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| PGN > SEC Filings for PGN > Form 10-Q on 5-Nov-2008 | All Recent SEC Filings |
5-Nov-2008
Quarterly Report
The following combined Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is separately filed by Progress Energy, Inc. (Progress Energy), Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. (PEC) and Florida Power Corporation d/b/a Progress Energy Florida, Inc. (PEF). As used in this report, Progress Energy, which includes Progress Energy, Inc. holding company (the Parent) and its regulated and nonregulated subsidiaries on a consolidated basis, is at times referred to as "we," "us" or "our." When discussing Progress Energy's financial information, it necessarily includes the results of PEC and PEF (collectively, the Utilities). The term "Progress Registrants" refers to each of the three separate registrants: Progress Energy, PEC and PEF. Information contained herein relating to PEC and PEF individually is filed by such company on its own behalf. Neither of the Utilities makes any representation as to information related solely to Progress Energy or the subsidiaries of Progress Energy other than itself.
The following MD&A contains forward-looking statements that involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Please review "Safe Harbor for Forward-Looking Statements" and Item 1A, "Risk Factors" found within Part II of this Form 10-Q and Item 1A, "Risk Factors" to the Progress Registrant's annual report on Form 10-K for the fiscal year ended December 31, 2007 (2007 Form 10-K) for a discussion of the factors that may impact any such forward-looking statements made herein.
Amounts reported in the interim statements of income are not necessarily indicative of amounts expected for the respective annual or future periods due to the effects of weather variations and the timing of outages of electric generating units, especially nuclear-fueled units, among other factors.
This discussion should be read in conjunction with the accompanying financial statements found elsewhere in this report and in conjunction with the 2007 Form 10-K.
PROGRESS ENERGY
RESULTS OF OPERATIONS
Our reportable operating business segments are PEC and PEF, which are primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina and South Carolina, and Florida, respectively.
Our "Corporate and Other" segment primarily includes the operations of the Parent, Progress Energy Service Company, LLC (PESC) and other miscellaneous nonregulated businesses that do not separately meet the quantitative disclosure requirements as a separate business segment.
As discussed more fully in Note 3 and "Results of Operations - Discontinued Operations," in accordance with our business strategy to reduce our business risk and to focus on the core operations of the Utilities, the majority of our nonregulated business operations have been divested. These operations have been classified as discontinued operations in the accompanying financial statements. Consequently, the composition of other continuing segments has been impacted by these divestitures. For comparative purposes, prior year results have been restated to conform to the current presentation. In this section, earnings and the factors affecting earnings for the three and nine months ended September 30, 2008, are compared to the same periods in 2007. The discussion begins with a summarized overview of our consolidated earnings, which is followed by a more detailed discussion and analysis by business segment.
OVERVIEW
For the quarter ended September 30, 2008, our net income was $309 million, or $1.19 per share, compared to net income of $319 million, or $1.24 per share, for the same period in 2007. For the quarter ended September 30, 2008, our income from continuing operations was $308 million compared to $311 million for the same period in 2007. The decrease in income from continuing operations as compared to prior year was primarily due to:
· unfavorable weather at the Utilities;
· higher interest expense at PEF;
· the impact of tax levelization recorded because accounting principles generally accepted in the United States (GAAP) require companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual effective tax rate; and
· unfavorable retail customer growth and usage at PEF.
Partially offsetting these items were:
· favorable allowance for funds used during construction (AFUDC) at the Utilities;
· increased retail base rates at PEF;
· higher wholesale revenues at PEF; and
· lower purchased power capacity costs at PEC due to the expiration of a power buyback agreement.
For the nine months ended September 30, 2008, our net income was $723 million, or $2.78 per share, compared to net income of $401 million, or $1.57 per share, for the same period in 2007. For the nine months ended September 30, 2008, our income from continuing operations was $657 million compared to $598 million for the same period in 2007. The increase in income from continuing operations as compared to prior year was primarily due to:
· favorable AFUDC at the Utilities;
· increased retail base rates at PEF;
· higher wholesale revenues at PEF;
· favorable retail customer growth and usage at PEC; and
· lower purchased power capacity costs at PEC due to the expiration of a power buyback agreement.
