UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Exact name of 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
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in PART III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether 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 .
1
As of June 30, 2004, the aggregate market value of the voting and non-voting
common equity of Progress Energy, Inc. held by non-affiliates was
$10,653,481,488. As of June 30, 2004, 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.
As of March 4, 2005, each registrant had the following shares of common stock
outstanding:
Registrant Description Shares
Progress Energy, Inc. Common Stock (Without Par Value) 248,533,367
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, 2005 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, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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 DISCLOSURES 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
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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 Broad River LLC's Broad River Facility
Btu British thermal unit
CAIR Clean Air Interstate Rule
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, LLLP
the Company Progress Energy, Inc. and subsidiaries
CP&L Carolina Power & Light Company
CP&L Energy CP&L Energy, Inc.
CR3 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
ETS Engineering and Track-work
ECRC Environmental Cost Recovery Clause
EITF Emerging Issues Task Force
EMCs Electric Membership Cooperatives
ENCNG Eastern North Carolina Natural Gas Company, formerly referred to as
EasternNC
EPA of 1992 Energy Policy Act of 1992
EPIK EPIK Communications, Inc.
ESOP Employee Stock Ownership Plan
FASB Financial Accounting Standards Board
FDEP Florida Department of Environment and Protection
FERC Federal Energy Regulatory Commission
FIN No. 45 Financial Accounting Standards Board (FASB) Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
FIN No. 46R FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities -
an Interpretation of ARB No. 51"
Florida Progress or FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Fuels Fuels business segment
Funding Corp. Florida Progress Funding Corporation
GAAP Accounting Principles Generally Accepted in the United States of America
Genco Progress Genco Ventures LLC
Georgia Power Georgia Power Company
Global U.S. Global LLC
Harris Plant Shearon Harris Nuclear Plant
the holding company Progress Energy Corporate
Interpath Interpath Communications, Inc.
IBEW International Brotherhood of Electrical Workers
IRS Internal Revenue Service
ISO Independent System Operator
4
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
Medicare Act Medicare Prescription Drug, Improvement and Modernization Act of 2003
MGP Manufactured Gas Plant
MW Megawatt
MWh Megawatt-hour
NC Clean Air North Carolina Clean Smokestacks Act enacted in June 2002
NCNG North Carolina Natural Gas Corporation
NCUC North Carolina Utilities Commission
NDE Nondestructive Examination
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
O&M Operations & Maintenance Expense
Odyssey Odyssey Telecorp, Inc.
OPEB Postretirement benefits other than pensions
P11 Intercession Unit P11
PCH Progress Capital Holdings, Inc.
PEC Progress Energy Carolinas, Inc.
PEC Electric PEC Electric business segment made up of the utility operations and
excludes operations of nonregulated subsidiaries
PEF Progress Energy Florida
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
Preferred Securities FPC-obligated mandatorily redeemable preferred securities of FPC Capital I
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
PRP Potentially responsible party, as defined in CERCLA
PSSP Performance Share Sub-Plan
PTC Progress Telecommunications Corporation
PT LLC Progress Telecom, LLC
PUHCA Public Utility Holding Company Act of 1935, as amended
PURPA Public Utilities Regulatory Policies Act of 1978
PVI Progress Energy Ventures, Inc. (formerly referred to as CPL Energy
Ventures, Inc.)
PWR Pressurized water reactor
QF Qualifying facility
Rail Services Rail Services business segment
RCA Revolving credit agreement
Rockport Indiana Michigan Power Company's Rockport Unit No. 2
Robinson PEC's Robinson Nuclear Plant
ROE Return on Equity
RSA Restricted Stock Awards program
RTO Regional Transmission Organization
5
SCPSC Public Service Commission of South Carolina
SEC U.S. Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
(See Note/s "#") For all Sections, except the Carolina Power & Light Company Financial
Statements in Part II, Item 8, this is a reference to the Notes in the
Progress Energy Consolidated Financial Statements in Part II, Item 8
Service Company Progress Energy Service Company, LLC
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. 109 Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes"
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. 123R Statement of Financial Accounting Standards No. 123R, "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"
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
Winchester Energy Winchester Energy Company, Ltd. (formerly Westchester Gas Company)
Winchester Production Winchester Production Company, Ltd., an indirectly owned subsidiary of
Progress Fuels Corporation
6
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Certain matters discussed throughout this Form 10-K that are not historical
facts are forward-looking and, accordingly, involve estimates, projections,
goals, forecasts, assumptions, risks and uncertainties that could cause actual
results or outcomes to differ materially from those expressed in the
forward-looking statements.
In addition, examples of forward-looking statements discussed in this Form 10-K
include 1) PART II, ITEM 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" including, but not limited to, statements
under the following headings: a) "Results of Operations" about trends and
uncertainties; b) "Liquidity and Capital Resources" about operating cash flows,
estimated capital requirements through the year 2007 and future financing plans;
c) "Strategy" about Progress Energy, Inc.'s, strategy; and d) "Other Matters"
about the effects of new environmental regulations, nuclear decommissioning
costs and the effect of electric utility industry restructuring; and 2)
statements made in the "Risk Factors" sections.
Any forward-looking statement is based on information current as of the date of
this report and speaks only as of the date on which such statement is made, and
neither Progress Energy, Inc., (the Company) nor Progress Energy Carolinas (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; deregulation or restructuring in
the electric industry that may result in increased competition and unrecovered
(stranded) costs; the ability of the Company to implement its cost management
initiatives as planned; the uncertainty regarding the timing, creation and
structure of regional transmission organizations; weather conditions that
directly influence the demand for electricity; the Company's ability to recover
through the regulatory process, and the timing of such recovery of, the costs
associated with the four hurricanes that impacted our service territory in 2004
or other future significant weather events; recurring seasonal fluctuations in
demand for electricity; fluctuations in the price of energy commodities and
purchased power; economic fluctuations and the corresponding impact on the
Company and its subsidiaries' commercial and industrial customers; the ability
of the Company's subsidiaries to pay upstream dividends or distributions to it;
the impact on the facilities and the businesses of the Company from a terrorist
attack; the inherent risks associated with the operation of nuclear facilities,
including environmental, health, regulatory and financial risks; the ability to
successfully access capital markets on favorable terms; the impact on the
Company's financial condition and ability to meet its cash and other financial
obligations in the event its credit ratings are downgraded below investment
grade; the impact that increases in leverage may have on the Company; the
ability of the Company to maintain its current credit ratings; the impact of
derivative contracts used in the normal course of business by the Company;
investment performance of pension and benefit plans; the Company's ability to
control costs, including pension and benefit expense, and achieve its cost
management targets for 2007; the availability and use of Internal Revenue Code
Section 29 (Section 29) tax credits by synthetic fuel producers and the
Company's continued ability to use Section 29 tax credits related to its coal
and synthetic fuel businesses; the impact to the Company's financial condition
and performance in the event it is determined the Company is not entitled to
previously taken Section 29 tax credits; the impact of future accounting
pronouncements regarding uncertain tax positions; the outcome of PEF's rate
proceeding in 2005 regarding its future base rates; the Company's ability to
manage the risks involved with the operation of its nonregulated plants,
including dependence on third parties and related counter-party risks, and a
lack of operating history; the Company's ability to manage the risks associated
with its energy marketing operations; the outcome of any ongoing or future
litigation or similar disputes and the impact of any such outcome or related
settlements; and unanticipated changes in operating expenses and capital
expenditures. Many of these risks similarly impact the Company's subsidiaries.
