall Marshall, NC 2 1910 Water 100 5
Tillery Mount Gilead, NC 4 1928-1960 Water 100 86
Walters Waterville, NC 3 1930 Water 100 105
-------- ---------------
Total 15 218
TOTAL 83 12,416
- --------------------------------------------------------------------------------------------------------------------
(a) Amounts represent PEC's net summer peak rating, gr