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| PGN > SEC Filings for PGN > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 nine months ended September 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 September 30, 2009, our net income attributable to controlling interests was $247 million, or $0.88 per share, compared to net income attributable to controlling interests of $309 million, or $1.18 per share, for the same period in 2008. The decrease in net income attributable to controlling interests as compared to prior year was primarily due to losses from discontinued operations, partially offset by an increase in income from continuing operations as discussed below. The current year losses from discontinued operations are primarily due to a legal judgment in a lawsuit related to certain of our now discontinued synthetic fuels facilities (See Note 16C).
For the three months ended September 30, 2009, our income from continuing operations was $350 million compared to $309 million for the same period in 2008. The increase in income from continuing operations as compared to prior year was primarily due to:
· favorable impact of interim and limited base rate relief at PEF;
· lower operation and maintenance (O&M) expenses at the Utilities;
· net impact of returns earned on higher levels of nuclear and environmental cost recovery clause (ECRC) assets at PEF; and
· lower depreciation expense associated with PEC's accelerated cost-recovery program for nuclear generating assets recognized during 2008.
Offsetting these items was:
· unfavorable net retail customer growth and usage at the Utilities.
For the nine months ended September 30, 2009, our net income attributable to controlling interests was $603 million, or $2.16 per share, compared to net income attributable to controlling interests of $723 million, or $2.77 per share, for the same period in 2008. The decrease in net income attributable to controlling interests as compared to prior year was primarily due to losses from discontinued operations, partially offset by an increase in income from continuing operations as discussed below. The impact from discontinued operations is primarily due to a legal judgment in the current year, as previously mentioned (See Note 16C), partially offset by the prior year gain on sales of our coal terminals and docks.
For the nine months ended September 30, 2009, our income from continuing operations was $708 million compared to $662 million for the same period in 2008. The increase in income from continuing operations as compared to prior year was primarily due to:
· favorable weather at the Utilities;
· favorable impact of interim and limited base rate relief at PEF;
· 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;
· net impact of returns earned on higher levels of nuclear and ECRC assets at PEF; and
· favorable allowance for funds used during construction (AFUDC) equity at the Utilities.
Offsetting these items were:
· unfavorable net retail customer growth and usage at the Utilities; and
· higher interest expense.
Our segments contributed the following profits or losses for the three and nine months ended September 30, 2009 and 2008:
Three Months Ended September 30, Nine Months Ended September 30,
(in millions) 2009 2008 2009 2008
Business Segment
PEC $ 207 $ 200 $ 429 $ 426
PEF 177 143 384 334
Total segment profit 384 343 813 760
Corporate and Other (34 ) (34 ) (105 ) (98 )
Income from continuing operations 350 309 708 662
Discontinued operations, net of tax (102 ) 1 (103 ) 67
Net income attributable to
noncontrolling interests, net of tax (1 ) (1 ) (2 ) (6 )
Net income attributable to controlling
interests $ 247 $ 309 $ 603 $ 723
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PROGRESS ENERGY CAROLINAS
PEC contributed segment profits of $207 million and $200 million for the three months ended September 30, 2009 and 2008, respectively. The increase in profits for the three months ended September 30, 2009, compared to the same period in 2008, was primarily due to lower O&M expenses, lower depreciation expense and higher wholesale revenues, partially offset by unfavorable net retail customer growth and usage.
PEC contributed segment profits of $429 million and $426 million for the nine months ended September 30, 2009 and 2008, respectively. The increase in profits for the nine months ended September 30, 2009, compared to the same period in 2008, was primarily due to lower depreciation and amortization expense and the favorable impact of weather, partially offset by unfavorable net retail customer growth and usage, primarily in the industrial customer class.
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, applicable portions 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 September 30, 2009, Compared to Three Months Ended September 30, 2008 REVENUES PEC's electric revenues for the three months ended September 30, 2009 and 2008, and the amount and percentage change by customer class were as follows: (in millions) Three Months Ended September 30, Customer Class 2009 Change % Change 2008 Residential $ 525 $ 30 6.1 $ 495 Commercial 348 17 5.1 331 Industrial 197 (3 ) (1.5 ) 200 Governmental 33 1 3.1 32 Unbilled (11 ) 5 - (16 ) Total retail revenues 1,092 50 4.8 1,042 Wholesale 186 (10 ) (5.1 ) 196 Miscellaneous 29 1 3.6 28 Total electric revenues 1,307 41 3.2 1,266 Less: Fuel and other pass-through revenues (520 ) (54 ) - (466 ) Revenues excluding fuel and other pass-through revenues $ 787 $ (13 ) (1.6 ) $ 800 |
PEC's revenues, excluding fuel and other pass-through revenues of $520 million and $466 million for the three months ended September 30, 2009 and 2008, respectively, decreased $13 million. The decrease was primarily due to $23 million unfavorable impact of net retail customer growth and usage, partially offset by $6 million higher wholesale revenues. 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 13,000 increase in the average number of customers for the three months ended September 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 September 30, 2008, compared to the same period in 2007, increased a net 23,000 customers. Higher energy rates with a major customer drove the higher wholesale revenues, excluding fuel and other pass-through revenues.
