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| PGN > SEC Filings for PGN > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
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, 2008 (2008 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 2008 Form 10-K.
PROGRESS ENERGY
RESULTS OF OPERATIONS
In this section, earnings and the factors affecting earnings for the three and six months ended June 30, 2009, are compared to the same period in 2008. The discussion begins with a summarized overview of our consolidated earnings, which is followed by a more detailed discussion and analysis by business segment.
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 reportable business segment.
OVERVIEW
For the three months ended June 30, 2009, our net income attributable to controlling interests was $174 million, or $0.62 per share, compared to net income attributable to controlling interests of $205 million, or $0.78 per share, for the same period in 2008. For the three months ended June 30, 2009, our income from continuing operations was $175 million compared to $200 million for the same period in 2008. The decrease in income from continuing operations as compared to prior year was primarily due to:
· unfavorable net retail customer growth and usage at the Utilities;
· higher interest expense at PEF; and
· lower wholesale revenues at the Utilities.
Offsetting these items was:
· lower depreciation expense associated with PEC's accelerated cost-recovery program for nuclear generating assets recognized during 2008.
For the six months ended June 30, 2009, our net income attributable to controlling interests was $356 million, or $1.28 per share, compared to net income attributable to controlling interests of $414 million, or $1.59 per share, for the same period in 2008. For the six months ended June 30, 2009, our income from continuing operations was $358 million compared to $353 million for the same period in 2008. The increase in income from continuing operations as compared to prior year was primarily due to:
· favorable allowance for funds used during construction (AFUDC) equity at the Utilities;
· favorable weather at the Utilities; and
· lower depreciation and amortization expense at PEC related to North Carolina Clean Smokestacks Act (Clean Smokestacks Act) amortization expense and depreciation expense associated with the accelerated cost-recovery program for nuclear generating assets recognized during 2008.
Offsetting these items were:
· unfavorable net retail customer growth and usage at the Utilities; and
· higher interest expense at PEF.
Our segments contributed the following profits or losses for the three and six months ended June 30, 2009 and 2008:
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2009 2008 2009 2008
Business Segment
PEC $ 95 $ 104 $ 222 $ 226
PEF 119 125 207 191
Total segment profit 214 229 429 417
Corporate and Other (39 ) (29 ) (71 ) (64 )
Income from continuing operations 175 200 358 353
Discontinued operations, net of tax (1 ) 5 (1 ) 66
Net income attributable to
noncontrolling interests, net of tax - - (1 ) (5 )
Net income attributable to controlling
interests $ 174 $ 205 $ 356 $ 414
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PROGRESS ENERGY CAROLINAS
PEC contributed segment profits of $95 million and $104 million for the three months ended June 30, 2009 and 2008, respectively. The decrease in profits for the three months ended June 30, 2009, compared to the same period in 2008, was primarily due to lower wholesale revenues and unfavorable net retail customer growth and usage, primarily in the industrial customer class, partially offset by the impact of lower depreciation expense.
PEC contributed segment profits of $222 million and $226 million for the six months ended June 30, 2009 and 2008, respectively. The decrease in profits for the six months ended June 30, 2009, compared to the same period in 2008, was primarily due to higher operation and maintenance expenses (O&M), unfavorable net retail customer growth and usage, primarily in the industrial customer class, and lower wholesale revenues, partially offset by lower depreciation and amortization expense and the favorable impact of weather.