These and other risk factors are detailed from time to time in the Company's and
PEC's filings with the United States Securities and Exchange Commission (SEC).
Many, but not all, of the factors that may impact actual results are discussed
in the "Risk Factors" sections of this report. You should carefully read the
"Risk Factors" sections of this report. All such factors are difficult to
predict, contain uncertainties that may materially affect actual results and may
be beyond the control of 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. The Company is 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., (PVI) began doing business under the names Progress Energy
Carolinas, Inc. (PEC), Progress Energy Florida, Inc. (PEF) and Progress Energy
Ventures, Inc. (PVI), respectively. The legal names of these entities have not
changed and there was no restructuring of any kind related to the name change.
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. The
Progress Ventures business unit consists of the Fuels business segment (Fuels)
and Competitive Commercial Operations (CCO) operating segments. Progress
Energy's legal structure is not currently aligned with the functional management
and financial reporting of the Progress Ventures business unit. Whether, and
when, the legal and functional structures will converge depends upon legislative
and regulatory action, which cannot currently be anticipated. 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 and commodity economic hedging activities. Through its Rail Services
business segment (Rail Services), Progress Energy engages in various rail and
railcar-related services. In February 2005, Progress Energy signed a definitive
agreement to sell its Progress Rail subsidiary for a sales price of $405 million
(See Note 24). The Corporate and Other Businesses segment primarily includes
Service Company activities, miscellaneous nonregulated activities and holding
company operations. For information regarding the revenues, income and assets
attributable to the Company's business segments, See Note 20 to the Progress
Energy Consolidated Financial Statements in PART II, ITEM 8.
The Company has approximately 24,000 megawatts (MW) of electric generation
capacity and serves approximately 2.9 million retail electric customers in
portions of North Carolina, South Carolina and Florida and also serves other
load-serving entities. PEC's and PEF's customer base and demand cycles are
complementary. Historically, PEC normally has a summer peaking demand, while PEF
normally 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 Company's electric generation capacity and delivering
reliable, competitively priced energy.
Progress Energy revenues for the year ended December 31, 2004, were $9.8 billion
and assets at year-end were $26.0 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 Web
site 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.
8
SIGNIFICANT DEVELOPMENTS
Sale of Natural Gas Assets
In December 2004, the Company sold certain gas-producing properties and related
assets owned by Winchester Production Company, Ltd. (Winchester Production), an
indirectly owned subsidiary of Progress Fuels Corporation (Progress Fuels),
which is included in the Fuels segment. Net proceeds of approximately $251
million were used to reduce debt (See Note 4A).
2004 Hurricanes
Hurricanes Charley, Frances, Ivan and Jeanne struck significant portions of the
Company's service territories during the third quarter of 2004, significantly
impacting PEF's territory. As of December 31, 2004, restoration of the Company's
systems from hurricane related damage was estimated at $398 million (See Note
3).
Divestiture of Synthetic Fuel Partnership Interests
In June 2004, the Company, through its subsidiary Progress Fuels, sold, in two
transactions, a combined 49.8% partnership interest in Colona Synfuel Limited
Partnership, LLLP, one of its synthetic fuel facilities. Substantially all
proceeds from the sales will be received over time, which is typical of such
sales in the industry (See Note 4B).
Railcar Ltd., Divestiture
In March 2003, the Company signed a letter of intent to sell the majority of
Railcar Ltd. assets to The Andersons, Inc. The asset purchase agreement was
signed in November 2003, and the transaction closed on February 12, 2004. Net
proceeds of approximately $75 million were used to reduce debt (See Note 4C).
Progress Telecommunications Corporation Business Combination
In December 2003, Progress Telecommunications Corporation (PTC) and Caronet,
Inc. (Caronet), both wholly owned subsidiaries of Progress Energy, and EPIK
Communications, Inc. (EPIK), a wholly owned subsidiary of Odyssey Telecorp, Inc.
(Odyssey), contributed substantially all of their assets and transferred certain
liabilities to Progress Telecom, LLC (PT LLC), a subsidiary of PTC.
Subsequently, the stock of Caronet was sold to an affiliate of Odyssey for $2
million in cash and Caronet became a wholly owned subsidiary of Odyssey.
Following consummation of all the transactions described above, PTC holds a 55%
ownership interest in and is the parent of PT LLC (See Note 5A).
Mesa Hydrocarbons, Inc. Divestiture
In October 2003, the Company sold certain gas-producing properties owned by Mesa
Hydrocarbons, LLC, a wholly owned subsidiary of Progress Fuels. Net proceeds of
approximately $97 million were used to reduce debt (See Note 4D).
NCNG Divestiture
In September 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 $443 million were used to reduce debt (See Note 4E).
Acquisition of Natural Gas Reserves
During 2003, Progress Fuels entered into several independent transactions to
acquire approximately 200 natural gas-producing wells with proven reserves of
approximately 190 billion cubic feet (Bcf) from Republic Energy, Inc. and three
other privately owned companies, all headquartered in Texas. The total cash
purchase price for the transactions was approximately $168 million (See Note
5B).
9
Wholesale Energy Contract Acquisition
In May 2003, Progress Ventures, Inc. (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 Note 5C).
Westchester Acquisition
In April 2002, Progress Fuels acquired 100% of Westchester Gas Company
(Westchester). During 2004, the name of the company was changed to Winchester
Energy Co. Ltd., (Winchester Energy). The acquisition included approximately 215
natural gas-producing wells, 52 miles of intrastate gas pipeline and 170 miles
of gas-gathering systems. The aggregate purchase price was approximately $153
million (See Note 5D).
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 Note 5E).
Florida Progress Acquisition
On November 30, 2000, the Company completed its acquisition of Florida Progress
Corporation (FPC), a diversified, exempt electric utility holding company, for
an aggregate purchase price of approximately $5.4 billion. The Company paid cash
consideration of approximately $3.5 billion and issued 46.5 million shares of
common stock valued at approximately $1.9 billion. In addition, the Company
issued 98.6 million contingent value obligations (CVOs) valued at approximately
$49 million.
The FPC acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations for FPC have been included in the
Company's Consolidated Financial Statements since the date of acquisition.