Partially offsetting these items were:
· higher interest expense at PEF;
· unfavorable weather at PEC;
· higher income tax expense due to the benefit from the closure of certain federal tax years and positions in 2007;
· higher depreciation and amortization expense at the Utilities excluding prior year recoverable storm amortization at PEF; and
· unfavorable retail customer growth and usage at PEF.
Our segments contributed the following profits or losses for the three and nine months ended September 30, 2008 and 2007:
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2008 2007 2008 2007
Business Segment
PEC $ 200 $ 203 $ 426 $ 414
PEF 143 138 334 266
Total segment profit 343 341 760 680
Corporate and Other (35 ) (30 ) (103 ) (82 )
Income from continuing operations 308 311 657 598
Discontinued operations, net of tax 1 8 66 (197 )
Net income $ 309 $ 319 $ 723 $ 401
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PROGRESS ENERGY CAROLINAS
PEC contributed segment profits of $200 million and $203 million for the three months ended September 30, 2008 and 2007, respectively. The decrease in profits for the three months ended September 30, 2008, compared to the same period in 2007, was primarily due to the unfavorable impact of weather, partially offset by favorable AFUDC and lower purchased power capacity costs due to the expiration of a power buyback agreement.
PEC contributed segment profits of $426 million and $414 million for the nine months ended September 30, 2008 and 2007, respectively. The increase in profits for the nine months ended September 30, 2008, compared to the same period in 2007, was primarily due to the favorable impact of retail customer growth and usage, lower purchased power capacity costs due to the expiration of a power buyback agreement and favorable AFUDC, partially offset by the unfavorable impact of weather, higher depreciation and amortization and lower excess generation revenues.
The revenue tables below present the total amount and percentage change of revenues excluding fuel. Revenues excluding fuel is defined as total electric revenues less fuel revenues. We and PEC consider revenues excluding fuel a useful measure to evaluate PEC's electric operations because fuel revenues primarily represent the recovery of fuel and a portion of purchased power expenses through cost-recovery clauses and, therefore, do not have a material impact on earnings. We and PEC have included the analysis below as a complement to the financial information we provide in accordance with GAAP. However, revenues excluding fuel is not defined under GAAP, and the presentation may not be comparable to other companies' presentation or more useful than the GAAP information provided elsewhere in this report.
Three Months Ended September 30, 2008, Compared to Three Months Ended September 30, 2007
REVENUES
PEC's electric revenues for the three months ended September 30, 2008 and 2007,
and the amount and percentage change by customer class were as follows:
(in millions) Three Months Ended September 30,
Customer Class 2008 Change % Change 2007
Residential $ 495 $ (8 ) (1.6 ) $ 503
Commercial 331 6 1.8 325
Industrial 200 4 2.0 196
Governmental 32 3 10.3 29
Total retail revenues 1,058 5 0.5 1,053
Wholesale 196 (12 ) (5.8 ) 208
Unbilled (16 ) (16 ) - -
Miscellaneous 28 3 12.0 25
Total electric revenues 1,266 (20 ) (1.6 ) 1,286
Less: Fuel revenues (455 ) (12 ) - (443 )
Revenues excluding fuel $ 811 $ (32 ) (3.8 ) $ 843
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PEC's electric energy sales for the three months ended September 30, 2008 and 2007, and the amount and percentage change by customer class were as follows:
(in millions of kWh) Three Months Ended September 30,
Customer Class 2008 Change % Change 2007
Residential 4,929 (189 ) (3.7 ) 5,118
Commercial 4,079 (12 ) (0.3 ) 4,091
Industrial 2,879 (231 ) (7.4 ) 3,110
Governmental 437 16 3.8 421
Total retail energy sales 12,324 (416 ) (3.3 ) 12,740
Wholesale 3,746 (438 ) (10.5 ) 4,184
Unbilled (250 ) (112 ) - (138 )
Total kWh sales 15,820 (966 ) (5.8 ) 16,786
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PEC's revenues, excluding fuel revenues of $455 million and $443 million for the three months ended September 30, 2008 and 2007, respectively, decreased $32 million. The decrease in revenues excluding fuel is primarily due to the $28 million unfavorable impact of weather and $5 million lower excess generation revenues, partially offset by the $7 million favorable impact of retail customer growth and usage. The unfavorable impact of weather was driven by cooling degree days 12 percent lower than 2007. The lower excess generation revenues were primarily due to unfavorable market dynamics due to higher relative fuel costs. The favorable impact of retail customer growth and usage was driven by a net 23,000 customer increase in PEC's average number of customers for the three months ended September 30, 2008, compared to the same period in 2007, partially offset by a decrease in the average usage per retail customer.