The revenue tables that follow present the total amount and percentage change of revenues excluding fuel and other pass-through revenues. Revenues excluding fuel and other pass-through revenues is defined as total electric revenues less fuel and other pass-through revenues. We and PEC consider revenues excluding fuel and other pass-through revenues a useful measure to evaluate PEC's electric operations because fuel and other pass-through revenues primarily represent the recovery of fuel and a portion of purchased power expenses and other pass-through expenses through cost-recovery clauses and, therefore, do not have a material impact on earnings. Pass-through
revenues do not include the revenues associated with the return on asset component of demand-side management (DSM), energy-efficiency and renewable energy clause revenues as these revenues will have an impact on reported earnings. We and PEC have included the analysis below as a complement to the financial information we provide in accordance with accounting principles generally accepted in the United States of America (GAAP). However, revenues excluding fuel and other pass-through revenues 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 June 30, 2009, Compared to Three Months Ended June 30, 2008 REVENUES PEC's electric revenues for the three months ended June 30, 2009 and 2008, and the amount and percentage change by customer class were as follows: (in millions) Three Months Ended June 30, Customer Class 2009 Change % Change 2008 Residential $ 367 $ 33 9.9 $ 334 Commercial 288 19 7.1 269 Industrial 172 (15 ) (8.0 ) 187 Governmental 26 3 13.0 23 Unbilled 31 7 - 24 Total retail revenues 884 47 5.6 837 Wholesale 165 (24 ) (12.7 ) 189 Miscellaneous 27 5 22.7 22 Total electric revenues 1,076 28 2.7 1,048 Less: Fuel and other pass-through revenues (430 ) (45 ) - (385 ) Revenues excluding fuel and other pass-through revenues $ 646 $ (17 ) (2.6 ) $ 663 |
PEC's revenues, excluding fuel and other pass-through revenues of $430 million and $385 million for the three months ended June 30, 2009 and 2008, respectively, decreased $17 million. The decrease in revenues, excluding fuel and other pass-through revenues, was primarily due to $16 million lower wholesale revenues, and $14 million unfavorable impact of net retail customer growth and usage, primarily in the industrial customer class, partially offset by $9 million favorable impact of weather. Lower wholesale revenues, excluding fuel and other pass-through revenues, were primarily due to lower energy rates with a major customer. The unfavorable impact of net retail customer growth and usage was driven by a decrease in the average usage per retail customer, partially offset by a net 15,000 increase in the average number of customers for the three months ended June 30, 2009, compared to the same period in 2008. However, PEC's rate of residential growth has declined as PEC's average number of customers for the three months ended June 30, 2008, compared to the same period in 2007, increased a net 25,000 customers. The favorable impact of weather was driven by 13 percent higher cooling degree days than 2008. Cooling degree days were higher than normal in both 2009 and 2008.
PEC's electric energy sales for the three months ended June 30, 2009 and 2008, and the amount and percentage change by customer class were as follows:
(in millions of kWh) Three Months Ended June 30, Customer Class 2009 Change % Change 2008 Residential 3,591 5 0.1 3,586 Commercial 3,290 (94 ) (2.8 ) 3,384 Industrial 2,562 (560 ) (17.9 ) 3,122 Governmental 357 22 6.6 335 Unbilled 634 389 - 245 Total retail kWh sales 10,434 (238 ) (2.2 ) 10,672 Wholesale 3,259 (182 ) (5.3 ) 3,441 Total kWh sales 13,693 (420 ) (3.0 ) 14,113 |
Many of the manufacturers in PEC's service territory have been adversely impacted by the recession, and we expect continued industrial sales weakness until the broader economy recovers. PEC's industrial kilowatt-hours (kWh) sales have decreased 17.9 percent from 2008, primarily due to reductions in textile manufacturing in the Carolinas as a result of global competition and domestic consolidation as well as a downturn in the lumber and building materials segment as a result of declines in construction activities. However, sales to the chemical segment, now our largest industrial segment, have slightly increased. While industrial kWh sales have decreased 17.9 percent from 2008, industrial revenues have only decreased 8.0 percent due in part to increased fuel revenues and the demand charges component of industrial revenues.
Retail revenues increased for the three months ended June 30, 2009, despite a decrease in retail kWh sales for the same period primarily due to the impact of increased fuel revenues as a result of higher fuel rates.
Wholesale kWh sales decreased for the three months ended June 30, 2009, primarily due to decreased excess generation sales resulting from unfavorable market dynamics. In June 2009, PEC executed a contract extension with its largest municipal wholesale customer, Public Works Commission of the City of Fayetteville, N.C. The 20-year agreement extends the current contract, representing more than 500 megawatts (MW) of electricity load, through 2032.
PEC has experienced a decline in the rate of residential sales growth and in its commercial and industrial kWh sales due to the current recession in the United States. We cannot predict how long the recession may last or the extent to which it may impact revenues. In the future, PEC's customer usage could be impacted by customer response to energy-efficiency programs and to increased rates.
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 $440 million for the three months ended June 30, 2009, which represents a $45 million increase compared to the same period in 2008. Fuel used in electric generation increased $60 million to $383 million primarily due to $40 million higher deferred fuel expense and the $20 million net impact of higher fuel costs. The increase in deferred fuel expense was primarily due to the implementation of new fuel rates in North Carolina. The higher fuel costs are primarily due to higher coal prices and a change in generation mix, partially offset by lower system requirements. Purchased power expense decreased $15 million to $57 million compared to the same period in 2008 primarily due to lower purchases resulting from higher relative fuel pricing.