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 2004 working on a comprehensive energy bill.
While that legislation passed the House, the Senate failed to pass the
legislation in 2004. The Company expects that there will be an effort to
resurrect the legislation in 2005. 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 nonutility 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.
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.
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.
10
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
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. These standards have
been clarified and supplemented by subsequent FERC orders. The new standards of
conduct govern the relationship between transmission providers and their energy
affiliates in a manner that prevents excessive market power and preferential
treatment. Each utility was required to submit a plan and schedule for
compliance with the new rules by February 2004. PEC and PEF have complied in all
material respects with all of the requirements associated with these standards
and FERC orders.
In April 2004, the FERC issued two orders concerning utilities' ability to sell
wholesale electricity at market-based rates. In the first order, the FERC
adopted two new interim screens for assessing potential generation market power
of applicants for wholesale market-based rates, and described additional
analyses and mitigation measures that could be presented if an applicant does
not pass one of these interim screens. In July 2004, the FERC issued an order on
rehearing affirming its conclusions in the April order. In the second order, the
FERC initiated a rulemaking to consider whether the FERC's current methodology
for determining whether a public utility should be allowed to sell wholesale
electricity at market-based rates should be modified in any way. Management is
unable to predict the outcome of these actions by the FERC or their effect on
future results of operations and cash flows. PEF does not have market-based rate
authority for wholesale sales in peninsular Florida. Given the difficulty PEC
believes it would experience in passing one of the interim screens, on August
12, 2004, PEC notified the FERC that it would revise its Market-based Rate
tariff to restrict it to sales outside PEC's control area and file a new
cost-based tariff for sales within PEC's control area that incorporates the
FERC's default cost-based rate methodologies for sales of one year or less. PEC
anticipates making this filing the first quarter of 2005.
On December 23, 2004, PEF advised the FERC that PEF only has market-based rate
authority in Southern Company's control area in Georgia. PEF also advised the
FERC that PEF filed market power studies in 2003 demonstrating that it does not
have market power in that market and that because nothing has changed since that
study was performed, PEF should not have to perform the new tests.
Although the Company cannot predict the ultimate outcome of these changes, the
Company does not anticipate that the current operations of PEC or PEF would be
impacted materially if they were unable to sell power at market-based rates in
their respective control areas.
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,
acquisitions of securities and utility assets, and services performed by
Progress Energy Service Company, LLC.
While various proposals, including the 2004 energy bill, have been introduced in
Congress regarding PUHCA, the prospects for legislative reform or repeal are
uncertain at this time.
11
REGULATORY MATTERS
GENERAL
PEC is subject to regulation in North Carolina by the North Carolina Utilities
Commission (NCUC), and in South Carolina by the Public Service Commission of
South Carolina (SCPSC) and PEF is subject to regulation 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
cost recovery of unusual or unexpected expense, such as severe storm costs, and
issuances of securities. PEC and PEF are also subject to regulation by the
United States Nuclear Regulatory Commission (NRC). 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 generating units and PEF owns and operates
one nuclear generating unit regulated by the NRC under the Atomic Energy Act of
1954 and the Energy Reorganization Act of 1974. In the event of noncompliance,
the NRC has the authority to impose fines, set license conditions, shut down a
nuclear unit, or some combination of these, depending upon its assessment of the
severity of the situation, until compliance is achieved. Nuclear units are
periodically removed from service to accommodate normal refueling and
maintenance outages, repairs and certain other modifications.
The nuclear power industry faces uncertainties with respect to the cost and
long-term availability of sites for disposal of spent nuclear fuel and other
radioactive waste, compliance with changing regulatory requirements, nuclear
plant operations, increased capital outlays for modifications, the technological
and financial aspects of decommissioning plants at the end of their licensed
lives and requirements relating to nuclear insurance.
On April 19, 2004, the NRC announced that it has renewed the operating license
for PEC's Robinson Nuclear Plant (Robinson) for an additional 20 years through
July 2030. The original operating license of 40 years was set to expire in 2010.
NRC operating licenses held by PEC currently expire in December 2014 and
September 2016 for Brunswick Units 2 and 1, respectively. An application to
extend these licenses 20 years was submitted in October 2004. The NRC operating
license held by PEC for the Shearon Harris Nuclear Plant (Harris Plant)
currently expires in October 2026. An application to extend this license 20
years is expected to be submitted in the fourth quarter of 2006.
The NRC operating license held by PEF for Crystal River Unit No. 3 (CR3)
currently expires in December 2016. An application to extend this license 20
years is expected to be submitted in the first quarter of 2009.
A condition of the operating license for each unit requires an approved plan for
decontamination and decommissioning.
On February 27, 2004, PEC requested to have its license for the Independent
Spent Fuel Storage Installation at the Robinson Plant extended by 20 years with
an exemption request for an additional 20-year extension. Its current license is
due to expire in August 2006. PEC expects to receive this extension including
the exemption.
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.
12
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 Robinson reactor head was re-inspected during its 2004 outage, and no
indication of control rod drive mechanism cracking or corrosion of the head was
observed. The head is scheduled for replacement 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.
The NRC also issued a bulletin requesting PWR licensees to address inspection
plans for reactor pressure vessel lower head penetrations. The Company completed
a bare metal visual inspection of the vessel bottom at Robinson during its 2004
outage and at Harris and CR3 during their 2003 outages and found no signs of
corrosion or leakage at any 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 has reviewed the required
inspection frequencies and has incorporated them into long-range plans. The
Harris Plant will complete the required nonvisual nondestructive examination
(NDE) inspection prior to February 2008. Both CR3 and Robinson will be required
to inspect their new heads within seven years or four refueling outages after
replacement. CR3 plans to inspect its new head prior to the end of 2009, and
Robinson will need to inspect its new head prior to the end of 2012.
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 at nuclear facilities 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 completed the
requirements as outlined in the orders by the committed dates. 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
(2010), 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.
With certain modifications and additional approval by the NRC, including the
installation of onsite dry storage facilities at PEF's nuclear unit, Crystal
River Unit No. 3 (CR3), PEF's spent nuclear fuel storage facilities will be
sufficient to provide storage space for spent fuel generated on PEF's system
through the expiration of the operating license for CR3.
See Note 23E and Note 18D to the PGN and PEC Consolidated Financial Statements,
respectively, 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 Note 6D for a
discussion of PEC and PEF's nuclear decommissioning costs.
13
ENVIRONMENTAL
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 2005
through 2007 are included in the "Capital Expenditures" discussion for Progress
Energy under PART II, ITEM 7, "Liquidity and Capital Resources."
The provisions of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA), authorize the EPA to require the
cleanup of hazardous waste sites. This statute imposes retroactive joint and
several liabilities. Some states, including North and South Carolina, have
similar types of legislation. 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 that may require investigation and/or
remediation.