The decline in general economic conditions, including weakness in the housing markets in both Florida and the United States, has contributed to a slowdown in customer growth and usage in PEF's service territory (See "Progress Energy Florida - Revenues"). PEC has not been impacted by the decline in general economic conditions as significantly as PEF. However, through September 30, 2008, PEC has experienced some decline in the rate of residential and commercial sales growth. In the future, PEC's customer usage could be impacted by customer response to energy-efficiency programs and to increased rates resulting from higher fuel and other recoverable costs.
Retail revenues increased for the three months ended September 30, 2008, despite a decrease in retail energy sales for the same period primarily due to the impact of increased fuel revenues as a result of higher energy costs and the recovery of prior year fuel costs.
EXPENSES
Fuel and Purchased Power
Fuel and purchased power costs represent the costs of generation, which include fuel purchases for generation, as well as energy purchased in the market to meet customer load. Fuel and a portion of purchased power expenses are recovered primarily through cost-recovery clauses, and as such, changes in these expenses do not have a material impact on earnings. The difference between fuel and purchased power costs incurred and associated fuel revenues that are subject to recovery is deferred for future collection from or refund to customers.
Fuel and purchased power expenses were $493 million for the three months ended September 30, 2008, which represents a $1 million decrease compared to the same period in 2007. Fuel used in electric generation decreased $37 million compared to the same period in 2007. The decrease was primarily due to a decrease in deferred fuel expense driven by a $24 million impact from the implementation of the North Carolina comprehensive energy legislation (See "Other Matters - Regulatory Environment") and a $12 million impact related to a decrease in the collection of prior period costs. Current year purchased power costs were $36 million higher than the three months ended September 30, 2007, due to increased economical purchases in 2008. Higher purchased power expenses were partially offset by the $9 million impact from the expiration of a power buyback agreement with North Carolina Eastern Municipal Power Agency (Power Agency).
Depreciation and Amortization
Depreciation and amortization expense was $124 million for the three months ended September 30, 2008, which represents a $6 million increase compared to the same period in 2007. Depreciation and amortization expense increased primarily due to $10 million additional depreciation associated with the accelerated cost-recovery program for nuclear generating assets (See Note 4A) and the $4 million impact of depreciable asset base increases, partially offset by $8 million lower Clean Smokestacks Act amortization (See Note 4A).
Total Other Income, net
Total other income, net of $6 million increased $2 million for the three months ended September 30, 2008, compared to the same period in 2007, primarily due to $7 million favorable AFUDC equity related to increased Clean Smokestacks Act compliance and other eligible construction project costs, partially offset by $5 million derivative mark-to-market losses. The derivative mark-to-market losses relate to commodity instruments that are not subject to retail regulatory treatment. We expect AFUDC equity to continue to increase for the remainder of 2008, primarily due to increased spending on eligible construction projects.
Total Interest Charges, net
Total interest charges, net of $50 million decreased $6 million for the three months ended September 30, 2008, compared to the same period in 2007, primarily due to $2 million lower interest as a result of lower average debt outstanding and $2 million favorable AFUDC debt related to increased Clean Smokestacks Act compliance and other eligible construction project costs.