PEC's electric energy sales for the three months ended September 30, 2009 and 2008, and the amount and percentage change by customer class were as follows:
(in millions of kWh) Three Months Ended September 30, Customer Class 2009 Change % Change 2008 Residential 4,824 (105 ) (2.1 ) 4,929 Commercial 3,923 (156 ) (3.8 ) 4,079 Industrial 2,789 (90 ) (3.1 ) 2,879 Governmental 437 - - 437 Unbilled (397 ) (147 ) - (250 ) Total retail kWh sales 11,576 (498 ) (4.1 ) 12,074 Wholesale 3,607 (139 ) (3.7 ) 3,746 Total kWh sales 15,183 (637 ) (4.0 ) 15,820 |
Retail revenues increased for the three months ended September 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. The decrease in retail kWh sales for the three months ended September 30, 2009, is primarily due to a decrease in average usage per retail customer.
Wholesale revenues and kWh sales decreased for the three months ended September 30, 2009, primarily due to a decline in usage for a major wholesale customer.
PEC has experienced a decline in its retail and wholesale 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 $539 million for the three months ended September 30, 2009, which represents a $46 million increase compared to the same period in 2008. Fuel used in electric generation increased $109 million to $457 million primarily due to higher deferred fuel expense. The increase in deferred fuel expense was primarily due to the implementation of new fuel rates in North Carolina. Purchased power expense decreased $63 million compared to the same period in 2008, primarily due to lower market purchases resulting from lower system requirements and lower fuel prices.
Operation and Maintenance
O&M expense was $225 million for the three months ended September 30, 2009, which represents an $18 million decrease compared to the same period in 2008. This decrease is primarily due to $9 million in targeted cost reductions, $6 million lower net plant outage and maintenance costs, and the $3 million impact of changes to an environmental reserve (see Note 15).
Depreciation, Amortization and Accretion
Depreciation, amortization and accretion expense was $120 million for the three months ended September 30, 2009, which represents a $4 million decrease compared to the same period in 2008. Depreciation, amortization and accretion expense decreased primarily due to the $10 million depreciation associated with the accelerated cost-recovery program for nuclear generating assets recognized during 2008, partially offset by the $5 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.
Taxes other than on income
Taxes other than on income was $56 million for the three months ended September 30, 2009, which represents a $3 million increase compared to the same period in 2008. This increase is primarily due to an increase in gross receipts taxes due to higher operating 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.
Total interest charges, net
Total interest charges, net was $45 million for the three months ended September 30, 2009, which represents a $5 million decrease compared to the same period in 2008. This decrease was primarily due to lower interest rates on variable rate debt, partially offset by higher interest as a result of higher average debt outstanding.
Income Tax Expense
Income tax expense increased $12 million for the three months ended September 30, 2009, as compared to the same period in 2008, primarily due to the $8 million impact of higher pre-tax income and the $5 million impact of changes in tax estimates.
Nine Months Ended September 30, 2009, Compared to Nine Months Ended September 30, 2008 REVENUES PEC's electric revenues for the nine months ended September 30, 2009 and 2008, and the amount and percentage change by customer class were as follows: (in millions) Nine Months Ended September 30, Customer Class 2009 Change % Change 2008 Residential $ 1,404 $ 148 11.8 $ 1,256 Commercial 926 64 7.4 862 Industrial 533 (22 ) (4.0 ) 555 Governmental 85 7 9.0 78 Unbilled (18 ) (8 ) - (10 ) Total retail revenues 2,930 189 6.9 2,741 Wholesale 544 (22 ) (3.9 ) 566 Miscellaneous 87 13 17.6 74 Total electric revenues 3,561 180 5.3 3,381 Less: Fuel and other pass-through revenues (1,417 ) (188 ) - (1,229 ) Revenues excluding fuel and other pass-through revenues $ 2,144 $ (8 ) (0.4 ) $ 2,152 |
PEC's revenues, excluding fuel and other pass-through revenues of $1.417 billion and $1.229 billion for the nine months ended September 30, 2009 and 2008, respectively, decreased $8 million. The decrease was primarily due to the $43 million unfavorable impact of net retail customer growth and usage, primarily in the industrial customer class, partially offset by the $23 million favorable impact of weather and $13 million higher miscellaneous revenues. 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 nine months ended September 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 nine months ended September 30, 2008, compared to the same period in 2007, increased a net 25,000 customers. The favorable impact of weather was driven by higher cooling and heating degree days than 2008. Additionally, cooling degree days were 8 percent higher than normal in 2009 compared to 2 percent higher than normal in 2008. Higher miscellaneous revenues were primarily due to higher point to point transmission sales.