There are presently several sites, including manufactured gas plant (MGP) 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 a
potentially responsible party (PRP). 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 determine the total costs that
may be incurred in connection with all sites at this time. See Note 22 for a
discussion of the Company's environmental matters.
EMPLOYEES
As of February 28, 2005, Progress Energy and its subsidiaries employed
approximately 15,700 full-time employees. Of this total, approximately 2,400
employees at PEF are represented by the International Brotherhood of Electrical
Workers (IBEW). The three-year labor contract with IBEW expires in December
2005.
The Company and some of its subsidiaries have a noncontributory 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.
On February 28, 2005, as part of a previously announced cost management
initiative, the executive officers of the Company approved a workforce
restructuring. The restructuring will result in a reduction of approximately 450
positions and is expected to be completed in September of 2005. In addition to
the workforce restructuring, the cost management initiative includes a voluntary
enhanced retirement program. See Note 24 for more information.
As of February 28, 2005, PEC employed approximately 5,100 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,
2004, PEC had a total summer generating capacity (including jointly owned
capacity) of approximately 12,482 MW.
PEC distributes and sells electricity in 56 of the 100 counties in North
Carolina and 14 counties in northeastern South Carolina. The service territory
covers 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. At December 31, 2004, PEC was
14
providing electric services, retail and wholesale, to approximately 1.4 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,
the SCPSC and the NRC. No single customer accounts for more than 10% of PEC's
revenues.
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 2004 2003 2002
Residential 38% 36% 36%
Commercial 25% 24% 24%
Industrial 19% 18% 19%
Wholesale 16% 20% 19%
Other retail 2% 2% 2%
Major industries in PEC's service area include textiles, chemicals, metals,
paper, food, rubber and plastics, wood products and electronic machinery and
equipment.
FUEL AND PURCHASED POWER
Sources of Generation
PEC's consumption of various types of fuel depends on several factors, the most
important of which are the demand for electricity by PEC's customers, the
availability of various generating units, the availability and cost of fuel and
the requirements of federal and state regulatory agencies. PEC's total system
generation (including jointly owned capacity) by primary energy source, along
with purchased power for the last three years is presented in the following
table:
ENERGY MIX PERCENTAGES
2004 2003 2002
Coal 47% 46% 46%
Nuclear 43% 44% 42%
Purchased power 6% 7% 8%
Oil/Gas 3% 2% 3%
Hydro 1% 1% 1%
PEC is generally permitted to pass the cost of fuel and purchased power to its
customers through fuel adjustment clauses. The future prices for and
availability of various fuels discussed in this report cannot be predicted with
complete certainty. See "Commodity Price Risk" under Item 7A, QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK and "Risk Factors." 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)
2004 2003 2002
Coal $ 2.17 $ 2.00 $ 1.93
Nuclear 0.42 0.43 0.43
Oil 6.78 6.69 5.48
Gas 8.29 8.32 5.31
Hydro - - -
Weighted-average 1.57 1.43 1.38
15
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
PEC anticipates a requirement of approximately 12.4 million to 13.0 million tons
of coal in 2005. Almost all of the coal will be supplied from Appalachian coal
sources in the United States and is primarily delivered by rail.
For 2005, PEC has short-term, intermediate and long-term agreements from various
sources for approximately 102% of its burn requirements of its coal units. All
of these contracts are at fixed prices adjusted annually. The contracts have
expiration dates ranging from 2005 to 2009. PEC will continue to sign contracts
of various lengths, terms and quality to meet its expected burn requirements.
All the coal to be purchased for PEC 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.
PEC has sufficient uranium, conversion, enrichment and fabrication contracts to
meet its near-term nuclear fuel requirement needs. PEC's nuclear fuel contracts
typically have terms ranging from five to ten years. 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 all four 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
Oil and natural gas 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 and gas 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 4.0 million MWh, 4.5 million MWh and 5.2 million MWh
of its system energy requirements during 2004, 2003 and 2002, respectively, and
had available 1,498 MW, 1,810 MW and 1,737 MW of firm purchased capacity under
contract at the time of peak load during 2004, 2003 and 2002, respectively. PEC
may acquire additional purchased power capacity in the future to accommodate a
portion of its system load needs.
COMPETITION
Electric Industry Restructuring
PEC continues to monitor developments that may occur toward a more competitive
environment and actively participates 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.
16
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. On
December 22, 2004, the FERC, citing superseding events, voted to close a portion
of the GridSouth docket. The GridSouth Companies asked the FERC for further
clarification as to the portions of the GridSouth docket it intended to address.
On March 2, 2005, the FERC affirmed that it only intended to close the mediation
portion of the GridSouth docket.
See Note 8D for additional discussion of current developments of GridSouth RTO.
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. The general effect of these franchises is to provide for the
manner in which PEC occupies rights-of-way in incorporated areas of
municipalities for the purpose of constructing, operating and maintaining an
energy transmission and distribution system. 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
General
PEC is subject to the jurisdiction of the NCUC and SCPSC 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 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 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.
The Clean Smokestacks Act enacted in North Carolina in 2002 (NC Clean Air)
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 Note 22 and Note 8B to the PGN and PEC Consolidated Financial
Statements, respectively, for further discussion of PEC's rate freeze.
See Note 8B and Note 6B to the PGN and PEC Consolidated Financial Statements,
respectively, for further discussion of PEC's retail rate developments during
2004.
17
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.
See PART I, ITEM 1, "General," under Competition for further discussion of FERC
screens for assessing generation market power.
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 a
certain portion 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.
NUCLEAR MATTERS
PEC is 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. At the Brunswick Plant,
Unit 1 increased its capacity by 52 MW in 2002 and by 66 MW in 2004. Brunswick
Unit 2 increased its capacity by 89 MW in 2003, and an additional increase is
planned for 2005. The total increased generation from all these projects is
estimated to be approximately 300 MW. See PART I, ITEM 1, "Nuclear Matters," for
further discussion of these and other nuclear matters.
ENVIRONMENTAL MATTERS
In the areas of air quality, water quality, control of toxic substances and
hazardous and solid wastes and other environmental matters, PEC is subject to
regulation by various federal, state and local authorities. PEC 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 PEC's existing fossil
facilities that it expects to incur from 2005 through 2007 are included in the
"Capital Expenditures" discussion under PART II, ITEM 7, "Liquidity and Capital
Resources."
The provisions of the Comprehensive Environmental Response, CERCLA, authorize
the EPA to require the cleanup 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 nine
former MGP sites and a number of other sites with respect to which PEC has been
notified by the EPA or the State of North Carolina of its potential liability,
as a PRP. Although PEC may incur costs at the sites about which it has been
notified, based upon the current status of these sites, PEC cannot determine the
total costs that may be incurred in connection with all sites at this time. See
Notes 22 and 17 to the PGN and PEC Consolidated Financial Statements,
respectively, for a discussion of PEC's environmental matters.