Income Tax Expense
Income tax expense decreased $11 million for the three months ended September 30, 2008, as compared to the same period in 2007, primarily due to the $6 million tax impact of lower pre-tax earnings, the $4 million tax impact of employee stock-based benefits and the $3 million impact of the increase in AFUDC equity discussed above, partially offset by the $4 million impact of tax levelization. AFUDC equity is excluded from the calculation of income tax expense. GAAP requires companies to apply a levelized effective income tax rate to interim periods that is consistent with the estimated annual effective tax rate. PEC's income tax expense was increased by $3 million for the three months ended September 30, 2008, in order to maintain an effective tax rate consistent with the estimated annual rate, compared to a decrease of $1 million for the three months ended September 30, 2007. Fluctuations in estimated annual earnings and the timing of various permanent items of income or deduction can cause fluctuations in the effective tax rate for interim periods. Therefore, this adjustment will vary each quarter, but will have no effect on net income for the year.
Nine Months Ended September 30, 2008, Compared to Nine Months Ended September 30, 2007
REVENUES
PEC's electric revenues for the nine months ended September 30, 2008 and 2007,
and the amount and percentage change by customer class were as follows:
(in millions) Nine Months Ended September 30,
Customer Class 2008 Change % Change 2007
Residential $ 1,256 $ 2 0.2 $ 1,254
Commercial 862 22 2.6 840
Industrial 555 20 3.7 535
Governmental 78 5 6.8 73
Total retail revenues 2,751 49 1.8 2,702
Wholesale 566 6 1.1 560
Unbilled (10 ) (13 ) - 3
Miscellaneous 74 - - 74
Total electric revenues 3,381 42 1.3 3,339
Less: Fuel revenues (1,227 ) (61 ) - (1,166 )
Revenues excluding fuel $ 2,154 $ (19 ) (0.9 ) $ 2,173
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PEC's electric energy sales for the nine months ended September 30, 2008 and 2007, and the amount and percentage change by customer class were as follows:
(in millions of kWh) Nine Months Ended September 30,
Customer Class 2008 Change % Change 2007
Residential 13,192 (242 ) (1.8 ) 13,434
Commercial 10,741 59 0.6 10,682
Industrial 8,773 (144 ) (1.6 ) 8,917
Governmental 1,105 25 2.3 1,080
Total retail energy sales 33,811 (302 ) (0.9 ) 34,113
Wholesale 10,959 (347 ) (3.1 ) 11,306
Unbilled (246 ) (168 ) - (78 )
Total kWh sales 44,524 (817 ) (1.8 ) 45,341
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PEC's revenues, excluding fuel revenues of $1.227 billion and $1.166 billion for the nine months ended September 30, 2008 and 2007, respectively, decreased $19 million. The decrease in revenues excluding fuel is primarily due to the $36 million unfavorable impact of weather and $13 million lower excess generation revenues, partially offset by the $33 million favorable impact of retail customer growth and usage. The unfavorable impact of weather was driven by cooling degree days 7 percent lower than 2007. Lower excess generation revenues were primarily due to unfavorable market dynamics due to higher relative fuel costs. The favorable impact of retail customer growth and usage was driven by a net 25,000 customer increase in PEC's average number of customers for the nine months ended September 30, 2008, compared to the same period in 2007, and by an increase in the average usage per retail customer.
As discussed previously in "Revenues" for the three months ended September 30, 2008 and 2007, PEC has not been impacted by the decline in general economic conditions as significantly as PEF. However, through September 30, 2008, PEC has experienced some decline in the rate of residential and commercial sales growth. In the future, PEC's customer usage could be impacted by customer response to energy-efficiency programs and to increased rates resulting from higher fuel and other recoverable costs.
Retail and wholesale revenues increased for the nine months ended September 30, 2008, despite a decrease in retail and wholesale energy sales for the same period primarily due to the impact of increased fuel revenues as a result of higher energy costs. Additionally, retail revenues increased for the nine months ended September 30, 2008, due to the recovery of prior year fuel costs.