PEC's electric energy sales for the nine months ended September 30, 2009 and 2008, and the amount and percentage change by customer class were as follows:
(in millions of kWh) Nine Months Ended September 30, Customer Class 2009 Change % Change 2008 Residential 13,553 361 2.7 13,192 Commercial 10,528 (213 ) (2.0 ) 10,741 Industrial 7,771 (1,002 ) (11.4 ) 8,773 Governmental 1,137 32 2.9 1,105 Unbilled (227 ) 19 - (246 ) Total retail kWh sales 32,762 (803 ) (2.4 ) 33,565 Wholesale 10,542 (417 ) (3.8 ) 10,959 Total kWh sales 43,304 (1,220 ) (2.7 ) 44,524 |
Retail revenues increased for the nine months ended September 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. The decrease in retail kWh sales for the nine months ended September 30, 2009, is primarily due to a decrease in average usage per retail customer. PEC's industrial kWh sales have decreased 11.4 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 11.4 percent from 2008, industrial revenues have only decreased 4.0 percent due in part to increased fuel revenues and the demand charges component of industrial revenues.
Wholesale kWh sales decreased for the nine months ended September 30, 2009, primarily due to decreased excess generation sales resulting from unfavorable market dynamics.
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 $1.478 billion for the nine months ended September 30, 2009, which represents a $185 million increase compared to the same period in 2008. Fuel used in electric generation increased $255 million to $1.282 billion primarily due to $156 million higher deferred fuel expense and the $99 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 the unfavorable impact of a change in generation mix, partially offset by lower system requirements. Purchased power expense decreased $70 million to $196 million compared to the same period in 2008 primarily due to lower co-generation of $42 million and lower market purchases of $36 million, primarily due to lower system requirements and fuel prices.
Operation and Maintenance
O&M expense was $767 million for the nine months ended September 30, 2009, which represents a $1 million increase compared to the same period in 2008. This increase is primarily due to $22 million higher net 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, offset by $16 million of targeted cost reductions and lower emission allowance expense of $12 million resulting from lower system requirements, generation mix and sales of nitrogen oxide (NOx) allowances.
Depreciation, Amortization and Accretion
Depreciation, amortization and accretion expense was $355 million for the nine months ended September 30, 2009, which represents a $24 million decrease compared to the same period in 2008. Depreciation, amortization and accretion expense decreased primarily due to the $25 million of depreciation associated with the accelerated cost-recovery program for nuclear generating assets recognized during 2008 and the $15 million of Clean Smokestacks Act amortization recognized during 2008, partially offset by the $13 million impact of depreciable asset base increases. As previously discussed, PEC does not anticipate recording additional accelerated depreciation. In accordance with a regulatory order, PEC ceased to amortize Clean Smokestacks Act compliance costs, but will record depreciation over the useful life of the assets.
Taxes Other Than on Income
Taxes other than on income was $161 million for the nine months ended September 30, 2009, which represents a $9 million increase compared to the same period in 2008. This increase is primarily due to an increase in gross receipts taxes due to higher operating 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 nine months ended September 30, 2009 and 2008, respectively. The prior year gain was primarily due to land sales.
Total Other Income, Net
Total other income, net was $22 million for the nine months ended September 30, 2009, which represents a $6 million decrease compared to the same period in 2008. This decrease is primarily due to lower interest income of $5 million, primarily due to lower balances on unrecovered deferred fuel, and losses on a balanced billing program of $5 million, partially offset by favorable AFUDC equity related to higher eligible construction project costs of $4 million.
Total interest charges, net
Total interest charges, net was $148 million for the nine months ended September 30, 2009, which represents an $8 million decrease compared to the same period in 2008. This decrease was primarily due to lower interest rates on variable rate debt, partially offset by higher interest as a result of higher average debt outstanding.
PROGRESS ENERGY FLORIDA
PEF contributed segment profits of $177 million and $143 million for the three months ended September 30, 2009 and 2008, respectively. The increase in profits . . .
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