18
ELECTRIC - PEF
GENERAL
PEF, incorporated in Florida in 1899, is an operating public utility engaged in
the generation, transmission, distribution and sale of electricity. At December
31, 2004, PEF had a total summer generating capacity (including jointly owned
capacity) of approximately 8,544 MW.
PEF provided electric service during 2004 to an average of 1.5 million customers
in west central Florida. Its service territory covers approximately 20,000
square miles and includes the densely populated areas around Orlando, as well as
the cities of St. Petersburg and Clearwater. PEF is interconnected with 21
municipal and 9 rural electric cooperative systems. Major wholesale power sales
customers include Seminole Electric Cooperative, Inc., Florida Power & Light
Company, Tampa Electric Company and the City of Bartow. PEF is subject to the
rules and regulations of the FERC, the FPSC and the NRC. No single customer
accounts for more than 10% of PEF's revenues.
BILLED ELECTRIC REVENUES
PEF's electric revenues, billed by customer class for the last three years, are
shown as a percentage of total PEF electric revenues in the table below:
BILLED ELECTRIC REVENUES
Revenue Class 2004 2003 2002
Residential 53% 55% 55%
Commercial 25% 24% 24%
Industrial 8% 7% 7%
Other retail 6% 6% 6%
Wholesale 8% 8% 8%
Important industries in PEF's territory include phosphate rock mining and
processing, electronics design and manufacturing, and citrus and other food
processing. Other important commercial activities are tourism, health care,
construction and agriculture.
FUEL AND PURCHASED POWER
Sources of Generation
PEF's consumption of various types of fuel depends on several factors, the most
important of which are the demand for electricity by PEF's customers, the
availability of various generating units, the availability and cost of fuel and
the requirements of federal and state regulatory agencies. PEF's total system
generation (including jointly owned capacity) by primary energy source, along
with purchased power for the last three years is presented in the following
table:
ENERGY MIX PERCENTAGES
Fuel Type 2004 2003 2002
Coal (a) 32% 36% 33%
Oil 16% 16% 16%
Nuclear 16% 14% 15%
Gas 16% 13% 15%
Purchased Power 20% 21% 21%
(a) Amounts include synthetic fuel from unrelated third parties.
PEF is generally permitted to pass the cost of fuel and purchased power to its
customers through fuel adjustment clauses. The future prices for and
availability of various fuels discussed in this report cannot be predicted with
19
complete certainty. See "Commodity Price Risk" under Item 7A, QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK and "Risk Factors." 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)
2004 2003 2002
Coal (a) $ 2.30 $ 2.42 $ 2.43
Oil 4.67 4.38 3.77
Nuclear 0.49 0.50 0.46
Gas 6.41 5.98 4.06
Weighted-average 3.21 3.07 2.60
(a) Amounts include synthetic fuel from unrelated third parties.
Changes in the unit price for coal, oil and gas are due to market conditions.
Since these costs are primarily recovered through recovery clauses established
by regulators, fluctuations do not materially affect net income.
Coal
PEF anticipates a combined requirement of approximately 6 million tons of coal
in 2005. Approximately 70% of the coal is expected to be supplied from
Appalachian coal sources in the United States and 30% supplied from coal sources
in South America. Approximately 67% of the fuel is expected to be delivered by
rail and the remainder by barge. All of this fuel is supplied by Progress Fuels,
a subsidiary of Progress Energy, pursuant to contracts between PEF and Progress
Fuels.
For 2005, Progress Fuels has medium-term and long-term contracts with various
sources for approximately 115% of the burn requirements of PEF's coal units.
Supply disruption caused by recent hurricanes has made it necessary to build
inventories back to the traditional level of 45 days. These contracts have price
adjustment provisions and have expiration dates ranging from 2005 to 2006.
Progress Fuels will continue to sign contracts of various lengths, terms and
quality to meet PEF's expected burn requirements. All the coal to be purchased
for PEF is considered to be low sulfur coal by industry standards.
Oil and Gas
Oil and natural gas supply for PEF's generation fleet is purchased under term
and spot contracts from several suppliers. The majority of the cost of PEF's oil
and gas is determined by market prices as reported in certain industry
publications. PEF believes that it has access to an adequate supply of oil and
gas for the reasonably foreseeable future. PEF's natural gas transportation is
purchased under term firm transportation contracts with interstate pipelines.
PEF purchases capacity on a seasonal basis from numerous shippers and interstate
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's nuclear fuel contracts
typically have terms ranging from five to ten years. For a discussion of PEF's
plans with respect to spent fuel storage, see PART I, ITEM I, "Nuclear Matters."
20
Purchased Power
PEF, along with other Florida utilities, buys and sells power in the wholesale
market on a short-term and long-term basis. At December 31, 2004, PEF had a
variety of purchase power agreements for the purchase of approximately 1,498 MW
of firm power. These agreements include (1) long-term contracts for the purchase
of about 484 MW of purchased power with other investor-owned utilities,
including a contract with The Southern Company for approximately 414 MW, and (2)
approximately 821 MW of capacity under contract with certain QFs. The capacity
currently available from QFs represents about 9% of PEF's total installed system
capacity.
COMPETITION
Electric Industry Restructuring
PEF continues to monitor developments toward a more competitive environment and
actively participates in regulatory reform deliberations in Florida. Movement
toward deregulation in this state has been affected by developments related to
deregulation of the electric industry in other states.
In response to a legislative directive, the FPSC and the Florida Department of
Environment and Protection (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, Florida Power & Light Company and Tampa Electric
Company (collectively, 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. In December 2003, the FPSC ordered
further state proceedings and established a collaborative workshop process to be
conducted during 2004. In June 2004, the workshop process was abated pending
completion of a cost-benefit study currently scheduled to be presented at a FPSC
workshop on May 25, 2005, with subsequent action by the FPSC to be thereafter
determined. It is unknown when the FERC or the FPSC will take final action with
regard to the status of GridFlorida or what the impact of further proceedings
will have on the Company's earnings, revenues or pricing. See Note 8D for a
discussion of current developments of GridFlorida RTO.
Franchises
PEF holds franchises with varying expiration dates in 108 of the municipalities
in which it distributes electric energy. PEF also serves 13 other municipalities
and in all its unincorporated areas without franchise agreements. The general
purpose of these franchises is to provide for the manner in which PEF occupies
rights-of-way in incorporated areas of municipalities for the purpose of
constructing, operating and maintaining an energy transmission and distribution
system.
Approximately 39% of PEF's total utility revenues for 2004 were from the
incorporated areas of the 108 municipalities that had franchise ordinances
during the year. Since 2000, PEF has renewed 34 expiring franchises and reached
agreement on a franchise with a city that did not previously have a franchise.