Operation and Maintenance
O&M expense was $283 million for the three months ended June 30, 2009, which represents an $8 million increase compared to the same period in 2008. This increase is primarily due to higher net nuclear plant outage and maintenance costs.
Depreciation, Amortization and Accretion
Depreciation, amortization and accretion expense was $118 million for the three months ended June 30, 2009, which represents an $11 million decrease compared to the same period in 2008. Depreciation, amortization and accretion expense decreased primarily due to the $15 million depreciation associated with the accelerated cost-recovery program for nuclear generating assets recognized during 2008, partially offset by the $4 million impact of depreciable asset base increases. The North Carolina jurisdictional aggregate minimum amount of accelerated cost recovery has been met and the South Carolina jurisdictional obligation was terminated by the Public Service Commission of South Carolina (SCPSC). PEC does not anticipate recording additional accelerated depreciation in the North Carolina jurisdiction, but will record depreciation over the remaining useful life of the assets.
Other
Other operating expenses consisted of losses of $2 million and gains of $5 million for the three months ended June 30, 2009 and 2008, respectively, primarily due to land sales in 2008.
Income Tax Expense
Income tax expense decreased $13 million for the three months ended June 30, 2009, as compared to the same period in 2008, primarily due to the $9 million impact of lower pre-tax income and the $3 million impact of tax levelization. GAAP requires companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual effective tax rate. PEC's income tax expense was decreased by $1 million for the three months ended June 30, 2009, compared to an increase of $2 million for the three months ended June 30, 2008, in order to maintain an effective tax rate consistent with the estimated annual rate. 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.
Six Months Ended June 30, 2009, Compared to Six Months Ended June 30, 2008 REVENUES PEC's electric revenues for the six months ended June 30, 2009 and 2008, and the amount and percentage change by customer class were as follows: (in millions) Six Months Ended June 30, Customer Class 2009 Change % Change 2008 Residential $ 879 $ 119 15.7 $ 760 Commercial 578 47 8.9 531 Industrial 336 (19 ) (5.4 ) 355 Governmental 52 6 13.0 46 Unbilled (7 ) (14 ) - 7 Total retail revenues 1,838 139 8.2 1,699 Wholesale 358 (12 ) (3.2 ) 370 Miscellaneous 58 12 26.1 46 Total electric revenues 2,254 139 6.6 2,115 Less: Fuel and other pass-through revenues (909 ) (137 ) - (772 ) Revenues excluding fuel and other pass-through revenues $ 1,345 $ 2 0.1 $ 1,343 |
PEC's revenues, excluding fuel and other pass-through revenues of $909 million and $772 million for the six months ended June 30, 2009 and 2008, respectively, increased $2 million. The increase in revenues, excluding fuel
and other pass-through revenues, was primarily due to the $22 million favorable impact of weather and $12 million higher miscellaneous revenues, partially offset by $19 million unfavorable impact of net retail customer growth and usage, primarily in the industrial customer class, and $12 million lower wholesale revenues. The favorable impact of weather was driven by higher cooling and heating degree days than 2008. Cooling degree days were 22 percent higher than normal in 2009 compared to 5 percent higher than normal in 2008. Higher miscellaneous revenues were primarily due to higher transmission revenues resulting from the Open Access Transmission Tariff rates that went into effect on July 1, 2008. The unfavorable impact of net retail customer growth and usage was driven by a decrease in the average usage per retail customer, partially offset by a net 16,000 increase in the average number of customers for the six months ended June 30, 2009, compared to the same period in 2008. Lower wholesale revenues, excluding fuel and other pass-through revenues, were primarily due to lower energy rates with a major customer and lower excess generation sales due to unfavorable market dynamics and higher relative fuel costs.