EXPENSES
Fuel and Purchased Power
Fuel and purchased power expenses were $1.293 billion for the nine months ended September 30, 2008, which represents a $9 million increase compared to the same period in 2007. Current year purchased power costs were $23 million higher than the nine months ended September 30, 2007 due to increased economical purchases in 2008 of $46 million, partially offset by the $29 million impact from the expiration of a power buyback agreement with Power Agency. Fuel used in electric generation decreased $14 million compared to the same period in 2007 primarily due to a decrease in deferred fuel expense of $31 million, partially offset by an increase in current year fuel costs of $17 million. Deferred fuel expense decreased primarily due to a $48 million impact of the implementation of the North Carolina comprehensive energy legislation (See "Other Matters - Regulatory Environment"), partially offset by a $10 million increase driven by higher fuel costs. Current year fuel costs increased primarily due to an increase in fuel prices, partially offset by a change in the generation mix and lower system requirements.
Operation and Maintenance
O&M expenses were $766 million for the nine months ended September 30, 2008, which represents a $4 million increase compared to the same period in 2007. O&M expenses increased primarily due to a $24 million increase in nuclear expenses, of which $11 million relates to refurbishments, preventative maintenance and incremental outage expenses at Brunswick Nuclear Plant (Brunswick), and a $7 million increase in estimated environmental remediation expenses (See Note 12A), partially offset by lower plant outage and maintenance costs of $25 million (primarily due to one nuclear outage in the current year compared to two in the prior year).
Depreciation and Amortization
Depreciation and amortization expense was $379 million for the nine months ended September 30, 2008, which represents a $26 million increase compared to the same period in 2007. Depreciation and amortization expense increased primarily due to $25 million additional depreciation associated with the accelerated cost-recovery program for nuclear generating assets (See Note 4A) and the $9 million impact of depreciable asset base increases, partially offset by $10 million lower Clean Smokestacks Act amortization (See Note 4A).
Other
Other operating expenses consisted of gains of $6 million for the nine months ended September 30, 2008, primarily due to land sales. There were no net gains from land sales for the same period in 2007.
Total Other Income, net
Total other income, net of $28 million increased $3 million for the nine months ended September 30, 2008, compared to the same period in 2007, primarily due to $12 million favorable AFUDC equity related to increased Clean Smokestacks Act compliance and other eligible construction project costs, partially offset by $7 million lower interest income resulting from lower temporary investment balances. We expect AFUDC equity to continue to increase for the remainder of 2008, primarily due to increased spending on eligible construction projects.
Total Interest Charges, net
Total interest charges, net of $156 million decreased $9 million for the nine months ended September 30, 2008, compared to the same period in 2007, primarily due to $5 million lower interest as a result of lower average debt outstanding and $4 million favorable AFUDC debt related to increased Clean Smokestacks Act compliance and other eligible construction project costs.
Income Tax Expense
Income tax expense increased $8 million for the nine months ended September 30, 2008, as compared to the same period in 2007, primarily due to the $8 million tax impact of higher pre-tax earnings, $4 million prior year changes in tax estimates and the $4 million impact of tax levelization, partially offset by the $6 million tax impact of employee stock-based benefits and the $5 million impact of the increase in AFUDC equity discussed above. AFUDC equity is excluded from the calculation of income tax expense. GAAP requires companies to apply a levelized effective income tax rate to interim periods that is consistent with the estimated annual effective tax rate. PEC's income tax expense was increased by $2 million for the nine months ended September 30, 2008, in order to maintain an effective tax rate consistent with the estimated annual rate, compared to a decrease of $2 million for the nine months ended September 30, 2007. Fluctuations in estimated annual earnings and the timing of various permanent items of income or deduction can cause fluctuations in the effective tax rate for interim periods. Therefore, this adjustment will vary each quarter, but will have no effect on net income for the year.
PROGRESS ENERGY FLORIDA
PEF contributed segment profits of $143 million and $138 million for the three months ended September 30, 2008 and 2007, respectively. The increase in profits for the three months ended September 30, 2008, compared to the same period in 2007, was primarily due to increased retail base rates, favorable AFUDC and higher wholesale revenues, partially offset by higher interest expense, the unfavorable impact of weather, the unfavorable impact of retail customer growth and usage and severance expenses in 2008.
PEF contributed segment profits of $334 million and $266 million for the nine months ended September 30, 2008 and 2007, respectively. The increase in profits . . .
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