Franchises with five municipalities have expired without renewal.
All but 27 of the existing franchises cover a 30-year period from the date
enacted. The exceptions are 23 franchises, each with a term of 10 years and
expiring between 2005 and 2013; two franchises each with a term of 15 years and
expiring in 2017; one 30-year franchise that was extended in 1999 for 5 years
expiring in 2005; and one franchise with a term of 20 years expiring in 2020. Of
the 108 franchises, 46 expire between January 1, 2005, and December 31, 2015,
and 62 expire between January 1, 2016, and December 31, 2034.
Ongoing negotiations and, in some cases, litigation are taking place with
certain municipalities to reach agreement on franchise terms and to enact new
franchise ordinances. See PART II, ITEM 7, "Other Matters," for a discussion of
PEF's franchise litigation.
21
Wholesale Competition
See PART I, ITEM 1, "General," under Competition for a discussion of wholesale
competition.
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.
REGULATORY MATTERS
General
PEF is subject to the jurisdiction of the FPSC with respect to, among other
things, rates and service for electric energy sold at retail, retail service
territory and issuances of securities. In addition, PEF is subject to regulation
by the FERC with respect to transmission and sales of wholesale power,
accounting and certain other matters. The underlying concept of utility
ratemaking is to set rates at a level that allows the utility to collect
revenues equal to its cost of providing service plus a reasonable rate of return
on its equity. Increased competition as a result of industry restructuring may
affect the ratemaking process.
Retail Rate Matters
The FPSC authorizes retail "base rates" that are designed to provide a utility
with the opportunity to earn a specific rate of return on its "rate base," or
average investment in utility plant. These rates are intended to cover all
reasonable and prudent expenses of utility operations and to provide investors
with a fair rate of return.
In March 2002, the parties in PEF's rate case entered into a Stipulation and
Settlement Agreement (the Agreement) related to retail rate matters. The
Agreement was approved by the FPSC and is generally effective from May 1, 2002,
through December 31, 2005. The Agreement eliminates the authorized Return on
Equity (ROE) range normally used by the FPSC for the purpose of addressing
earning levels, provided, however, that if PEF's base rate earnings fall below a
10% return on equity, PEF may petition the FPSC to amend its base rates. The
Agreement is described in more detail in Note 8C.
In January 2005, in anticipation of the expiration of the Agreement, PEF
notified the FPSC that it intends to request an increase in its base rates,
effective January 1, 2006. In its notice, PEF requested the FPSC to approve
calendar year 2006 as the projected test period for setting new base rates. The
request for increased base rates is based on the fact that PEF has faced
significant cost increases over the past decade and expects its operational
costs to continue to increase. These costs include the costs associated with
completion of the Hines 3 generation facility, extraordinary hurricane damage
costs including capital costs which are not expected to be directly recoverable,
the need to replenish the depleted storm reserve and the expected infrastructure
investment necessary to meet high customer expectations, coupled with the
demands placed on PEF as a result of strong customer growth. Related risks are
described in more detail in the "Risk Factors" section.
Fuel and Other Cost Recovery
PEF's operating costs not covered by the utility's base rates include fuel,
purchased power, energy conservation expenses and specific environmental costs.
The state commission allows electric utilities to recover certain of these costs
through various cost recovery clauses, to the extent the commission determines
in an annual hearing that such costs are prudent. In addition, in December 2002,
the FPSC approved an Environmental Cost Recovery Clause (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 FPSC's annual 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.
22
In accordance with a regulatory order, PEF accrues $6 million annually to a
storm damage reserve and is allowed to defer losses in excess of the accumulated
reserve for major storms. Under the order, the storm reserve is charged with
operation and maintenance expenses related to storm restoration and with capital
expenditures related to storm restoration that are in excess of expenditures
assuming normal operating conditions.
As of December 31, 2004, $291 million of hurricane restoration costs in excess
of the previously recorded storm reserve of $47 million had been classified as a
regulatory asset recognizing the probable recoverability of these costs. On
November 2, 2004, PEF filed a petition with the FPSC to recover $252 million of
storm costs plus interest from retail ratepayers over a two-year period.
Hearings on PEF's petition for recovery of $252 million of storm costs filed
with the FPSC are scheduled to begin on March 30, 2005 (See Note 3).
PEF's January 2005 notice to the FPSC of its intent to file for an increase in
its base rates effective January 1, 2006, anticipates the need to replenish the
depleted storm reserve balance and adjust the annual $6 million accrual in light
of recent storm history to restore the reserve to an adequate level over a
reasonable time period.
NUCLEAR MATTERS
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 that are also
anticipated to incur investigation and remediation costs. At this time, PEF
cannot determine the total costs that may be incurred in connection with the
remediation of all sites. See Note 22 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 oil and gas products, blend and
transload coal, mine coal and produce a solid coal-based synthetic fuel. This
product has been classified as a synthetic fuel within the meaning of Section 29
of the Internal Revenue Service Code (Section 29). Sales of synthetic fuel
therefore qualify for tax credits, as more fully described below.
The current combined assets of Fuels that are involved in fuel extraction,
manufacturing and delivery include:
o Natural gas properties in Texas and Louisiana producing approximately 22
Bcf equivalent per year;
o Five terminals on the Ohio River and its tributaries, part of the trucking,
rail and barge network for coal delivery;
o Two active coal-mining complexes, expected to produce approximately 3 to 5
million tons per year:
o Four wholly owned synthetic fuel entities, a majority owned synthetic fuel
entity and a minority interest in one synthetic fuel entity, capable of
producing up to 16 million tons per year;
o Majority-ownership in a barge partnership that transports coal products
from the mouth of the Mississippi River to PEF's Crystal River 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
Note 5B).
In December 2004, the Company sold certain gas-producing properties and related
assets owned by Winchester Production, a wholly owned subsidiary of Progress
Fuels Corporation (See Note 4A).
23
SYNTHETIC FUELS TAX CREDITS
The Company has substantial operations associated with the production of
coal-based synthetic fuels. The production and sale of these products qualifies
for federal income tax credits so long as certain requirements are satisfied.
These operations are subject to numerous risks.
Although the Company believes that it operates its synthetic fuel facilities in
compliance with applicable legal requirements for claiming the credits, its four
Earthco facilities are under audit by the IRS. IRS field auditors have taken an
adverse position with respect to the Company's compliance with one of these
legal requirements, and if the Company fails to prevail with respect to this
position it could incur significant liability and/or lose the ability to claim
the benefit of tax credits carried forward or generated in the future.
Similarly, the Financial Accounting Standards Board may issue new accounting
rules that would require that uncertain tax benefits (such as those associated
with the Earthco plants) be probable of being sustained in order to be recorded
on the financial statements; if adopted, this provision could have an adverse
financial impact on the Company.