PEC's electric energy sales for the six months ended June 30, 2009 and 2008, and the amount and percentage change by customer class were as follows:
(in millions of kWh) Six Months Ended June 30, Customer Class 2009 Change % Change 2008 Residential 8,729 465 5.6 8,264 Commercial 6,605 (57 ) (0.9 ) 6,662 Industrial 4,982 (912 ) (15.5 ) 5,894 Governmental 700 32 4.8 668 Unbilled 170 166 - 4 Total retail kWh sales 21,186 (306 ) (1.4 ) 21,492 Wholesale 6,935 (278 ) (3.9 ) 7,213 Total kWh sales 28,121 (584 ) (2.0 ) 28,705 |
Retail revenues increased for the six months ended June 30, 2009, despite a decrease in retail kWh sales for the same period primarily due to the impact of increased fuel revenues as a result of higher fuel rates. PEC's industrial kWh sales have decreased 15.5 percent from 2008, primarily due to reductions in textile manufacturing in the Carolinas as a result of global competition and domestic consolidation as well as a downturn in the lumber and building materials segment as a result of declines in construction. However, sales to the chemical segment, now our largest industrial segment, have slightly increased. Many of the manufacturers in PEC's service territory have been adversely impacted by the recession, and we expect continued industrial sales weakness until the broader economy recovers. While industrial kWh sales have decreased 15.5 percent from 2008, industrial revenues have only decreased 5.4 percent due in part to increased fuel revenues and the demand charges component of industrial revenues.
Wholesale kWh sales decreased for the six months ended June 30, 2009, primarily due to decreased excess generation sales resulting from unfavorable market dynamics. As previously discussed, PEC executed a contract extension with its largest municipal wholesale customer through 2032.
As previously discussed, PEC has been, and may continue to be, impacted by the current recession in the United States.
EXPENSES
Fuel and Purchased Power
Fuel and purchased power expenses were $939 million for the six months ended June 30, 2009, which represents a $139 million increase compared to the same period in 2008. Fuel used in electric generation increased $146 million to $825 million primarily due to the $90 million net impact of higher fuel costs and $56 million higher deferred fuel expense. The higher fuel costs are primarily due to higher coal prices and an unfavorable change in generation mix, partially offset by lower system requirements. The increase in deferred fuel expense was primarily due to the implementation of new fuel rates in North Carolina. Purchased power expense decreased $7 million to $114 million compared to the same period in 2008 primarily due to lower co-generation of $18 million, partially offset by an increase in interchange purchases of $5 million and purchases from renewable energy sources of $7 million. The
lower co-generation purchases were primarily due to higher relative fuel pricing. The increase in interchange purchases was primarily due to plant outages in 2009.
Operation and Maintenance
O&M expense was $542 million for the six months ended June 30, 2009, which represents a $19 million increase compared to the same period in 2008. This increase is primarily due to $22 million higher net nuclear plant outage and maintenance costs, as a result of two nuclear refueling and maintenance outages in the current year compared to one in the prior year.
Depreciation, Amortization and Accretion
Depreciation, amortization and accretion expense was $235 million for the six months ended June 30, 2009, which represents a $20 million decrease compared to the same period in 2008. Depreciation, amortization and accretion expense decreased primarily due to the $15 million of Clean Smokestacks Act amortization and the $15 million of depreciation associated with the accelerated cost-recovery program for nuclear generating assets recognized during 2008, partially offset by the $8 million impact of depreciable asset base increases. In accordance with a regulatory order, PEC ceased to amortize Clean Smokestack Act compliance costs, but will record depreciation over the useful life of the assets. As previously discussed, PEC does not anticipate recording additional accelerated depreciation.
Taxes Other Than on Income
Taxes other than on income was $105 million for the six months ended June 30, 2009, which represents a $6 million increase compared to the same period in 2008. This increase is primarily due to an increase in gross receipts taxes due to higher retail revenues. Gross receipts taxes are collected from customers and recorded as revenues and then remitted to the applicable taxing authority. Therefore, these taxes have no material impact on earnings.
Other
Other operating expenses consisted of losses of $2 million and gains of $6 million for the six months ended June 30, 2009 and 2008, respectively, primarily due to land sales in 2008.
Total Other Income, Net
Total other income, net was $16 million for the six months ended June 30, 2009, which represents a $6 million decrease compared to the same period in 2008. This decrease is primarily due to losses on a balanced billing program of $6 million and lower interest income of $4 million, partially offset by favorable AFUDC equity of $6 million.
Income Tax Expense
Income tax expense decreased $12 million for the six months ended June 30, 2009, as compared to the same period in 2008, primarily due to the $7 million impact of lower pre-tax income and $5 million of favorable tax benefit related to a deduction triggered by the transfer of previously funded amounts from nonqualified nuclear decommissioning trust (NDT) funds to qualified NDT funds.
PROGRESS ENERGY FLORIDA
PEF contributed segment profits of $119 million and $125 million for the three . . .
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