The Company's ability to utilize tax credits is dependent on having sufficient
tax liability. Any conditions that negatively impact the Company's tax
liability, such as weather, could also diminish the Company's ability to utilize
credits, including those previously generated, and the synthetic fuel is
generally not economical to produce absent the credits. Finally, the tax credits
associated with synthetic fuels may be phased out if market prices for crude oil
exceed certain prices.
The Company's synthetic fuel operations and related risks are described in more
detail in Note 23E and in the "Risk Factors" section.
COMPETITION
Fuels' synthetic fuel operations and coal operations compete in the eastern
United States steam and 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 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 Note 22 for a discussion of Fuels' environmental matters.
COMPETITIVE COMMERCIAL OPERATIONS (CCO)
The CCO business segment is responsible for marketing energy in the wholesale
market outside the realm of retail regulation. CCO currently owns six
electricity generation facilities with approximately 3,100 MW of generation
capacity, and it has contractual rights to an additional 2,500 MW of generation
capacity from mixed fuel generation facilities through its agreements with 16
Georgia electric membership cooperatives (EMCs). CCO has contracts for its
combined production capacity of approximately 77% for 2005, approximately 81%
for 2006 and approximately 75% for 2007.
The energy CCO markets is sold under both term contracts and in the spot market.
CCO purchases fuel, such as oil and natural gas for use in the generation of
electricity. The Company believes that there are adequate sources of fuel for
CCO's expected fuel requirements. CCO also uses financial instruments to manage
the risks associated with fluctuating commodity prices to hedge the economic
value of its portfolio of assets.
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. In 2004, PVI
executed wholesale power-supply agreements with 15 Georgia electric membership
cooperatives (EMCs) to serve their electricity needs through 2010.
24
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 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 Track-work Services (ETS).
The LRS unit is primarily focused on railroad rolling stock that includes
freight cars, transit cars and locomotives, the repair and maintenance of these
units, the manufacturing or reconditioning of major components for these units
and scrap metal recycling. The ETS unit focuses on rail and other track
components, the infrastructure that 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.
In February 2005, Progress Energy signed a definitive agreement to sell its
Progress Rail subsidiary to subsidiaries of One Equity Partners LLC for a sales
price of $405 million. Proceeds from the sale are expected to be used to reduce
debt. See Note 24 for more information.
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 Note
4C).
ENVIRONMENTAL MATTERS
See Note 22 for a discussion of Rail's environmental matters.
CORPORATE AND OTHER BUSINESS SEGMENT
GENERAL
The Corporate and Other Businesses segment includes the operations of PT LLC and
Strategic Resource Solutions Corp. (SRS) and holding company operations. 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 PT LLC,
a subsidiary of PTC. Subsequently, the stock of Caronet was sold to an affiliate
of Odyssey for $2 million in cash and Caronet became a wholly owned subsidiary
of Odyssey. Following consummation of all the transactions described above, PTC
holds a 55% ownership interest in, and is the parent of, PT LLC; Odyssey holds a
combined 45% ownership interest in PT LLC through EPIK and Caronet. The accounts
of PT LLC have been included in the Company's Consolidated Financial Statements
since the transaction date.
25
PT LLC has data fiber network transport capabilities that stretch from New York
to Miami, Florida, with gateways to Latin America, and conducts primarily a
carrier's carrier business. PT LLC markets wholesale fiber-optic-based capacity
service in the Eastern United States to long-distance carriers, Internet service
providers and other telecommunications companies. PT LLC also markets wireless
structure attachments to wireless communication companies and governmental
entities. At December 31, 2004, PT LLC owned and managed more than 8,500 route
miles and more than 420,000 fiber miles of fiber-optic cable.
PT LLC competes with other providers of fiber-optic telecommunications services,
including local exchange carriers and competitive access providers, in the
Eastern United States.
Lease revenue for dedicated transport and data services is generally billed in
advance on a fixed rate basis and recognized over the period the services are
provided. Revenues relating to design and construction of wireless
infrastructure are recognized upon completion of services 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 Notes 7 and 10
to the PEC Consolidated Financial Statements.
26
ELECTRIC UTILITY REGULATED OPERATING STATISTICS - PROGRESS ENERGY
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2004 2003 2002 2001 2000(d)
- ----------------------------------------------------------------------------------------------------------------------------
Energy supply (millions of kilowatt-hours)
Generated - Steam 50,782 51,501 49,734 48,732 31,132
Nuclear 30,445 30,576 30,126 27,301 23,857
Combustion Turbines/Combined Cycle 9,695 7,819 8,522 6,644 1,337
Hydro 802 955 491 245 441
Purchased 13,466 13,848 14,305 14,469 5,724
- ----------------------------------------------------------------------------------------------------------------------------
Total energy supply (Company share) 105,190 104,699 103,178 97,391 62,491
Jointly owned share (a) 5,395 5,213 5,258 4,886 4,505
- ----------------------------------------------------------------------------------------------------------------------------
Total system energy supply 110,585 109,912 108,436 102,277 66,996
- ----------------------------------------------------------------------------------------------------------------------------
Average fuel cost (per million Btu)
Fossil $ 3.17 $ 2.94 $ 2.62 $ 2.46 $ 1.96
Nuclear fuel $ 0.44 $ 0.44 $ 0.44 $ 0.45 $ 0.45
All fuels $ 2.21 $ 2.05 $ 1.84 $ 1.77 $ 1.30
Energy sales (millions of kilowatt-hours)
Retail
Residential 35,350 34,712 33,993 31,976 15,365
Commercial 24,753 24,110 23,888 23,033 12,221
Industrial 17,105 16,749 16,924 17,204 14,762
Other Retail 4,475 4,382 4,287 4,149 1,626
Wholesale 18,323 19,841 19,204 17,715 15,012
Unbilled 449 189 275 (1,045) 1,098
- ----------------------------------------------------------------------------------------------------------------------------
Total energy sales 100,455 99,983 98,571 93,032 60,084
Company uses and losses 3,936 3,753 3,604 3,478 2,286
- ----------------------------------------------------------------------------------------------------------------------------
Total energy requirements 104,391 103,736 102,175 96,510 62,370
- ----------------------------------------------------------------------------------------------------------------------------
Electric revenues (in millions)
Retail $ 6,066 $ 5,620 $ 5,515 $ 5,462 $ 2,799
Wholesale 843 915 881 923 665
Miscellaneous revenue 244 206 205 172 81
- ----------------------------------------------------------------------------------------------------------------------------
Total electric revenues $ 7,153 $ 6,741 $ 6,601 $ 6,557 $ 3,545
- ----------------------------------------------------------------------------------------------------------------------------
Peak demand of firm load (thousands of kW)
System (b) 19,711 19,876 20,365 19,166 18,874
Company 19,126 19,235 19,746 18,564 18,272
Total regulated capability at year-end (thousands of kW)
Fossil plants 16,522 16,522 16,006 15,826 (e) 14,747
Nuclear plants 4,286 (h) 4,220 (g) 4,127 (f) 4,008 4,008
Hydro plants 218 218 218 218 218
Purchased 2,852 2,826 2,929 2,890 2,278
- ----------------------------------------------------------------------------------------------------------------------------
Total system capability 23,878 23,786 23,280 22,942 21,251
Less jointly owned portion (c) 714 698 682 668 662
- ----------------------------------------------------------------------------------------------------------------------------
Total Company capability - regulated 23,164 23,088 22,598 22,274 20,589
- ----------------------------------------------------------------------------------------------------------------------------
(a) Amounts represent co-owner's share of the energy supplied from the six
generating facilities that are jointly owned.
(b) Amounts represent the combined summer noncoincident 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 MDCs were
restated January 2004.
(h) Amount includes power uprate for Brunswick 1; the MDC was restated January
2005.
27
REGULATED OPERATING STATISTICS - PROGRESS ENERGY CAROLINAS
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Energy supply (millions of kilowatt-hours)
Generated - Steam 28,632 28,522 28,547 27,913 29,520
Nuclear 23,742 24,537 23,425 21,321 23,275
Combustion Turbines/Combined Cycle 1,926 1,344 1,934 802 733
Hydro 802 955 491 245 441
Purchased 4,023 4,467 5,213 5,296 4,878
- ----------------------------------------------------------------------------------------------------------------------------
Total energy supply (Company share) 59,125 59,825 59,610 55,577 58,847
Power Agency share (a) 4,794 4,670 4,659 4,348 4,505
- ----------------------------------------------------------------------------------------------------------------------------
Total system energy supply 63,919 64,495 64,269 59,925 63,352
- ----------------------------------------------------------------------------------------------------------------------------
Average fuel cost (per million Btu)
Fossil $ 2.52 $ 2.29 $ 2,16 $ 1.91 $ 1.83
Nuclear fuel $ 0.42 $ 0.43 $ 0.43 $ 0.44 $ 0.45
All fuels $ 1.57 $ 1.43 $ 1.38 $ 1.26 $ 1.21
Energy sales (millions of kilowatt-hours)
Retail
Residential 16,003 15,283 15,239 14,372 14,091
Commercial 13,019 12,557 12,468 11,972 11,432
Industrial 13,036 12,749 13,089 13,332 14,446
Other Retail 1,432 1,408 1,437 1,423 1,423
Wholesale 13,221 15,518 15,024 12,996 14,582
Unbilled 91 (44) 270 (534) 679
- ----------------------------------------------------------------------------------------------------------------------------
Total energy sales 56,802 57,471 57,527 53,561 56,653
Company uses and losses 2,323 2,354 2,083 2,016 2,194
- ----------------------------------------------------------------------------------------------------------------------------
Total energy requirements 59,125 59,825 59,610 55,577 58,847
- ----------------------------------------------------------------------------------------------------------------------------
Electric revenues (in millions)
Retail $ 2,953 $ 2,824 $ 2,796 $ 2,666 $ 2,609
Wholesale 575 687 651 634 577
Miscellaneous revenue 100 78 92 44 122
- ----------------------------------------------------------------------------------------------------------------------------
Total electric revenues $ 3,628 $ 3,589 $ 3,539 $ 3,344 $ 3,308
- ----------------------------------------------------------------------------------------------------------------------------
Peak demand of firm load (thousands of kW) (g)
System 11,192 11,771 11,977 11,376 11,157
Company 10,607 11,130 11,358 10,774 10,555
Total regulated capability at year-end (thousands of kW)
Fossil plants 8,816 8,816 8,816 8,648 (c) 7,569
Nuclear plants 3,448 (f) 3,382 (e) 3,293 (d) 3,174 3,174
Hydro plants 218 218 218 218 218
Purchased 1,545 1,513 1,617 1,586 978
- ----------------------------------------------------------------------------------------------------------------------------
Total system capability 14,027 13,929 13,944 13,626 11,939
Less Power Agency-owned portion (b) 645 629 613 599 593
- ----------------------------------------------------------------------------------------------------------------------------
Total Company capability 13,382 13,300 13,331 13,027 11,346
- ----------------------------------------------------------------------------------------------------------------------------
(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.
(f) Amount includes power uprate for Brunswick 1; the MDC was restated January
2005.
(g) Amount is the summer peak demand.
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, 2004, PEC's 18 generating plants represent a flexible mix of
fossil, nuclear, hydroelectric, combustion turbines and combined cycle
resources, with a total summer generating capacity of 12,482 MW. Of this total,
Power Agency owns approximately 694 MW. On December 31, 2004, 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, N.C. 2 1964-1971 Coal 100 392
Cape Fear Moncure, N.C. 2 1956-1958 Coal 100 316
Lee Goldsboro, N.C. 3 1952-1962 Coal 100 407
Mayo Roxboro, N.C. 1 1983 Coal 83.83 745 (b)
Robinson Hartsville, S.C. 1 1960 Coal 100 174
Roxboro Roxboro, N.C. 4 1966-1980 Coal 96.32 (c) 2,462 (b)
Sutton Wilmington, N.C. 3 1954-1972 Coal 100 613
Weatherspoon Lumberton, N.C. 3 1949-1952 Coal 100 176
-------- ---------------
Total 19 5,285
COMBINED CYCLE
Cape Fear Moncure, N.C. 2 1969 Oil 100 84
Richmond Hamlet, N.C. 1 2002 Gas/Oil 100 472
-------- ---------------
Total 3 556
COMBUSTION TURBINES
Asheville Skyland, N.C. 2 1999-2000 Gas/Oil 100 330
Blewett Lilesville, N.C. 4 1971 Oil 100 52
Darlington Hartsville, S.C. 13 1974-1997 Gas/Oil 100 812
Lee Goldsboro, N.C. 4 1968-1971 Oil 100 91
Morehead City Morehead City, N.C. 1 1968 Oil 100 15
Richmond Hamlet, N.C. 5 2001-2002 Gas/Oil 100 775
Robinson Hartsville, S.C. 1 1968 Gas/Oil 100 15
Roxboro Roxboro, N.C. 1 1968 Oil 100 15
Sutton Wilmington, N.C. 3 1968-1969 Gas/Oil 100 64
Wayne County Goldsboro, N.C. 4 2000 Gas/Oil 100 668
Weatherspoon Lumberton, N.C. 4 1970-1971 Gas/Oil 100 138
-------- ---------------
Total 42 2,975
NUCLEAR
Brunswick Southport, N.C. 2 1975-1977 Uranium 81.67 1,838 (b)(d)
Harris New Hill, N.C. 1 1987 Uranium 83.83 900 (b)
Robinson Hartsville, S.C. 1 1971